Today, the health care landscape has changed. Our view is that while demand may still be inelastic, providers and consumers are not being reimbursed as generously as they were during the last recession a decade ago.
Health care has long been viewed as a defensive sector compared to the broader market when a potential economic downturn is looming. There were sound reasons for this — many health care services had relatively inelastic demand and they were insulated from the effects of any global trade tensions.
Today, the health care landscape has changed. Our view is that while demand may still be inelastic, providers and consumers are not being reimbursed as generously as they were during the last recession a decade ago.
So what changed from the previous recession? There are four major differences:
- The Affordable Care Act did not exist.
- As a result, Medicaid expansion had not begun.
- Out-of-pocket expenses were lower.
- Fewer people were on Medicare and Medicare Advantage
To begin with, Medicaid has expanded significantly.
Moving uninsured people to Medicaid is typically a benefit to providers. But a sustained increase in unemployment, which is typically seen in a recession, may significantly reduce the number of people with commercial insurance in some areas of the country. Shifts in payer mixes from commercial to Medicaid will put financial pressure on providers in those areas.
Out-of-pocket costs have substantially increased.
Higher deductibles are one reason for this increase in costs.
At the same time, consumers are expecting more.
As patients spend more money out of pocket for medical care and further immerse themselves in digital technology they are growing to expect the same type of personalized on-demand service they receive from other companies like Amazon or Netflix. This consumerism shift is causing health care providers to redesign how consumers interact with their total health care experience.
Medicaid and Medicare Advantage enrollment has increased faster than the U.S. population.
Since 2008, Medicaid enrollment has increased by 26%, from 45 million to 61 million in July 2019. Over this same period, the U.S. population has grown by approximately 7.5%.
On top of the general growth in Medicare enrollment, the penetration of Medicare Advantage has also increased, from 22% in 2008 to 38% in July 2019.
Most health care providers struggle with generating profits with Medicare enrollees. Medicare Advantage can also add complexities in terms of provider networks and required referrals. The additional operating and financial complexity represented by these patient populations has been somewhat hidden through the economic expansion. A recession will lay bare those providers that are overly exposed to these populations.
How can health care providers prepare for a recession?
- Push to make more from your Medicare portfolio. We are seeing more and more health care clients enter into value-based care contracts with Medicare managed care organizations as well as enter into the Medicare Shared Saving Program. Enter into as many of these arrangements now so your organization can learn how to manage these populations in a relatively more forgiving economic environment.
- Push pricing transparency (and other consumerism efforts) through your organization. As patients’ responsibility for financing their care grows, they will make decisions based on value. If your price is not transparent how would they choose your organization if price is being used to determine providers?
- Refine your collection processes. Both on the front end and the back end. As your patients’ financial condition maybe retreating, your collection efforts have to be aligned well to maximize your collection.
- Invest in innovation. While many of your competitors may cut investment in innovation and technology, you could position yourself to gain market share and pass by your competitors when the recession is over by doubling down on innovation.
- Cautiously fill your job openings. Currently most health care providers have many open jobs, but in a recession other industries may shed people from their payroll and these people may come to health care for employment opportunities. Many health care providers will quickly hire these new entrants. But be cautious. You had these roles open for some time – is this role really critical to fill?
