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Disrupted—But in Demand

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eye on the news

Disrupted—But in Demand

Health care in New York City after the coronavirus October 29, 2020
New York City Reborn
Covid-19
Health Care

The coronavirus pandemic has disrupted every sector of New York’s economy, and health care is no exception. Many elective surgeries were postponed, physicians had to treat patients via teleconferencing, and dentists stopped seeing anyone temporarily. The demand for medical services is likely to rebound faster than the leisure, hospitality, and retail sectors of the city’s economy. Nonetheless, the cost of health care, and particularly of Medicaid, looms large in both state and city budgets. If the high earners on whom the city depends for its revenues move away in significant numbers, New York City will need to cut back its spending in these areas.

Covid-19’s first wave hit New York City harder than any major metropolitan area in the developed world. By late June 2020, according to the Financial Times, the city’s overall mortality rate was up 208 percent relative to a typical year—far above the increases across the United States as a whole (23 percent), Stockholm (61 percent), Paris (82 percent), London (91 percent), and even Madrid (158 percent).

As of October 21, New York City had suffered 250,053 recorded coronavirus infections, 58,465 total hospitalizations, and 23,949 probable or confirmed deaths. Within eight months of the first recorded case, 0.28 percent of all New Yorkers had already died from the disease. New York City Health + Hospitals, the city’s public health-care system, nonetheless boasted: “While the health care systems in Wuhan, China and in parts of Italy collapsed, we did not.”

It’s true that things could have been worse. In normal times, New York City’s hospital-referral region has 30 ICU beds per 100,000—slightly below the U.S. national average of 36, but well above levels in Spain (7), the United Kingdom (8), and France (11). State, federal, and local governments acted in concert to expand capacity further. By April, the city’s public-hospital system alone had increased its ICU beds fourfold.

The state projected that it could need 140,000 hospital beds for a worst-case scenario, and even its rosiest projections predicted a peak of 55,000 patients hospitalized with the coronavirus. In reality, hospitalizations statewide peaked at 18,235 on April 12 —and by early August, they had fallen to around 500. Emergency hospital-overflow capacity established at the Javits Center and on board the U.S. Naval Ship Comfort ended up going largely unused.

It’s understandable that authorities wanted significant hospital overcapacity to deal with Covid cases, rather than erring in the other direction. Still, the push to free up hospital beds for coronavirus patients entailed significant costs. Many observers maintain that the state’s practice of ordering nursing homes to accept infected patients from hospitals was responsible for a spike in deaths. Yet, while the state’s nursing homes have undoubtedly suffered thousands of deaths from the epidemic, little evidence suggests that these deaths would not have occurred absent the policy. Recorded Covid case and death rates among New York’s nursing-home residents actually appear to be lower than in neighboring states New Jersey, Connecticut, Massachusetts, and Pennsylvania.

The desire to keep hospital beds for coronavirus patients by cancelling elective surgeries has, however, hurt revenues at state hospitals—as it has elsewhere across the country. NYC Health + Hospitals, which incorporates 11 acute-care facilities and 70 community clinics, initially saw inpatient volumes reduced by 12 percent and outpatient clinic volumes fall by 48 percent before gaining permission from the state to resume elective procedures in early June. By the end of July, the city’s public hospitals were back up to 92 percent of pre-Covid levels of surgical volumes. Indeed, several facilities treated more patients than normal, as they dealt with backlogs. Though NYC H+H estimated that it will face $350 million in revenue losses and $1.1 billion in unplanned costs related to the coronavirus, it had $680 million in cash-on-hand and received $1.2 billion from the CARES Act provider fund.

New York–Presbyterian, the city’s largest private hospital system, lost $129 million in the first quarter of 2020 as procedures were postponed. The system claimed further strain from $250 million in additional operating costs due to the pandemic and $175 million in capital improvements due to the surge in patients. Yet these costs were more than offset by $567 million in assistance from Washington that New York–Presbyterian received through the CARES Act, and the hospital system plans to seek additional federal funding from FEMA. Given that the hospital system’s assets exceed liabilities on its balance sheet by $8.4 billion, and that NYC H+H, a supposedly nonprofit organization, made $354 million in profits in 2018, its future appears solid.

New York’s hospital sector has generally fared well in securing federal support. Of the $51 billion distributed in the CARES Act’s targeted relief fund established by Congress, 18 percent went to New York hospitals—a proportion substantially greater than the state’s 6 percent share of the U.S. population, though in line with its share of hospitalizations, as of October. Facilities also stand to gain a piece of the $65 billion in federal assistance tied to Medicare and Medicaid spending levels from previous years.

Nationwide, the coronavirus has barely dented the hospital sector. Whereas employment across the economy as a whole plummeted 11.5 percent in May relative to July 2019 (recovering to 7.7 percent down in July 2020), employment in the hospital sector was down only 2.2 percent in May before recovering to 1.2 percent down in July, relative to the 2019 level on the same date. Indeed, the 5.1 million workers employed by American hospitals in July 2020 matches the number employed in July 2018.

Employment in physician offices saw a more serious disruption (falling by 7 percent, from 2.7 million in July 2019 to May 2020, before recovering to a 3.2 percent deficit in July), while dental employment was closed by law and saw a steep, V-shaped recession and recovery (down by 30.4 percent in May; but down only 6.1 percent by July). The pinch was undoubtedly acute for both sectors, dominated by small firms with limited cash reserves, but the problem is not one of demand. Both can expect to recover.

By contrast, nursing homes have seen no rebound, so far. With Covid-19 already killing 5 percent of care-facility residents and scaring away many more, the vacancy rate in New York nursing homes soared from 8 percent in March 2020 to 22 percent in May. The number of Americans employed in nursing homes—3.4 million in July 2019—had fallen by 5.2 percent in May 2020 and continued to decline to a 6.3 percent deficit in July. Given the experience of the past few months, New Yorkers may remain reluctant to place aging and frail relatives in these facilities until the threat from the disease abates.

Nonetheless, the health-care sector is not likely to find itself disrupted significantly by the direct effects of the coronavirus, relative to the changes looming for other sectors of the economy—such as leisure, hospitality, retail, real estate, or higher education. The S&P health-care sector index began January 2020 at 1,190, fell to a low of 871 on March 23, but by the end of May had bounced back and was up for the year.

While the medical sector nationwide is likely to return to good health swiftly, New York’s health-care industry is highly dependent on government funding and is likely to be caught up in the looming fiscal crisis. New York’s Medicaid spending per capita of $3,869 is more than any other state’s by a significant margin and more than twice the national average of $1,866. From February to June 2020, enrollment in the state’s Medicaid managed care plans rose by another 7 percent as the coronavirus drove New Yorkers out of their jobs.

In its most recent financial plan, New York estimated that its Medicaid spending would total $80 billion in the 2020 fiscal year. Though the federal government is expected to cover 59 percent of this cost, the remainder—$32.8 billion—is large relative to the state government’s $99 billion in operating funds, and amounts to 4.6 percent of the state’s total GDP. For years, the state has sought to shift more of the Medicaid cost burden to localities, though they have little power to influence how the money gets spent. Medicaid costs New York’s metropolitan counties and the city over $7 billion each year—more than the Medicaid costs that all other local governments in the nation combined incur—imposing a unique fiscal vulnerability.

Following a rise in the city’s unemployment, from 3 percent in February to 20 percent in June, the state comptroller’s August 2020 review of New York City’s financial plan estimated that the city would face a $7.1 billion shortfall in locally generated revenues for the 2021 fiscal year. The comptroller anticipates that the cost of health-care benefits for New York City employees will also increase, from $4.8 billion in 2019 to $7.6 billion in 2024, while the cost of interest on the city’s debt is also expected to rise by a further $3 billion over that period.

Hotel tax revenues are expected to collapse, while sales and business tax revenues will also be down due to a decline in retail sales and the closure of restaurants and other leisure activities. These sectors are expected to recover mostly, though not completely, over the next 5 years. Personal income-tax revenues are expected to fall by $2.1 billion in 2021, while an expected increase in delinquencies and declining demand for city real estate means that the shortfall in property tax revenues will get worse. Revenue is expected to be down $3.7 billion in fiscal year 2024.

The impact of the virus on state and city budgets may even be underestimated by these already-pessimistic revenue projections, due to the overdependence of the city on a small number of taxpayers. In 2016, only 0.7 percent of city tax filers earned over $1 million, but they accounted for 39 percent of the city’s personal income tax revenues. New York already has the nation’s highest effective tax rate, and the capping of the deduction for state and local taxes from federal income taxes has further increased the sensitivity of those individuals to high regional taxes.

On May 1, neighborhoods accounting for the city’s highest-earning taxpayers had seen over 40 percent of their residents flee the city. With the virus normalizing full-time telework, many of these people may not return, and businesses and individuals will both feel less bound by the need for an in-person presence to accept the city’s high tax rates in the future. Any flight of taxpayers from the city due to concerns relating to crime, personal safety, or declining quality of life will only make these pressures worse.

In the short run, the 6.2 percentage-point increase in the federal Medicaid matching rate, established in March by the Families First Coronavirus Response Act, should relieve some of the fiscal pressure. As the value of this increase is proportionate to total Medicaid spending, New York will receive twice as much per capita as the average state. But this boost is already built into the city’s budget protections, which optimistically assume that its Medicaid costs will fall from $6.1 billion in the 2020 fiscal year to $5.1 billion in 2021, before rising back to no more than $5.8 billion in 2024. And the Medicaid funding bump from the federal government will eventually disappear.

The city plans to fill some of its funding hole by raiding employee pensions and health benefits. It will surely be assisted in seeking additional federal funds by Senate Democratic leader Charles Schumer, but neither of these solutions will fill the shortfall in the long term if a key segment of the tax base stays away. Albany itself faces its own budget canyon, and the willingness of Governor Andrew Cuomo to expend political capital on securing federal funds to bail out the city will probably be limited.

Even if it hikes taxes to compensate for revenue shortfalls, New York City will likely need to cut public spending on health-care services. In mid-March, just as the coronavirus was sweeping through the city, Cuomo had already proposed cutting $2.5 billion from the state’s Medicaid budget. New York Health + Hospitals, which partly relies upon direct appropriations from the city, is also likely to feel a pinch.

Photo by Spencer Platt/Getty Images

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