Dive Brief:
- The healthcare industry would fare better in an economic downturn now, compared with the recession in 2008, due in part to the impact of the Affordable Care Act, an analysis from McKinsey & Company suggests. But the degree of protection varies depending on the amount of business they do in states that expanded Medicaid.
- Providers would have less exposure to uncompensated care because of expanded Medicaid eligibility and ACA subsidies on the ACA insurance exchanges, although states would likely cut Medicaid reimbursement rates.
- Insurers' downside risk would be mitigated by the shift from fee-for-service to managed care in Medicaid and Medicare and from government subsidies for commercial plans sold on the exchanges. Medicare and Medicaid account for 53% of insurers total revenues, which would help protect them from revenue declines in their other lines of business, according to McKinsey.
Dive Insight:
The Affordable Care Act, implemented after the 2008 economic downturn, has had a major impact on the healthcare sector by increasing the number of Americans with insurance coverage through commercial plans sold on the insurance exchanges or Medicaid. A total of 34 states have expanded Medicaid eligibility since the law was enacted, extending coverage to 13 million adults as of 2018, according to the McKinsey analysis.
During an economic downturn, the revenue the healthcare industry gets from those sources of coverage would help offset drops employer spending on commercial plans or third-party administration.
If a downturn happened now, McKinsey expects between 4 million and 10 million fewer people to be insured through commercial plans and from 1 to 3 million more people to be uninsured.
But actions states would take to control Medicaid costs would blunt the positive financial impact of the ACA.
The increase in Medicaid enrollees — which McKinsey estimates at between 3 million and 7 million — would put pressure on state budgets. States that expanded Medicaid eligibility would be particularly hard hit. Thirteen of those states have rainy day funds that are less than 5% of their total general-fund expenditures, McKinsey estimates.
To offset increases in Medicaid spending, states likely would reduce reimbursement rates to providers and tighten capitated rates for enrollees in Medicaid managed care plans.
Overall, McKinsey projects earnings decreases of between 5% and 20% for both payers and pharmacy benefit managers, and between 5% and 30% for providers. These estimates do not reflect the impact of actions individual businesses might take to protect themselves from declining revenues.
Other analysts also have weighed in on the impact of an economic downturn on the healthcare industry. For example, Moody's says providers would be "particularly sensitive" to increases in uninsured patients, which would lead to increases in bad debt and lower revenues per patient.
Like McKinsey, Moody's expects that insurers with a strong presence in Medicare and Medicaid would be protected somewhat from the impact of declining revenues in other lines of business.
The economy is but one source of uncertainty. The future of the ACA is in doubt, too, as the latest legal challenge to its constitutionality plays out in the federal court system.
The U.S. Court of Appeals for the Fifth Circuit heard from lawyers this week in a suit brought by Texas and joined by 17 other states. Trial judge Reed O'Connor of the U.S. District Court for the Northern District of Texas invalidated the entire law late last year, finding it unconstitutional after Congress eliminated the law's individual mandate penalty in 2017.