What risk of recession spells for hospitals

A number of economic forecasters see a growing risk of recession for the United States as inflation spreads. What could this mean for hospitals? 

 

State of affairs 

Economists surveyed by The Wall Street Journal April 1-5 put the odds of recession in the next 12 months at 28 percent, which is more than double what the probability was a year ago. Economists surveyed by Reuters April 4-8 see a 40 percent probability of recession in 2023. 

Prices were up 7.9 percent in February 2022 compared to one year prior, marking the largest annual increase in 40 years. High inflation erodes spending power and consumer confidence and can prompt the Federal Reserve to tighten. 

The 100 economists polled by Reuters expect the Federal Reserve to deliver two back-to-back half-point interest rate hikes in May and June to damper inflation. Higher interest rates are the Fed's trusted mechanism to control inflation; those increases make the cost of borrowing or investing more expensive and can slow spending by both households and businesses. 

 

Healthcare — still "recession-proof?"

The healthcare industry has been described for generations as "recession-proof." Patients are less price sensitive when health insurance pays for a large proportion of healthcare costs. For healthcare professionals, the healthcare labor market's occupational licensing requirements protect healthcare tasks from being reallocated to other workers in response to cost pressures. 

Hospitals made it through the Great Recession — the sharp decline in economic activity from 2007-09 considered the most significant downturn since the Great Depression — relatively unscathed. The number of healthcare jobs and national expenditures consistently grew despite substantial cuts in other sectors. Employment of registered nurses in the U.S. more than doubled employment projections, for example. 

Now, perhaps a better framework for thinking about healthcare's exposure to the forces of recession is not one of being recession-proof, but being situated along a spectrum of sensitivity.  

"Maybe the way we would think about healthcare is it's moving along a continuum from having low sensitivity to recession to high sensitivity to recession," Eric Jordahl, managing director with Kaufman Hall, tells Becker's. "Historically, healthcare has had low sensitivity. It still has lower sensitivity than a lot of industries, but it is moving along that continuum and probably the biggest driver of that is the introduction of more consumer elements into the equation."

 

Patient volumes, high-deductible health plans and commercial insurance rates 

What has enabled hospitals to have low sensitivity to a recession in the past was a system driven by institutional intermediaries — insurers paid most of their members’ healthcare costs. The proliferation of consumer-driven health plans, introduced in 2001, changed that dynamic.    

"Recession leads to unemployment, which can increase exposure to uninsured care and always has," Mr. Jordahl says. "But I think the emergence of the consumer mentality — now more exposed to healthcare costs through the introduction of high-deductible plans — has really changed the dynamic." 

High-deductible health plans are structured to make enrollees more cost sensitive and have grown in prevalence in both the group and individual markets since the Great Recession. The share of workers enrolled in an HDHP with a savings option grew from 8 percent in 2009 to 28 percent in 2021, according to data from Kaiser Family Foundation. Since 2016, the percentage of covered workers with a general annual deductible of $2,000 or more for single coverage increased from 23 percent to 29 percent.

High deductibles chip away at the buffer that typically protects healthcare from a recession's slowdown on consumer spending. If a consumer has a $10,000 deductible, they're more likely to entertain choices of whether healthcare is urgently needed or if it can wait. 

Healthcare has a very recent point of comparison for how deferred or delayed care affects their bottom lines: the pandemic.

"During COVID-19, while organizations had to close services, people, for all sorts of reasons, also delayed or deferred care — for safety reasons, fundamentally," Carol Boston, MSN, CNO with Advisory Board, tells Becker's. "If that behavior is something that consumers are comfortable with, then could added price sensitivity and the possibility of costs continuing to go up when folks may be facing a recession and growing inflation rate — could that behavior continue? Jury is out on that, but it's an interesting trend for us to keep an eye on."

Commercial insurers are hugely important for how large a buffer would shield hospitals in a recession, given that commercial insurers pay much higher prices for hospitals' and physicians' services than Medicare fee-for-service. 

"There's still a buffer, but it's starting to get chipped away," says Mr. Jordahl. 

Back in September 2020, a perspective piece aptly titled "Are Hospitals Still Recession-Proof?" published by the New England Journal of Medicine challenged the assumption that the outcome of the Great Recession is replicable. "We are not entering this crisis with the same healthcare system we had during the Great Recession," the authors, from Stanford Medicine, wrote. 

One of the greatest differences since the Great Recession is the level of reliance hospitals place on commercial health plans. If a recession pushes unemployment up, and those who lose employer-sponsored private insurance instead enroll in Medicaid (an optimistic scenario) and use of privately funded healthcare services declines because of cost aversion — hospitals would face a long-term financial challenge on top of the financial fragility they see today

The American Hospital Association estimated that private payers compensated hospitals at 116 percent of costs in 2000. This estimate grew to 128 percent by 2008. A 2019 Rand report based on 2017 claims data from private employers in 25 states suggests that hospital systems charge commercial insurers an average of 208 percent of costs, with many charging substantially more.

"These changes mean that shifting 10 percent of privately insured patients to Medicaid would result in a loss of revenue of 3.2 percent, whereas in 2000 it would have cost hospitals only 0.8 percent," the Stanford Medicine authors wrote for NEJM. "Even with more people insured today, the increasing prevalence of high-cost-sharing plans and the widening gap between private and public payers each threaten access and create cracks in a previously recession-proof industry."

Ms. Boston says the reliability of insurers' reimbursement and revenue, and the buffer they can create in a recession, should hardly be seen by hospital leaders as a foregone conclusion. 

"Revenue for healthcare organizations is fundamentally contingent on the ability to deliver service and keep beds open. Revenue will be negatively impacted if a hospital has to cut services or close beds because of a staffing shortage," Ms. Boston says. "If you do not invest in what it takes to turn this RN exodus around, you will pay for it on the back end with revenue shrinkage." 

 

Management of wages and expenses 

Hospitals' ability to manage or lower expenses may look very different in 2022 or 2023 than it did during the Great Recession. Hospitals started 2022 with dropping margins, outpatient volumes and revenues and escalating expenses as nationwide labor shortages heighten wage pressures, and global supply chain issues coupled with inflation affect non-labor expenses.

Mr. Jordahl wonders how much hospitals can reduce expenses — their historic response to tighter margins — in the current environment. 

"How much can hospitals adjust expenses? I think that is one of the great unknowns, particularly because labor is such a significant part of healthcare cost structure," Mr. Jordahl says. 

Ms. Boston is concerned that hospital leaders will see the need to hold down expenses as an invitation to use short-term solutions for their workforce.

"There is potential temptation of healthcare organizations to back away or back off from some of the types of investments that are essential to stabilizing the workforce," she says. "We can't afford to back away from investments made despite the fact that hospitals may be trying to balance their bottom line amidst a recession."

Health systems have leaders and laggards, but it's difficult to point to any one system that has mastered the undertaking of workforce stabilization in 2022. Ms. Boston points to a number of metrics that would be worrisome at any time, and especially amid the risk of recession.

"The workforce is currently not stable as evidenced by every standard metric we track on an annual basis going in the wrong direction," Ms. Boston says. "Turnover is skyrocketing. Vacancy rates are double what they were a year ago, reflecting a very, very difficult challenge for hospitals to recruit. The pipeline is starting to look shaky in terms of replacements for folks making the decision to either sit out for a period of time or altogether. Mid-career retirements are up. Agency usage has doubled over the past 12 months as well." 

These pressures paired with the risk of recession moves workforce and labor management from an issue typically relegated to the health system's human resources department or CNO to the very top of CEOs' strategic priorities, Monica Westhead, managing director with Advisory Board, tells Becker's.

"There's been a realization among executive teams that this is not just a nursing or HR problem anymore," Ms. Westhead says. "If you don't staff appropriately, you will not be able to achieve any of your other strategic goals." 

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