Editor's note: Myth Diagnosis is a series that examines disputed topics in the industry, the evidence behind them and what conclusions experts have drawn. The first installment covered hospital cost-shifting.
Economists agree that while the timing is uncertain, the U.S. is overdue for a recession by several markers. And while logic dictates that people's need for healthcare services will persist through financial struggles, the industry could still get hit hard if the economy sags significantly.
Experts say the health sector isn't completely shielded during a recession, but it does respond differently than most other areas.
"It's not really recession-proof — that's a little bit of a misnomer," Ben Isgur, health researcher at PwC, told Healthcare Dive. "It is a little recession-resistant, but eventually that wears off."
Providers and payers didn't escape consequences of the last major downturn — the Great Recession that lasted from December 2007 to June 2009 — but much has changed since then. M&A activity has shot up, the Affordable Care Act greatly expanded insurance coverage and health services have steadily moved away from hospitals campuses.
The impacts of a recession don't skip the healthcare sector, but they do hit it later than most areas, and the industry also takes longer to bounce back, experts said.
When a downturn starts to result in job losses, people eventually lose their employment-sponsored health insurance and start to change their healthcare habits. That compounds as the unemployment rate grows.
"Year two is really the impact year," Aneesh Krishna, partner at McKinsey & Company, told Healthcare Dive.
When the economy recovers, though, people can still be wary of health spending that isn't absolutely necessary. "There's some care where you have a choice. And maybe you'll be willing to be in a bit of pain in your knee and use money for other things first," Isgur said.
Doctors, hospitals face most risk
Providers are likely most vulnerable to a major economic downturn, as they are affected most immediately by consumer spending changes. McKinsey predicts as much as a 30% drop in EBITDA across for-profit and nonprofit providers. That risk for payers and pharmacy benefit managers is 5% to 20% while for pharma companies it's 5% to 15%.
Payers and PBMs are a bit more shielded than providers, which will suffer from consumers electing to avoid treatments and more uncompensated care as people without insurance require emergency care.
Putting off preventive care, however, will hit payers down the road as treatment for chronic conditions is more expensive.
When the economy starts to tank, consumers get spooked. "That's when you start to see people really retracting and starting to get more conservative with healthcare spending, because people have lost their jobs because of a downturn in the economy," Isgur said.
One very likely effect of a recession that would be borne by providers is pressure from employers to cut down on employee healthcare costs. That's already a key motive for big businesses as overall health costs continue to climb, but in the pinch of a recession that push will intensify, Paul Hughes-Cromwick, co-director of sustainable health spending strategies at Altarum, told Healthcare Dive.
"There's no question, I think, that in the next downturn there will be serious pressure, and I think it will come from these large employers becoming very serious in negotiations with insurance companies," he said.
The surprise billing debate this year has brought attention to the markups providers charge commercial payers over Medicaid and Medicare rates — reaching as high as 400%. As employers trying to manage costs become more aware of that price difference, providers will likely face a harder line in contract talks, Hughes-Cromwick said.
A downturn would accelerate and magnify that effect. "I don't think there's any way where there won't be serious pressure on finances at these hospitals," he said.
Much has changed since Great Recession
Looking to the last major downturn can give some indicators of what a future recession would mean for the healthcare industry, but experts caution a number of key changes could spell some different outcomes.
One of the biggest new factors is the ACA, and especially its expansion of Medicaid in about three dozen states now. This extended coverage to millions of Americans — and those plans aren't eliminated if someone loses a job as part of a recession.
Still, states would also face significant financial pressure in a recession, and would be looking for ways to cut costs and potentially their Medicaid rolls and benefits offered. That effect would spill over to providers having to treat more patients with neither private or government insurance.
The ACA also established the federal exchanges — meaning someone who loses employer-based insurance could turn to the marketplace now and, if incomes is low enough, qualify for premium subsidies that help them still afford a plan. That could offer a cushioning effect.
Another change over the industry since the Great Recession is rampant M&A, startup entrants in the market and private equity investment.
And another factor is continued movement of care to non-hospital settings. "There's a lot more choice about where you seek care now," Isgur said. "Ten years ago we didn't have as many options in terms of retail clinics, urgent care, virtual care."
Those options could attract patients with renewed concerns about finding the lowest costs and getting the best value care, he said.
Consumer behavior is also affected by the proliferation of high-deductible health plans, which would likely mean less shielding from an economic downturn for people with that coverage. "I think consumers are making choices now. I think in a recession those choices now are becoming more acute," said Bret Schroeder, a healthcare expert with PA Consulting. "And that's the major difference now than from the last recession."
Large, more diverse companies most resilient
Multiple factors come into play when examining what businesses will be most hurt in a recession — and which may actually have a chance to get a leg up.
Krishna said his research showed that companies managing best in past downturns prepared and strengthened their balance sheets early. They also moved faster on M&A opportunities, divesting bad assets early and, coming out of the downturn, snapping up good deals.
"I would say that for organizations, having a plan in place is quite critical and I think if you execute well on that plan you can really get ahead of the competition," he said.
Larger health systems will generally be in a better position than small companies and rural hospitals, Isgur said. Bigger organizations can consolidate services lines and take advantage of their bargaining power with vendors. "Any time you're in a recession environment, the larger systems that have spread out their fixed costs can have an advantage there," he said. "Also, they've got a lot more choices."
It's also good for a system if it has already invested in services like virtual care and outpatient or retail clinics, analysts said.
Diversification in payer mix also has an impact. Providers not reliant on government or commercial lines exclusively will be better positioned for a downturn, Krishna said.
"If you are a Medicare-heavy hospital — you're more resilient because the Medicare population is not going to lose coverage. They're going to have the same coverage they had before," he said.
Location is also a factor. Providers in Medicaid expansion states will also likely fare better, as they already tend to have less bad debt than those in non-expansion states.