Historically, the healthcare industry has had a reputation of countercyclicality. The idea here is that people are always going to need healthcare services and products, so the sector is less vulnerable to the effects of a greater economic downturn than other industries may be. But in the wake of the pandemic and the midst of economic uncertainty, things have gotten much more nuanced, experts say.
“The current economic cycle has had unique and unprecedented impacts on the healthcare industry. As a result, some parts of the industry do remain resilient, and some parts have been really hard hit,” said Rebecca Springer, PitchBook’s lead healthcare analyst.
For example, payers and some for-profit hospital chains have been able to generate a healthy income, but many smaller health systems are suffering financial losses as they continue to battle high costs and declining volumes.
U.S. inflation rates may have reached a 40-year high last year, but this wasn’t the first time hospitals faced a highly inflationary environment. During past recessions, the healthcare sector remained relatively immune to economic downswings — but things are different now that a sweeping labor shortage and lower patient volumes have been added to the mix.
Dips in utilization lead to financial trouble
There is a “critical assumption” that people will always need healthcare services regardless of what the economic climate is like, and that this means the sector will witness less volatility in consumers’ spending levels due to economic conditions, Springer pointed out. However, it may time to reconsider the assumption.
“I think we have to call that logic into question a little bit, as deductibles have increased significantly,” she declared.
The latest data shows that more than 55% of U.S. workers were enrolled in a high-deductible health plan in 2021 — up from just 30% in 2013. As American households across the country continue to experience tight financial situations, many people end up forgoing or delaying care, especially for preventive and discretionary care, Springer explained.
Tina Wheeler, leader of Deloitte’s healthcare practice, agreed that the rise of high-deductible health plans, coupled with high consumer price inflation, has led to decreased healthcare utilization.
“People have to make a decision between buying gas or going to the doctor because they’ve got a high deductible plan,” she said.
In a survey Deloitte conducted last year, more than a quarter of Americans said they felt less prepared to pay for unexpected medical expenses than they did the year prior, citing inflation as the chief reason for feeling this way.
Another reason health systems’ volumes are dropping is patients’ changing preferences about how they access care. They are increasingly turning to care sites outside the traditional hospital setting, like ambulatory surgery centers and retail health clinics, pointed out Erik Swanson, Kaufman Hall‘s senior vice president of data and analytics.
For example, retail clinic claims volumes have shot up by 200% in the past five years. Claims growth for these clinics, which are usually located in stores like Walmart, CVS and Walgreens, have greatly outpaced growth in claims for urgent care centers, emergency departments and physician practices.
“The shift towards outpatient care was happening well before the pandemic, but the pandemic accelerated that movement. People are staying at home and working from home more often, so they may not want to go to the hospital — they may want to go to the CVS or Walgreens just right around the corner,” Swanson explained.
And that choice has a direct link to hospital finances.
A report that Kaufman Hall released on Monday highlighted the financial impact of the continued decline in hospitals’ patient volumes. It showed that discharges per day dropped by 4% nationally in July compared to the previous month, and operating room minutes per day decreased by 13%. This led hospitals’ median year-to-date operating margin index to fall to 1.3%.
Because health systems derive so much of their revenue from fee-for-service care, decreases in patient volume are expected to continue to hurt their finances for the foreseeable future, Swanson said. However, payers benefit from declining utilization — low patient volumes means they are paying for fewer hospital stays.
Payers have been more resilient partly due to decreased utilization and partly because they don’t have to bear the costs of expensive labor and equipment like providers do. Health insurers have remained profitable in the past few years, and a good handful raked in more than $1 billion in profits in the second quarter of this year — including UnitedHealthcare, Elevance Health, Centene, CVS Health and Cigna.
Not so recession-proof after all
As hospitals battle the effects of lower utilization, their financial woes are being exacerbated by rising costs for supplies, drugs, and most importantly, labor.
Hospitals’ supply expenses per patient increased by 18.5% from 2019 to 2022, and their drug expenses per patient rose by 19.7% during the same period, according to the American Hospital Association. As for labor costs, these rose by 20.8%. When looking solely at contract labor expenses, costs shot up a whopping 257.9% from 2019 to 2022.
Hospitals are turning to expensive contract labor due to healthcare’s severe workforce shortage. Healthcare employees are leaving the industry in droves — for instance, researchers project that the U.S. healthcare sector will be short 2.1 million nurses by 2025.
With declining patient-driven revenue, most hospitals are batting rising costs and struggling to offset them. This has forced many to make tough business decisions, such as shutting down service lines and laying off workers.
A running list of hospital layoffs published by Becker’s Hospital Review shows that 80 different hospitals and health systems have laid off staff this year, as of its last update on August 17. Some recent examples of hospitals that are eliminating hundreds of jobs include UNC Health, Jefferson Health and Allina Health.
How to weather the storm
Not all health systems are in the red — publicly-traded, for-profit systems have actually been doing quite well this year. For example, HCA Healthcare, the country’s largest for-profit hospital chain, reported a net income of $1.19 billion for the second quarter of this year. The second-largest for-profit health system, Tenet Healthcare, posted a net income of $123 million during the same period.
As for-profit companies, these health systems face pressure from their shareholders, Wheeler pointed out. Because of this, they don’t focus on advancing community health as much as nonprofit systems do — meaning for-profit hospitals don’t engage in the same level of charity care or community outreach.
“In the for-profit world, you have pressure from the expectations on the street and from your shareholders. In the nonprofit world, I think there’s more of a balance with their mission, as well as their charitable lens on the community. This is not to say that the for-profits don’t [provide charity care], but I don’t think they have as great an emphasis on it,” Wheeler said.
“We’ve been going to our lowest payers and either demanding increases from them or canceling those contracts that we view to be inadequate and simply admitting patients whose insurance will pay us more, again, in an environment where we can only treat a limited number of patients. We can be more selective about who we treat and the fairness of what we think we’re being paid,” he said during the call.
However, it’s not just the for-profit systems that are figuring out ways to overcome hospitals’ bleak financial situation — some large non-profit systems are doing okay too. For example, Kaiser Permanente posted $741 million in operating income for the second quarter, and Mayo Clinic reported almost $300 million.
Going forward, the health systems that will be successful will be the ones that establish strongholds in outpatient areas, Swanson declared.
“Systems that have more substantial outpatient footprints are outperforming those systems that do not. Systems with their own medical groups and surgery centers are outperforming those that don’t have that. And systems that have their own health plans tend to outperform those that don’t. Much of this is due to the ability to create access points and direct care more appropriately,” he explained.
Additionally, health systems that have achieved scale in the long-term care market will do better financially than those that don’t, Wheeler added. This market is experiencing high demand due to the country’s aging population — but it’s also facing a massive shortage of workers, so hospitals moving into this space will have to find ways to sufficiently staff their facilities.
Moving to make more investments in outpatient service lines and the long-term care market won’t be easy for hospitals that are facing severe financial pressure, but it could be what separates successful health systems from not-so-successful ones.
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