November 2022 | Point of View

The impacts of rising inflation and a potential recession on the healthcare industry

Payers and providers will be challenged differently by the current economic climate—each can navigate these potential threats with a digital focus

The impacts of rising inflation and a potential recession on the healthcare industry

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 will affect healthcare organizations for the next two years 

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: 

Challenges for providers  

  • 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).  

Challenges for payers  

  • Modernizing infrastructure. The technology used by many of today’s payers has traditionally been monolithic, inflexible, and ill-equipped to meet new requirements of regulations like the No Surprises Act. But the war for talent—which has left skilled tech workers scarce—and rising inflation means that payers will have to pay a premium to modernize their infrastructure.  
  • Contract negotiations. Providers are pushing for stringent contract negotiations in 2024 to restore lost margins from the pandemic and inflation. If those contracts are tied to the Consumer Price Index (CPI), payers may face higher costs and lower reimbursements that will impact their long-term financial outlook—albeit to a lesser degree if those contracts are capped. 
  • Drop in plan membership. Assuming key inflation drivers go unchecked, health plan members may have to shoulder the glut of price hikes, meaning they will see higher premiums, out-of-pocket spend, and deductibles. Paired with a recession, this could lead to drops in plan membership as business cut back on resources and more people find themselves unemployed and uninsured.

Navigating recession roadblocks

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. 

Providers should:  

  • Anticipate a drop in revenue. Providers should anticipate a drop in utilization as consumers delay elective and routine visits in order to focus on mitigating personal financial pressures. Provider revenue is likely to decline accordingly and profit margins may become even tighter.  
  • Follow the pandemic script and look to digital. Much of the tech-enabled, digital blueprint providers developed during the pandemic will remain crucial in this downturn. Embracing telehealth and digital services, for instance, maintained utilization for providers amid national lockdowns and restrictions—particularly for specialists. It can also streamline administrative workflows, broaden access to care, and reduce labor constraints. 
  • Prepare for a greater administrative burden. If household finances continue to tighten, healthcare bills may not be paid, disrupting revenue cycle management. Providers will have to make preparations to take on more administrative work such as sending out patient reminders, processing a greater number of payment collections, and/or leaning on external vendors to help put patients on payment plans.
  • Understand network consequences. If providers are hit by a potential recession, this will in turn impact organizations that are part of integrated delivery networks (e.g., managed groups of healthcare providers).  

Payers should:  

  • Brace for decreased enrollment. As we touched on in the inflation section above, payers may experience drops in enrollment for employer-sponsored coverage as companies lay off employees in a recession. While some of those former members may eventually join Medicare and Medicaid plans, many of them may not reenroll in a healthcare plan at all until the economic situation restabilizes. 
  • Take advantage of technology. Payers will have to consider how they can leverage telehealth and other digital services—and be prepared to process a rise in telemedicine claims. A sophisticated digital front door will be especially advantageous under strained economic conditions, as will supporting better integration with providers.
  • Explore ways to offset higher provider rates. If provider utilization stays low, the number of new health plan enrollees is still likely to slow to a crawl, meaning payers will have to find alternative means of offsetting higher provider rates. That may mean raising key components of member plan rates, like premiums or deductibles for instance, as well as looking at ways to drive down admin costs by building operational efficiencies. 
  • Prepare for a mixed bag. Ultimately, recessions can go a couple of different ways for payers. Margins for payers typically benefit from low utilization in specialty care, and price-conscious plan members may move to high deductible plans, which could further decrease utilization. But the overall share of members insured through employers will also decline; the last recession saw a drop of over 8 million enrollees. 

In general, capital will be limited across the healthcare industry—although the degree to which that will be the case remains to be seen.  

Three actions healthcare organizations can take

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. 

1. Streamline operations and strengthen foundational capabilities through digital transformation 

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. 

2. Invest in value-based care 

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. 

3. Explore ways to keep contract rates low 

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. 

What healthcare organizations need to keep top of mind

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.   

Explore our latest perspectives