As inflation soars to its highest point in four decades and the threat of recession looms over the country, payers and providers both stand to be impacted—each in different ways.
Between supply chain bottlenecks, soaring energy prices, talent shortages, and the lingering strains of the pandemic, provider margins have taken a substantial hit—one that will surely be exacerbated during a recession. While most contract rates for payers and providers are already set for 2023, we may see providers apply pressure for higher rates in 2024 to keep pace with inflation, shifting some of the economic burden to payers down the line.
That’s just the tip of the iceberg. Although the healthcare industry seeks relief from the worry of economic uncertainty, it can be difficult to pinpoint what the true impacts of ongoing inflation and a recession may be.
To help navigate this uncertain time, we’ve assembled top-of-mind challenges and recommended actions for both payers and providers in the months (and years) to come.
Inflation could cut healthcare sector profits by more than $70 billion in 2022. While many factors will contribute to this erosion, here are some of the most prominent challenges we see providers and payers facing right now:
Supply chain disruptions. An overseas shipping squeeze is forcing providers to negotiate with unreliable suppliers and navigate price pressures for specialized medical products. As a result, medical supply prices grew by 46% last year, outpacing labor expense growth.
Rising energy costs. The War in Ukraine has led to higher transportation rates that suppliers are now passing on to providers.
Labor shortages. Nurses and doctors are still in short supply. Health care employment remains below pre-pandemic levels, with the number of workers down by 1.1% (or 176,000).
Organizations across the healthcare sector are already amending their business plans to prepare for a financial downturn. But if they aim to develop a smart, recession-resistant strategy, they will have to strike a good balance between near-term responsiveness and long-term readiness.
In general, capital will be limited across the healthcare industry—although the degree to which that will be the case remains to be seen.
With the future uncertain, payers and providers can take concrete steps toward resiliency. Here are three smart strategies organizations can adopt to do just that.
If your organization has yet to assess potential areas that could benefit from modernization, digital transformation, or optimization, now is the time.
It’s imperative, for instance, that providers and payers update their infrastructure; this can, in turn, promote operational agility across the entire organization—particularly when it comes to clinical, procurement, and administrative tools. By automating administrative processes such as image analysis, billing, and scheduling, organizations can not only reduce overhead, but draw on data and analytics gathered from those automated processes to further streamline workflows and help inform decision-making across the enterprise.
When it comes to procurement, healthcare leaders will want to extend their existing vendor contracts and streamline the payer-provider contracting process. A recent study found that streamlined payer-provider contracting can cut administrative costs by 63%. Another way to optimize the procurement process is by reevaluating strategic partnerships. Health systems that include multiple hospitals, for example, may benefit from combining and coordinating vendor orders involving a single supplier. This ensures that each hospital doesn’t have to develop their own independent contracts for the same vendor, thereby reducing procurement costs.
Lastly, payers and providers should employ cloud-based internal communications tools and systems when possible. Given that hybrid and remote office models seem likely to stick around, this is a good way to ensure employees stay connected, informed, and engaged across the organization, and could even lead to better retention rates than those with 100% in-office requirements.
During an economic slump, providers must be prepared to redefine what it means to deliver excellent care for patients. Moving to value-based models can help.
In value-based arrangements, providers are better-positioned to avoid exaggerating the financial pressures consumers will face in a recession due to VBC’s emphases on access to care and the preservation of continuities. Additionally, other value-based offerings such as telehealth visits and prescription delivery services reduce travel costs for consumers while maintaining utilization rates.
Healthcare payers should also develop programs to handle members who have put off routine care (whether that’s because they’re reluctant to spend money to reach their deductible in a recession or because they’ve lost coverage due to layoffs), since they could come back sicker down the road.
As 2023 approaches, payers will have to keep provider contract rates low. Most of these contracts are multi-year and already negotiated for 2023, so it can be useful to include linkages to the CPI when renegotiating or amending at a later date in order to minimize any further rate increases linked to rising prices. Keeping rates low may mean scouting for unique partnerships with vendors, provider groups, and health systems to relieve the burden of contract renegotiations. If payers can align their incentives with providers, they’ll gain a collaborative partnership that can reduce financial strain on both parties by pooling risk.
Payers should also be mindful of a new transparency rule enacted back in October 2020. Since last January, providers have been required to provide clear, accessible pricing information online about the services they provide. What will happen when patients face steep financial pressures? They may begin to shop around for the lowest price in the market, driving margins down over the coming year. To mitigate this trend, payers should take the opportunity to gather new consumer data. They can leverage that data to develop a competitive pricing strategy, which will allow them to respond to sudden market changes with accuracy and agility.
While economists and executives continue to debate the imminence of a recession, healthcare leaders should get ahead of the conversation. The best way of doing that? Broadening their perspective on the situation and being aware of the current economic climate and other potential headwinds.
Economically speaking, the market has not experienced this unique combination of inflation and recession potential in decades. In all likelihood, inflation will drop with a recession—but healthcare leaders will have to hedge their bets on how quickly that drop happens.
While many unknowns lie ahead, cultivating a holistic understanding of provider and payer challenges, keeping up on both historical and current market trends, and taking swift action based on the resulting insights can shield smart organizations from market headwinds. Whether the U.S. manages to dodge a recession or curtail rising inflation in the future, one thing is certain: Healthcare leaders need to be ready for anything.