Health Care: Not So Recession-Proof

The medical industry's footing becomes shaky in tough economic times. For starters, folks could opt for mortgage payments over health insurance

The knees always go first. And the gums. That's what hospitals, physicians, and dentists say, noting an unusual leading indicator warning them a recession is on the way.

Demand for elective procedures such as knee replacements and gum surgery invariably rises whenever people are worried about losing their jobs—and their health insurance. In fact, the accelerated pace doesn't seem to start petering until a year and a half later, when laid-off workers are no longer entitled to COBRA and similar benefits that let them pay for health coverage through their former employers. "It's an interesting countercyclical trend," says Paul Levy, CEO of Beth Israel Deaconess Medical Center in Boston. "I only know this anecdotally, but it's accepted wisdom in the industry."

Then again, it's also accepted wisdom in the financial world that health care, the largest sector of the economy, is the most recession-proof. The thinking is that people get sick no matter what's happening to the economy. That premise holds true to an extent for the pharmaceutical and biotechnology industries, whose drugs are always in demand. But health-care providers are far more vulnerable to economic malady. "It's a myth to think hospitals are recession-resistant," says Sheryl Skolnick, an analyst with CRT Capital Holdings. "During the 2001-2002 recession there was the lowest demand for hospital services ever."

Cutbacks and Tough Choices

The heightened risk of economic contagion comes at a time when the health-care industry is already beset by troubles that have made reform an issue in the Presidential campaign. Nearly 50 million Americans are thought to be without health insurance, and those who have it are struggling with cutbacks in what's covered, higher co-payments for doctor office visits, and rising deductibles for out-of-pocket expenses before a policy begins picking up the tab. A large consumer survey conducted in February by Deloitte & Touche's Deloitte Center for Health Solutions found that only 11% of consumers feel they can handle upcoming medical bills. Hospitals and doctors, meanwhile, are being squeezed by rising costs and cutbacks on reimbursements from insurers.

During the last recession, earlier this decade, unemployment rose from 4.2% to 5.6% and more than 1 million Americans lost their health-insurance coverage, according to an analysis by Cornell University economists. By August, 2003, when the economy was recovering, only an estimated 137,000 people had regained health coverage. This time around, a recession could result in 4.2 million people losing health coverage, predicts the Center for Economic & Policy Research, a Washington think tank.

At best, worried workers who rush for medical repairs probably only delay the pain for health-care providers. Though COBRA benefits aren't exactly cheap, many unemployed workers face sticker shock once they're forced to procure health coverage on their own. And after 18 months of unemployment, bank accounts start running low. So when it comes to choosing between a mortgage payment and an insurance payment, most people choose their homes. Even people who keep their jobs and coverage will postpone medical procedures during a recession, fearful they may be cut if they take time off, says Skolnick.

A Medical "Mess"

Not all types of medical care can be put off, of course. Heart disease, cancer, Alzheimer's disease, and countless other maladies strike with ill regard for economic circumstance. And this time around, people are likely to get sick in larger numbers than during past recessions because the population is both older and more obese. But without insurance, many patients won't be able to pay, leaving hospitals and doctors to absorb the resulting bad debt.

Paul Keckley, executive director of the Deloitte Center for Health Solutions, sees three likely impacts from a recession: Primary and preventive care will be delayed, people with high deductibles will delay payments on care received, and there will be an increase in the number of bankruptcies from medical debt. "You can't separate the economy from health care. It's 17% of the [gross domestic product] right now and it will be 20% of GDP in seven years," says Keckley. The industry "had a pretty good run for 25 years, but now there are all these Scud missiles flying at it."

One of those missiles is the turmoil that gave rise to the current economic malaise. The crisis in the credit markets is taking a toll on nonprofit hospitals, which fund their capital spending with variable-interest bonds. The rising cost of borrowing can't be passed along right away with higher prices for medical care because Medicare, Medicaid, and most insurers negotiate reimbursement rates that are set two years out.

On top of all that, it's difficult for hospitals to cut staff or salaries given the extreme shortage of nurses and other health-care workers. "We're essentially a fixed-cost business," says Beth Israel's Levy. The only choice many hospitals have will be to delay or cancel capital investments. In other words, says Keckley, put the health-care industry together with a recession and there's only one likely result: "It's a mess."

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