Should hospitals worry about a recession? Maybe, CFOs say

As the Federal Reserve navigates a "soft landing" and the job market cools, recession fears are easing among some economists. 

"As long as the economy continues to produce more than 200,000 jobs a month, this economy is not going to slip into recession," Joe Brusuelas, PhD, chief economist at RSM, wrote in a research note.

Due to its essential nature, healthcare has traditionally been thought of as "recession-proof."

"Obviously, people's healthcare needs don't cease to exist just because the economy is in distress," Terry Collins, CFO of Rifle, Colo.-based Grand River Health Hospital, told Becker's. "In fact, you could argue that healthcare needs might even increase during a recession because of the additional stress people feel during difficult economic times."

However, some CFOs warned that hospitals aren't totally insulated from macroeconomic risk.

"Initially, hospitals may be recession-proof after the defining two quarters of decline in GDP. However, as the recession goes on, more jobs are lost and insurance coverage is lost with those jobs," said Gene Finley, CFO of Camden, Ala.-based J Paul Jones Hospital. "Hospitals should see a rise in self-pay patients and with that a rise in bad debt."

The healthcare sector is already dealing with a massive debt crisis. Hospitals hold $12 billion in impaired bonds, the most debt held by the sector in the past 15 years.

Some health systems in extreme debt due to a reliance on pandemic-era workforce expenses have had to cut back on services. Economic instability could pose even greater problems for hospitals that hold large amounts of debt.

To understand whether healthcare is actually recession-proof, some CFOs separate the insurance side of the industry from hospitals.

"The insurance side of the healthcare industry is somewhat recession-proof," said Jim Hermes, CFO of Grants, N.M.-based Cibola General Hospital. "They increase rates annually based on actuarial run-loss tables, mitigating their claims risk and when managed properly."

"Conversely, all healthcare providers dependent on Medicare and Medicare are subject to the budgetary largess of these programs which rarely, if ever, provide for rate increases sufficient to offset inflation. Since recessions are accompanied by higher unemployment, income tax, sales taxes, social security and Medicare contributions drop which almost assures reimbursements to be cut for these programs."

Since most patients receive insurance through their employer, mass periods of unemployment can dramatically affect a patient's ability to pay.

"Further, a significant uptick in unemployment and under-employment ensures the loss of insured business, leaving us nowhere to offset the incremental losses incurred for care delivered to government program recipients," said Mr. Hermes. "Lastly, for hospitals, the uptick in the uninsured population will undoubtedly increase bad debts arising from ER visits, compounding the losses."

Despite the risks posed by recession, healthcare can still be insulated in unique ways that allow the sector to ride out periods of downturn, at least for a short while.

"On the other hand, elective healthcare services that aren't covered by insurance tend to decrease during an economic downturn," said Mr. Collins. "My experience over the years teaches me that these two phenomena tend to balance out during periods of recession, meaning that recessions don't affect the healthcare industry significantly one way or the other. In that regard, we are indeed 'recession-proof,' at least for short periods of time."

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