Dr. Lexa is the Vice Chairman and Professor of Radiology, Drexel University College of Medicine Project Faculty, Spain, United Arab Emirates and East Asia Regional Manager, the Global Consulting Practicum & Adjunct Professor of Marketing, The Wharton School, Professor of Business Development in the Life Sciences, Instituto de Empresa, Madrid, Spain.
We can evade reality, but we cannot evade the consequences of evading reality. —Ayn Rand1
Well intentioned stupidity is still stupidity. —F. J. Lexa
For many radiologists, macroeconomics is something that is both misunderstood and underappreciated. For radiologists in my generation, it is fairly safe to say that only a minority of my peers had even taken a course in economics during college, let alone developed a reasonable command of the subject. In my university, most of us who were pre-med, majoring in biology and the other sciences, had neither the time nor the inclination for the material. Compared to chemistry, biology, and physics, the science seemed soft and the assumptions didn’t seem to correlate with, well, the real world—the 1970s witnessed terrible economic times coupled with poor fiscal and monetary choices. Economics at that time appeared highly politicized into left and right camps, an unfortunate circumstance that degraded credibility. Moreover, the coursework seemed to diverge into 2 completely different directions—one towards rather challenging forms of applied math for those going to Wall Street, and another toward a rather easy path for those hoping to get professional sports contracts.
As this article goes to print in 2012, it is fair to say that macroeconomics has more than proven its relevance in the past 3 years. In recent years, economic travails have brought down governments in the West. Over 10 trillion dollars (U.S.) of value was destroyed worldwide and, as this article goes to print, the recovery is incomplete with threats of a relapse into a double-dip recession still on the horizon. The political factions within the field are again evident with public arguments in newspaper columns and the electronic media, as policies are debated around Keynesian interventions versus market forces raging onward. In the political spectrum of the United States of America (U.S.), groups from both the right, the Tea Party, and the left, in the Occupy Wall Street movement, demonstrate anger and impatience with the government’s handling of macroeconomic issues.
In the wake of the crash of global financial markets, we are also seeing more clearly how societal choices lead to poor economic decisions and their ramifications. At the time of writing this article, several major European countries are facing very difficult bailouts with more likely to follow. The U.S. is not far behind with its own heavy deficit spending and a record amount of debt that is forcing a political crisis. The longer-term implications of societal spending and entitlements are not being addressed adequately and will come to the fore in just a few years. This article will provide a short primer on what is important in macroeconomics, particularly as it impacts upon those of us in medical practice now and in the future. The core principles will be covered and I will direct you to resources that I hope will help in understanding this topic and prepare you for the turbulent times that are coming.
GDP: What it is, why it matters
Gross domestic product (GDP) is the sum total of the final value of goods and services produced by a nation. It is denominated on a per annum basis and is probably the single most important factor in analyzing the economic status of a nation, the trends in improvement (or worsening) of a nation’s economy, and the implications of policy decisions. Growth in GDP is good, especially when you factor in the population changes and the GDP per person is increasing. To a first approximation, this correlates with greater new wealth per person and greater availability of resources. The standard calculation for GDP includes both the public and private sector with the following formula:
Y = C + I + G + (X-M), where: Y is GDP, C is consumption, I is income, G is government spending, X is exports, and M is total imports.2
A rising GDP per person means that there are more public and/or private resources available within society. Whether you are a leftist, a rightist, or centrist, this is a good thing. This increase in productivity should be welcomed regardless of whether your personal preferences lead you to believe that this surplus should go back to workers through lower taxation or to be kept and spent by the government on anything from better schools, to hospitals, high-speed rail lines, Mars colonization, or aircraft carriers.
In the other direction, a decline in GDP per capita results in lowering of living standards and difficulty in maintaining current programs. In fact, a “rule of thumb” for the definition of a recession proposed in the 1970s, and then repeated in many text books, was 2 consecutive quarters of decline in GDP.3 In the U.S., the arbiter of deciding when a recession has officially started and stopped is the National Bureau of Economic Research or NBER. While they consider a variety of more detailed factors in making their decision to declare that a recession has started, poor GDP performance is both a key factor as well as strong correlate with most of the other elements that they have to consider. Whenever you listen to an economic or policy debate, always consider what the effect would be on GDP, particularly the long-term effect. If healthcare is being blamed for being a drag on the future GDP of the republic, you can bet that “reforms” will be coming.
Real economic growth
Given the centrality of GDP in evaluating the economic state of a nation, the next obvious question is: What can we as a society do to promote GDP growth? How can we become more productive? There are many answers to these questions, but none of them are as simple or easy as you might surmise from the discourse on cable news channels. First and foremost, look for ways to improve productivity in a society. Making more with less is a form of “free” growth. Consider the example of agriculture in the U.S. Just over 100 years ago; the majority of the U.S. workforce was employed in producing food to feed the nation. Now, only a tiny fraction of U.S. citizens work on farms, and we produce enough food not only to keep the nation fed (or, unfortunately, in many cases overfed) but also to serve as an important source of exports for the U.S. economy.
Similarly, the revolution in information technology has made computing power exponentially cheaper during the lifetime of the readers of this article. A now famous observation by Moore, that computing power doubles roughly every 1.5 to 2 years, explains why most of us have much more processing capability in our homes (and many of us on our persons) than went to the Moon with the Apollo astronauts.4
While the above factors are impressive, they involve forms of innovation that led to more of everything and more for less. Unfortunately, much of the public debate revolves around tradeoffs in policy choices that affect GDP in more of a win/lose or close-to-zero-sum fashion. These include: taxation, government spending, trade policy, and other choices that a society makes. While current controversies rage over short-term stimulus programs and poor investments by the government in solar power companies, to be fair it should be noted that there are examples of government programs that have had positive effects on the GDP. These include examples such as the Federal Highway system, early research that led to the internet, the GI bill, and others. Supporters of further government intervention and spending in sectors as diverse as space exploring and clean energy like to cite the successes above.
The recent bankruptcies of some of the government-backed clean energy efforts should give you pause in assuming that this is the best use of public funds. Then there are examples of over-hyped or downright dubious ideas, such as corn-based ethanol that have not (and may never) grow into productive sectors that can stand on their own. You, as a healthcare provider and taxpayer, should always consider both sides of the coin (pun intended) when you examine a controversial issue about government spending.
Short-term interventions and outcomes
The effects of government intervention become much more suspect when evaluated closely, particularly when the longer-term impacts are included. There is a myth that the government can “improve” the economy by merely flipping a switch in Washington. Those levers include spending programs, loosening monetary policy, etc. Much of this, though, merely causes a short blip in economic activity with a substantial cost to pay back down the road. I sometimes use the analogy of my son opening the refrigerator door to cool the kitchen down. If you stand next to the open door, this does work for a short distance and short amount of time, so it makes sense to him and to other 5-year-olds, but obviously it isn’t the right way to get the job done.
Economists on the right like to point out the illusions of job creation. In most cases, the government can’t really create a net increase in jobs in the longer term. Every salary the government pays out uses dollars that were taken from somewhere else — from someone else’s taxes. This has been a criticism of the current administration’s stimulus package, as well as of President Roosevelt’s interventions during the Great Depression over a half-century ago. In the former case, the cost per job created has been cited as being as high as $278,000 USD or, to use another metric, it takes several taxpayer jobs to pay for one government-created job.5
In the case of the latter, which has been more thoroughly studied given the benefit of the intervening decades, a clearer picture emerges. While the Keynesian interventions early on were effective at creating some jobs programs and building a safety net, they did not reduce unemployment to pre-depression levels even after the economy recovered. Unemployment remained stubbornly high until the U.S. entered into World War II and the concomitant need for wartime materiel production boosted the employed workforce.
Compounded growth: Why it is unsustainable for anything to grow faster than GDP forever
Healthcare has become one of the central economic issues in the U.S. Whether your view is short term or long term, and whether you are focusing on the public or private sectors, healthcare dominates any discussion of government and private sector expenditures for several key reasons. First is that healthcare spending in recent years has generally increased faster than both inflation and growth in GDP. At first glance that would seem like a good thing. Successful companies grow faster than GDP. Fast growth is a source of real increase in wealth and if you are a young physician it would seem to imply job security. The problem with anything that chronically grows faster than GDP is that it eventually becomes the economy of the country.
In the natural history of a start-up company, growth eventually slows as the company successfully dominates its market. In the early years of Microsoft, growth was so robust that there were stories of engineers bragging that someday the company would rival the size of the largest economies in the world. While the company did enjoy phenomenal growth, that did not happen, and the company eventually entered a growth phase more in line with a large, mature entity.
In the case of healthcare in the U.S., this is not an exaggeration. If current growth rates were to continue unabated, then by the second half of the 21st century pretty much all of the government spending in the U.S. would be going to pay for healthcare. If nothing were to change by that point, then consumption of the entire economy will follow. That is an example of the promise and peril of compounded growth, but in the real world that will not happen. As a famous economist once said: “If something cannot go on forever, it will stop.”6 In the case of the U.S. healthcare industry, the stopping point appears near. The passage of the Patient Protection and Affordable Care Act (PPACA) in March of 2010 sent a strong signal that the government was serious about trying to control not only growth in costs but also many other aspects of how healthcare is delivered in the U.S.
In an earlier generation, the alarms in the press over unfunded entitlements tended to focus on the Social Security Administration. Workers were concerned (correctly) that unless adjustments were made, they would never collect on the payments that they were making for their shares in the system. Over the life of the program, a combination of increased longevity and decreased birth rate has substantially changed the ratio of active workers to living recipients and without adjustments in taxes, retirement age, or use of other levers, the young workers’ worst fears may come true.
However, if you want to be concerned about something more important, you need to understand that spending by CMS on Medicare and Medicaid in this century is projected to dwarf that of social security several times over. To put this into perspective, let us consider 3 numbers. Regardless of your politics or preferences, there are 3 key numbers that you need to both understand and pay attention to if you are going to honestly analyze the future of healthcare in the U.S.
U.S. federal deficit, the debt, and unfunded obligations
The first is the deficit. This is the shortfall in the government’s receipts and spending in a fiscal year and is analogous to a business income statement. In general, surpluses have been rare in recent decades, but the current year is projected to be approximately $1.6 trillion in the red. This is a record by itself, but if you analyze it as a fraction of the GDP, in the last century it has only been higher during the periods of the 2 world wars. The next number is the debt of the U.S. federal government. As this article is being prepared, this has been in the press because of political battles in Washington, and is now over $14 trillion. This is also a large number and is closing in on the GDP of the country. That is a disturbing level given that economists have observed that once a nation borrows to the level of 90% of GDP, it reaches a tipping point leading to poor economic outcomes including a loss of GDP growth.7
However, the third number, the unfunded obligations of the U.S. government-dwarfs even the debt and is the real issue. These are the promises to provide social security, Medicare, etc., to future generations. These are obligations for which there are no current assets set aside and which will therefore require future tax or other revenue streams. Estimates of that number range from a low of just over $60 trillion to over $100 trillion with the majority of it again in the category of CMS.8, 9
Inflation, monetary policy, and other issues that you should know about
Early on we focused on real increases in the magnitude of an economy. However, there are also false increases. Inflation is a term for increasing prices for goods. A definition of inflation is: “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.”10 Inflation can erode the value of savings and fixed benefits so it has substantial impacts on many sectors of society. The federal government has some controls over inflation. These include reductions in federal spending and borrowing which generally will reduce inflationary tendencies in the economy. To make the point clear about real and imaginary increases, consider getting a raise of 2% in 2011. The domestic inflation rate for 2011 looks like it will finish the calendar year at just under 4%. You lost money even with your raise. You may laugh at the obviousness of this, but it isn’t funny when this happens year after year.
Interest rates, a related but separate topic, are also affected by policies of the Federal Reserve. The Federal Reserve acts as a central bank for the U.S. and can affect inflation and interest rates through several mechanisms: 1) setting bank reserve requirements; 2) open market operations such as buying and selling securities; ie, the government sells bonds receiving cash from banks and reducing the money supply; and 3) setting the discount rate that banks can use to borrow from a Reserve bank. Generally the Federal Reserve tries to walk a tightrope between stimulating a sluggish economy and preventing inflation from an overheated one. Increasing the money supply through easy credit can help energize an economy, but also carries the risk of increased inflation. Conversely, aggressive attempts to control inflation can dry up credit and take the winds out of the economy leading to unemployment.
Applied macroeconomics and the future of radiology in the U.S.
In the first section of this article, we focused on the foundation principles for understanding macroeconomics. As we went through them, you could see some of the implications for us as practitioners, as taxpayers, and as (in some of our cases) small business owners. In this section, we will take a closer look at how the current economic policies of the government will likely impact upon medical practice in the U.S.
The first and biggest area of impact is that of fiscal policy. The role of the federal government in healthcare has increased substantially in recent years for several reasons. The first has nothing to do with which party is in power or who sits in the Oval Office. The demographics of the U.S. are evolving and the combination of the entry of the Baby Boomer generation and increases in longevity has substantially increased the number of people in Medicare. The second is that the recession has increased the number of unemployed in America, the number of people taking disability, and the number of people covered by Medicaid. The third is the healthcare reform bill itself, which increased the involvement of the federal government in managing both public and private sector healthcare.
The connection here is that we are increasingly working with the federal government either directly or indirectly at a time when it is not only insolvent but is likely to become more financially troubled unless severe measures are taken quickly. Furthermore, as our earlier discussion showed, those measures will focus on healthcare delivery. There is nothing else in the federal government’s obligations that is as large as healthcare, so we can expect any “fixes” to include substantial pushes towards changing healthcare delivery.
This was brought home by a Congressional Budget Office analysis of the impact of the healthcare bill of 2010.11 This analysis documented the growth in the commitment of the federal government to healthcare, but it also raised the possibility that the net effect on deficits would be an improvement, an assertion that has been made in more recent analyses by the CBO.12
However, multiple analyses by the CBO and others have raised concerns that the projections may in fact substantially underestimate the impact upon healthcare delivery. These uncertainties include the ability of Medicare to limit spending per beneficiary to 2% per year, the role of rationing in keeping costs down, and the degree to which employers will shift employees onto public plans rather than private insurance plans.
This raises the specter of continued cuts in reimbursement for Medicare services in attempts to hold down growth in expenditures. The radiology community has already seen substantial cuts to imaging through discounts in multiple imaging tests performed on the same day. Many in the current administration have declared a strong preference for supporting primary care at the expense of specialty care, leading to the expectation that cuts will be preferentially aimed at specialists like radiologists.
This concern is borne out in analyses of how the SGR (sustainable growth rate) mechanism for Medicare might be reformed. In brief, this was set up with the intent to keep Medicare spending in line with economic growth in the U.S. As discussed earlier in this article, spending on healthcare, including Medicare, has generally outstripped economic growth. The government has periodically let the threat of cuts arise and then passed spending allotments to cover the deficit, without addressing the underlying structure of the system. Currently, unless there is a fix, the next round would result in about a 30% cut in January of 2012.
Beyond the choices of a full allotment to fix that 29.5% deficit (unlikely in this political climate) or a complete cut (more unlikely, but not impossible), one alternative plan that the government has announced is to cut specialty care reimbursement at a substantial rate for several years while keeping primary care intact. This prejudice against specialty services is likely to inform many policy choices about healthcare going forward.13
Another set of solutions to these macroeconomic pressures that has been considered in the current administration revolves around ways to bundle care. The most prominent of these are ACOs, or accountable care organizations. These are attempts to combine quality goals with saving money and then sharing those savings with the government. For the interested reader, Breslau and Lexa,14 in the Journal of the American College of Radiology, provided an early analysis of the role of radiologists in such an arrangement. Note that while this is a rapidly evolving area, the desire for both caps on spending and capitation is high and likely to continue long after the first 3-year experiment with ACOs is over. We are likely to see more mechanisms that try to set fixed amounts of spending on healthcare from the national to the local levels. Related to these efforts will likely be forms of rationing. It is beyond the scope of this article to discuss the mechanisms by which this may be achieved, but the economic pressures of an aging population suggest that healthcare reimbursement will be used to ration care by effectiveness and perhaps other means such as age and frailty.
At this point many radiologists are probably ready to jump up and suggest smarter ways to change the healthcare system. In my own mind, tort reform is front and center in how to intelligently ration care and make the system more rational. Unfortunately, we need far better studies to buttress our case that torts irrationality drives healthcare costs. The data on the direct costs are pretty good. These include the costs of insurance, courts, settlements, etc. What we don’t have, but know intuitively, is the cost of behaviors that are unscientific and driven by fear of a lawsuit. Without tort reform, it is very unlikely that the healthcare costs of the U.S. can be brought in line with those of similar nations, since those nations do not share (or at least have a much milder case of) what my French friends used to call “the American disease”.
Another issue that has been at the front of many radiologists’ minds for years is the waste of self-referral by non-radiologist physicians. This is certainly a potential source of savings and it is likely that it will wither in coming years. However, that is more likely going to be due to a general reduction in the attractiveness of imaging rather than to strong injunctions against the practice.
Many of us became physicians in order to dedicate our lives to taking care of patients and advancing medical science. We hadn’t expected that economics and business would gain such influence over our field in our lifetimes. The events of recent years and the political struggles in the U.S. and elsewhere demand that we become literate in the macroeconomic forces that underlie the policy decisions that will shape the nature of medicine in developed nations.
Some closing advice for radiologists who are concerned about these issues is first and foremost to pay close attention to the fundamentals and to the specific policy implications that impact us. Both are in flux now and can change rapidly in the near future. Second, become politically aware and involved. Be willing to vote your future. Radiology is an important contributor to the health and welfare of our society — your actions, votes, donations and time — are all needed in order to ensure the survival of our specialty. Third, prepare for a world where our value will be constantly re-evaluated and sometimes under direct attack. A deeper understanding of disciplines such macroeconomics can help you prepare.
Resources for understanding economics
As we noted above, one of the hard parts about getting good economic information is that it may be politicized. The sources below all have their own biases, small and large, but they excel in accuracy, timeliness, and other key factors that make them good starting points with articles for both generalists and specialists.
• Major newspapers: Wall Street Journal, Financial Times
• Weekly magazines: The Economist
• Digital media: Bloomberg
Macroeconomics in the U.S.: Fundamentals and implications for radiologists in 2012. Appl Radiol.