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Health care is not recession-proof

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!

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tcoyote
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tcoyote

Actually, it’s an industry I follow closely. Health insurers have been adding to reserves the past five years at an unprecedented rate. This has been the most prosperous period in the history of the industry. Kaiser, historically undercapitalized, launched a $26 billion building program to replace and retrofit its hospitals. The for-profits bought new jets and paid fat bonuses to their execs. Cash flow is narrowing now and these companies have taken a real haircut in equity valuations in the past three months, but it has been an amazing run. Don’t think of Blue Cross as Wal-Mart, please. Wal-Mart never… Read more »

jd
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jd

tcoyote, I’ve seen you write some insightful things in the past, so I got the impression that you were pretty informed about healthcare and health insurance. But this last post is a mishmash of misconceptions. I will only address a few of them. There isn’t just one reason why premium increases were lower from 2003 to 2007 than in the preceding 5 years. Reduction in surplus reserves is just one reason, and it came in towards the end of that period. The question is not whether it mattered, but how much it mattered. In the NYC area, there are half… Read more »

ST
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ST

Health insurers days are numbered. In the next few years, the so called Govt controlled insurance option would be available for the public. It means, the current grossly inefficient insurers simply can not compete as more and more employers and individuals will opt for the ‘public’ insurance.
Recently, I have sold all my stock in health insurance industry.

tcoyote
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tcoyote

Rate moderation began after 2003, so disgorgement isn’t a good explanation of what is now a five year plus trend. How many choices do you have in YOUR small group market. I have, basically, one (Anthem), and they are having their way w/ me. The providers around here blow everyone else off, so Wellpoint’s competitors’ policies are 40% more expensive. Uwe Reinhardt showed long ago that the profits in this market, which Blue Cross dominates, approach 40%, not 5%. In other words, a lot of these “competitors” break even on their large corporate accounts, or make 2% in ASO fees… Read more »

jd
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jd

tcoyote, It is a tall order to defend this statement: “Price competition” in health insurance is a sham; it’s over. First, the Blues phenomenon you reference still exists. It doesn’t exist in as many markets as before due to WellPoint, but non-profits disgorging cash was absolutely a factor in rate moderation in 2006 and 2007. Second, price competition in the small group market certainly exists. At least, it does in NYC, which is the area I am most familiar with. Companies change insurers all the time in pursuit of a better price. Third, margins remain low in health insurance…in the… Read more »

tcoyote
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tcoyote

The health insurance cycle was driven by Blue Cross plans being forced to “disgorge” what insurance commissioners in many states deemed excessive profits, leading to competitive rate moderation by non-Blue Cross players. Occasionally, health plans made foolish attempts to lowball renewal quotes to grow enrollments. With private health coverage no longer growing and so many plans publicly traded, there are zero incentives to cut rates. I think the vaunted health insurance cycle is history. The person who said in an earlier post that plans recover what they could get from you last year is the way it works now. “Price… Read more »

jd
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jd

By the time I wrote the last sentence, I had forgotten that you didn’t claim health care was ever recession-proof. But you did claim that something substantial has changed: “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.” That’s why I think it’s important to point out that even with the recent changes you describe, we still have less out-of-pocket expenses for health care as a share of total health care spending than we did 20 years… Read more »

jd
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jd

Health care cost growth has always been cyclical. For example, the health insurance industry used to follow a pretty reliable 7 year cycle. Improved actuarial techniques and the growth of for-profit insurance might be changing that, but the evidence is still out. It’s not clear that anything fundamental has changed (yet) in health care as a whole. We have had enormous growth in the industry in jobs and revenues in the last 10 years and it would not be surprising to see a retrenchment, but there is not yet any reason to think that we have fixed the long-term trend… Read more »

Peter
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Peter

Good read on this subject: “Bad Money” by Kevin Phillips – “The reckless finance, failed politics, and the global crisis of American Capitalism.” Hang on for the ride.

Yana
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Yana

When they do get large health care bills, they put them at the bottom of the pile to be paid last.
And that is exactly what they should do.