An inability to cope with change is to blame for many losses suffered by bankers over the past decade.
Loans went to the energy, real estate, Latin American, and highly leveraged sectors; and they went in increasing amounts, as lenders failed to perceive that these industries would eventually turn negative.
The health-care sector may be the next to move from rapid growth to massive loan loss. Ameicans simply cannot afford the medical services now being offered, and this means the industry must slow its growth or contract.
The transition will result in large numbers of industry participants - from medical practitioners to biotechnology companies - being unable to sell their products and pay their bills. It is time for perceptive bankers with exposure to this industry to peer into its future.
The medical industry has been estimated to be about $700 billion in size.
To put it another way, the industry that consumed 5% of gross national product in 1950 is now absorbing 14% and promises to rise to 40% in 2030 if its growth continues at the current pace, according to industry projections in a recent Business Week supplement.
This "advertorial" also said the average worker has seen the cost of health-care insurance rise to $1,300 a year, from $150 just 10 years ago.
From 1970 to 1989, businesses saw their expenditures for health insurance rise 163%. Real wages are believed to have grown by just over 20% in the same time frame.
The Wyatt Co., a benefits consulting firm, estimates that employers spend an average of $4,081 per employee per year, on health costs, which will rise to $14,300 by the year 2000.
These numbers would suggest that the health-care industry has all the elements of continued expansion. However, a different set of numbers in the Business Week section raises questions about the future of growth of health care: * In 1965, when Medicaid was introduced, 76% of poor Americans were eligible for the service. Today, only 38% are. * Less than 40% of businesses with fewer than 10 employees offer health insurance. * The increased utilization of part-time workers has left a significant number of American workers with no insurance.
Overall, 37 million people are not covered by health insurance. Meanwhile, an increasing number of doctors refuse to serve the whole market because the government may pay only 50% of what a private-sector patient pays for the same medical procedure.
Moreover, doctors who do work with government-funded patients are willing to provide only minimal service. Volume must make up for low margins in these cases.
In short, the number of people that cannot afford health care is growing rapidly while the market could be on the verge of contracting.
The demographics are not very compelling. Baby boomers will not reach the age of significant medical demands in this decade. The number of people in the age range of 60 to 70 will actually decline in the 1990s, a result of historically low birth rates in the 1930s.
Granted, there will be a sizable increase of people above the age of 70, but this is still the smallest age cohort in the population. Therefore, the expected, near-term surge in the need for medical services due to population growth may be overstated.
The real source of increased demand for medical services is acute, emergency, or disaster conditions. AIDS, crack-addicted babies, and the last 10 days of an individual's life may create a greater demand for service than any demographic influences.
But detailed analysis is beginning to suggest that future health-care demand is a function of fewer and fewer people paying more and more for increased services. This is not a good basis for a growth industry.
It is unlikely that Americans - whether at the individual, business, or government level - will continue to find more dollars for health care by taking them away from other activities.
Assumptions on Consumption
Stated differently, it is unreasonable to assume that two of every five dollars in incremental output of the United States economy from the present to the year 2030 will be consumed by the medical industry at current growth rates.
This would be as real as the earlier assumptions that oil prices would go to $50 per barrel, or that real estate prices would never decline.
A more likely scenario is that every possible measure will be taken to reduce the size and cost of health care. This, in fact, is already being done.
The San Francisco research boutique L.H. Alton & Co. recently released a report on MidAtlantic Medical Services, which is increasing its healthcare subscribers at the rate of 65% a year. Growth is so explosive because MidAtlantic Medical is selling employers on the concept that it can be cut their medical costs.
First Financial Management Corp., a data and transaction processing company in Atlanta, has a subsidiary called First Health that is in the business of cutting medical costs for employers, as well as for the Medicaid systems in a number of states. In its brochure, this company promises to end: * Churning, or overutilization, wherein providers render multiple unnecessary services to increase their reimbursement. * Ping-ponging, or excessive referrals to other providers for unnecessary services, particularly between specialists in the same group practice. * Yo-yoing, or calling patients back for repeated, unnecessary follow-up visits.
The company says it will simply not pay for a series of other abusive practices, such as paying for services at a facility in which the prescribing doctor has an ownerships interest.
The |Gatekeeper' Concept
Other companies promising to cut medical costs have established the "gatekeeper" concept. In these cases the patient must first visit a general practitioner, who as "gatekeeper" seeks the lowest-cost solution.
In practice, this is how the cost-cutters intend to reduce the cost of health care: by insuring that fewer services will be used. The process will undoubtedly reduce the quality of the nation's health care but it will also cut the revenues of facilities previously used, at times to excess.
Relatively fewer drugs and less medical technology will be used. Doctor's incomes will fall. The probability of too many medical facilities becomes quite likely.
Wall Street and institutional investors are already foretelling these events. Drug and medical stocks, in general, have performed very poorly in recent months versus the S&P 500.
Just recently, the stock price of the medical technology company Sci-Med dropped sharply after an announcement of disappointing earnings. The action illustrated that stockholders are skittish and ready to sell quickly on any sign of weakness.
The Bank Connection
How are bankers reacting to these events? Do they know their exposure to this industry?
It is, of course, a simple matter to determine how much has been lent directly to doctors and medical companies. It is not so simple to understand the utility and potential growth rate for the products being financed.
Are the lenders relying too much on the views of industry "experts" just as they did when they were convinced that oil was going to $50 a barrel?
In how many instances have loans been made to projects outside the medical sector - projects where the cash flow to repay a loan comes from the medical industry?
How many nonmedical loans are backed by the stocks of medical of drug companies - collateral that is rapidly losing value?
The time has come for bankers to start doing some independent analysis. If health care is at the apogee because the U.S. economy cannot afford to pay for further advances, then it is time to adopt new lending strategies.