Will credit crisis reduce health care spending growth?

Another doom and gloom item appears in today’s New York Times (Disappearing Credit Forces Hospitals to Delay Improvements) about how hospitals –like other businesses– are being hurt in the credit crunch. The piece starts with news of a couple of hospitals that went bankrupt because they’ve been unable to meet their short-term obligations. That’s clearly not good.

However, much of the article focuses on how hospitals are starting to scale back capital spending on expensive equipment and facilities. Of course that will hurt equipment suppliers and construction firms, but I’m not convinced the aggregate impact will be bad for the economy. As the article says:

For hospitals, the current financial environment stands in stark contrast to the recent past. After years of heavy capital spending on new and improved equipment and buildings, outlays that were driven by easy access to credit from banks and bond markets, many hospitals have scaled back their ambitions as they scramble to protect their cash positions.

In other words, hospitals stepped up their equipment purchases and facility expansions because credit was easy to come by, not because it was really needed. There has been an arms race as hospitals have one-upped each other. Once equipment is installed doctors find ways to use it. That drives up costs: to employers, insurers, the government and consumers. If easy credit rather than clinical need was the reason for expanded supply, then a slowdown will be a good thing.

Yes, it will be shocking, but maybe there will be a silver lining in the form of unexpectedly low health care spending over the coming few years. Maybe the pause will enable cost containment measures to establish a stronger foothold that will hold up in the long run.

October 15, 2008

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