It is often accepted as conventional wisdom that health care is recession proof.
People get sick regardless of economic cycles, and the publicly funded safety net programs insure that people who need care get it. Yet if you look around the health system, what you see looks suspiciously like a recession: low single digit pharmaceutical cost growth, a collapse in high tech imaging and cardiovascular sales and clinical volumes, declining hospital admissions and rising bad debts. Is it possible that health care isn’t recession proof after all?
The reality is that health care has never been recession proof. It is simply that the system is so immense that lag effects in changed health care payment conceal the cyclicality. Recessions shrink tax revenue growth, and since Medicare and Medicaid are the balancing items in state and federal budgets, Medicaid and Medicare constrict payments a predictable 18-24 months after revenue problems surface.
Medicaid cuts are making their way through state budgets as I write, affecting a strategic segment of the health system — urban public hospitals, teaching hospitals and rural sole community providers.
Employers, who through their private health plans provide the industry most of its positive cash flow, also have a predictable response pattern to declining cash flow. When corporate cash flow dries up, health benefits get restructured. The last serious recession in the country, 1990-91, clobbered the NorthEast and California, and set off non-incremental growth in managed care enrollment in those markets.
This growth, and anxiety over the abortive Clinton health reforms, catalyzed both a panicky wave of consolidation in the health system and a bidding war among health providers to avoid being excluded from managed care panels. The effect was both provider price and margin compression and then a downturn in health plan earnings.
What we are seeing now is different, and a sign of a different health economy. While it is still not clear that we will actually have a recession (measured by two consecutive quarters of negative GDP growth), the U.S. economy is in the worst shape we’ve seen in seventeen years. The most significant changes in health coverage have been a shrinking of employer based coverage and a more than doubling of employees’ health premium contributions. Moreover, these increases have largely ignored the ability to pay; lower-income workers have far greater exposure to rising out of pocket costs than their better paid superiors.
As Brian Klepper showed a few months ago in an important THCB posting, last fall workers’ after tax earnings moved into negative territory — the productof ruinous increases in the costs of food, energy and housing. As people are more exposed to the cost of health care, they have responded predictably- by searching for generic drug alternatives when available, and postponing elective health care use. Moreover, when they do need and use healthservices, they have much more trouble paying the bills. When they do get large health care bills, they put them at the bottom of the pile to be paid last.
In other words, the restructuring of private health insurance coverage in the past decade have made the industry much more recession-sensitive, and exposed the industry to price and use sensitivity we have not seen before. In a sense, this was the intended consequence: people spend their own money more carefully than they spend their employers’ money. But the inequity of exposure to health costs by income class, and the likelihood that people are postponing seeking needed care for conditions that will worsen without treatment raises fundamental questions about the use of cost sharing as the principal braking mechanism for health costs.
This analysis suggests that health industry cash flow will continue to narrow in the coming 18 months, and that the layoffs we’ve seen in pharmaceutical and device sectors will be shortly joined by hospital system force reductions. The recession insulation provided by health insurance no longer protects this privileged 16% of the US economy. Welcome to the real world!