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Throw away your playbook from 2008-2009: Health care’s post-pandemic recovery will look radically different

By Yulan Egan

April 12, 2021

    While the fight against the Covid-19 pandemic continues, we believe the U.S. is likely on track to reach herd immunity by some point this summer. Although health care leaders are still spending a lot of their time on Covid-19 testing, treatment, and vaccinations, many are carefully starting to plan for the future as well. As leaders begin to look forward, it can be tempting to look to recovery from past crises to understand what the next few years might have in store. And from our conversations with health care leaders, at least some are looking to the years following the 2008-09 recession as a possible proxy.

    At first glance, the Covid-19 pandemic and the last recession share some similarities: they both played out on a global stage and shocked the worldwide economy. But that’s about as far as the resemblance goes. In fact, we believe that for the health care industry especially, recovery from the Covid-19 pandemic will look different from recovery from the 2008-09 financial crisis in almost every way—and that means the playbook for success will need to be very different as well.

    Here are three reasons why.

    1. The economic fallout from the pandemic has deviated from that of the global financial crisis in surprising ways—which means that volumes will likely rebound more quickly and pricing pressure will be less intense this time around.

    U.S. unemployment skyrocketed at the beginning of the pandemic. Between February and March of 2020, the unemployment rate jumped from 3.5% to 14.8%—the highest rate of unemployment recorded since the U.S. government started tracking those numbers in the 1940s. But most of that initial increase turned out to be temporary, and many of those people have since gone back to work. As of February 2021, the employment rate had dropped back down to 6.2%. This is a much faster recovery than was seen during the 2008-09 recession, when unemployment peaked at 10% in 2010 and then dropped slowly over time. It took over five years for the U.S. to hit a rate of 6.2%, comparable to where we sit today.

    This difference makes sense on closer examination. The current economic downturn was caused by government responses to a major health crisis, not excessive leverage or overpriced asset bubbles—which tend to cause corrections (or, in the case of 2008, a global financial crisis). And the economy in early 2020 wasn’t just healthy; it was thriving. As a result, many sectors of the U.S. economy proved to be surprisingly resilient. A strong stock market, a strong housing market, and a rebound in retail activity in the second half of 2020 meant that capital gains taxes, property taxes, and sales taxes all performed better than expected. As a result, most states took a much smaller hit to revenues than was originally feared.

    What does this mean for the health care industry?

    Volume recovery is likely to occur more quickly this time around—but it will also be more uneven.

    Job loss, insurance loss, and financial insecurity had a clear impact on health care utilization during the 2008-09 recession. Patients who lost health care insurance through their employers put off care, and those who still had coverage found themselves footing a higher portion of their health care bills as employers shifted to high-deductible health plans as a way to address their own financial challenges. Our own analysis shows that inpatient volume growth was tempered through at least 2011 a result.

    Financial insecurity is likely to have a smaller impact on volumes this time around. We project that the sudden drop in volumes due to postponed or cancelled procedures in 2020—combined with the relatively quick (although incomplete) recovery of employment—may even drive utilization above 2019 baselines. But volumes may be redistributed evenly. Health care providers with fewer workforce, bed, and operating room constraints, and those that can streamline new operating procedures and extend hours, will be able to address surgical backlogs sooner. Lingering patient fears about going to the hospital could position freestanding providers such as ambulatory surgery centers to attract patients. Finally, regions that experienced particularly high levels of unemployment (such as communities that rely heavily on tourism) may see persistent downward pressure on volumes due to high levels of financial insecurity.

    Purchasers will be less likely to rely on immediate cuts to health care to find savings. Purchasers—particularly employers and state governments—looked to health care as a source of savings during the period of recovery after the 2008-09 recession. Nearly every state Medicaid program froze or cut providers’ reimbursement rates. Employers took a more indirect route, shifting cost to employees to both drive immediate cost savings as well as encourage more cost-conscious behavior downstream.

    Due to stronger-than-expected tax revenues in 2020, we expect Medicaid to be less of a target this time around, especially since most states are receiving enhanced Medicaid funding from the federal government. Of course, the outlook for Medicaid will differ from state to state depending on revenue performance, which varied considerably. Employer strategies are likely to be different as well. As of mid-2020, employers were telling us that health care spending was trending anywhere from 3% to 5% below budget due to cancelled or postponed procedures. And early year-end reports suggest that most employers remained below budget despite the winter surge in Covid-19 cases. Employers have also been saying for some time that the quick and easy wins in health care savings (such as high-deductible health plans) have been maxed out. Employers are increasingly focused on steerage-related strategies like high-value primary care networks and navigation services, rather than straightforward cuts.

    2. The health care landscape, particularly the health insurance landscape, has evolved considerably across the past decade—and that means fewer people are likely to lose access to health care coverage.

    The health care industry itself has changed significantly in the past 10 to 12 years. Perhaps most notably, the country now has a wider range of insurance options for those who experience job loss. As mentioned above, the labor market is already recovering much more quickly than after the 2008-09 recession, and many people who remain without health coverage can either enroll in Medicaid or qualify for subsidies to purchase insurance on the public exchanges—two options that did not exist for many working-age Americans 12 years ago.

    What does this mean for the health care industry?

    The uninsured rate could hit a new low, rather than a new high.

    The 2008-09 recession drove the uninsured rate to a new high. It peaked at 17.8% in 2010 and then dropped slowly until the launch of the public exchanges and Medicaid expansion in 2014, at which point it dropped significantly.

    While we don’t yet have comprehensive data for 2020, we predict that the uninsured rate will be impacted very differently this time around. The initial impact is likely to be much smaller due to the temporary nature of many of the Covid-19-induced job losses and the concentration of job loss in service industries which are less likely to provide health insurance to begin with. Many of those who did lose coverage have turned to Medicaid. And the Biden administration is trying to expand coverage even more. Depending on how successfully they drive sign-ups on the public exchanges and encourage additional states to expand Medicaid, the uninsured rate may hit a new low across the next few years, despite the job losses caused by the pandemic.

    3. The current crisis was motivated by a health calamity, not a financial one—and that will have important implications for spending, investment, and competition in health care.

    Today we’re facing the fallout from a health care crisis, rather than a crisis of global finance. This difference is critical. Covid-19 has redirected billions of dollars into the health care industry, not only in the form of relief funding for the industry, but also new investments in digital health, the health care supply chain, and R&D budgets. While some of this funding is coming from external sources, such as the government or private investors, industry members themselves are spending more as well.

    What does this mean for the health care industry?

    Nontraditional competitors have been emboldened by the pandemic.

    Investment activity slowed in the aftermath of the global financial crisis. The decline of the stock market hurt both individual investors and investment firms, many of which froze investment activity at least temporarily.

    By contrast, the Covid-19 pandemic has encouraged a huge influx of investment—particularly into technology—both inside and outside of the health care industry. Digital health tools and virtual care providers have flourished and are actively racing to maintain their hold on the market. Major players within the “stay at home” economy, like Amazon and Walmart—both of whom had already been eyeing the health care industry—have grown as well. Risk-bearing providers, including newer entrants to the primary care space like ChenMed, One Medical, and Carbon Health, have also grown their membership and revenue bases. Venture capital had a record year in health care, and while private equity activity in health care slowed in the U.S., global activity remained strong and many private equity firms are eager to invest in 2021 as travel resumes. As volumes return, competition for those patients will be immense. And well-capitalized, nontraditional competitors will be eager to solidify their position in the market relative to incumbent players.

    The industry will face more intense cost pressures this time around, especially for labor and supplies.

    Typical recessions create loose labor markets. Health care has a reputation for being “recession-proof,” making it a particularly attractive target for students and entry-level workers in challenging financial times. This was the case after the 2008-09 financial crisis—the health care industry did not experience labor shortages and corresponding increases in labor costs. In fact, health care employment continued to grow steadily, and existing workers deferred retirements. While wages grew as well, the health care industry did not face the sorts of outsized increases in labor spending that are associated with workforce shortages and tight labor markets. In fact, cost control proved to be an important element of the health care industry’s ability to weather the financial impacts of the recession—hospitals, for example, constrained their capital spending.

    But cost is likely to be a much bigger issue during the post-pandemic recovery period. Burnt out health care workers are retiring early, leaving hospitals with both severe shortages of staff as well as a widening experience gap. While much has been made about the possibility of the “Fauci effect” driving an increase in medical school applications, this effect will not manifest for years to come (if at all). And the biggest concerns about potential shortages center on nursing, ancillary, and post-acute care staff. At the same time, hospitals across the industry are investing in “pandemic proofing” their supply chains. As a direct reaction to the severe shortages in PPE during the early days of the pandemic, many hospitals are purchasing excess supplies, investing in warehouses to store those supplies, and making efforts to diversify purchasing and encourage more onshore manufacturing.

    This week on Stay Up to Date: Volumes, capital, and strategic planning 

    calendarWe surveyed our members to get a sense of what strategic planners expect for the remainder of the year. Which patients are coming back to hospitals? Which ones are finding their care needs met elsewhere? And where are big players placing their investment bets?

    This Thursday at 3 p.m. ET, we'll share our latest models and survey results from strategic planners—plus answer your questions on the biggest health care issues of the day.

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