Multiple reports have been released indicating the increased likelihood of a recession in 2020. More than half of 147 CFOs surveyed by Deloitte believe that the U.S. will be in a recession by the end of 2020.
Leading indicators also point to a slowdown in economic growth. The treasury spread, China’s GDP growth, and S&P returns are all coming in low. Apple has cut its sales forecast on China’s financial weakness. GM has idled plants and cut thousands of jobs as sales slow. And Stanley Black & Decker is reducing costs because of “headwinds.”
What would a recession mean for your health plan and workforce? In looking back to the effects of the 2008-09 recession, here are some things to consider:
- A recession could temporarily alleviate or delay workforce shortages.
- Underemployment and unemployment can lead to significant declines in hospital admissions and elective surgeries for commercially-insured patients.
- A slowdown in healthcare spending could continue to push the healthcare industry toward outpatient care.
- An increase in the uninsured could create pricing pressures on the commercial insurance market.
- Resilient companies gain advantage in economic downturns.
How can companies manage to be resilient?
Even during the latest economic crisis, resilient companies flourished. In fact, resilient companies performed better before and after the downturn. What were the characteristics of these companies?
- Resilient companies moved early on operating cost. Resilient companies were able to reduce operating costs both during the downturn and the recovery periods, while the non-resilient companies were only able to reduce operating costs during the recovery period. In fact, the resilient companies were able to obtain a greater decrease in operating costs during the recovery period because of being pro-active. This was critical to driving sustained EBITDA improvement even while revenues were falling.
- Resilient companies divested underperforming assets aggressively and then acquired post-downturn. The differential is significant because the increased cash position gave them more buying power than the non-resilient companies.
- Resilient companies prepared their balance sheets ahead of the downturn. Resilient companies also were more proactive in doing so during the recovery period.
What are steps that companies can take to manage with resilience? Specifically, how can companies manage their health plans to be resilient?
Q: What is your exposure?
A: Evaluate your exposure and risk.
The first step for a resilient company to take in a challenging economic environment is to assess its own vulnerabilities in a systematic manner. Knowing your exposure and risk is like knowing what obstacles you will be faced with when heading for a long journey.
Consider several scenarios. As an economic crisis evolves, there are at least three scenarios that could come about — a modest downturn, a more severe recession, and a full-blown depression. Consider which scenario is most likely to unfold in your industry and your business.
Quantify the impact on your business. Run simulations for each of these scenarios that generate financial outcomes, and determine its impact on retention and recruitment. Claims utilization, costs, and frequency will need to be factored into each scenario.
Assess competitor vulnerabilities. It’s important to have an understanding of both your own strengths and weaknesses relative to those of your competitors. While they may have different cost structures and financial positions, understanding how they are managing the economic downturn will give you some insight on how to manage yours. To emerge from the downturn in a lead position, you must calibrate the actions you plan to take in light of the actions that your competitors will most likely take. For example, they may shed positions, which could provide an opportunity to acquire key talent at a lower cost.
Q: How can you reduce your exposure?
A: Conduct resilience planning, and develop initiatives that reduce your exposure and risk.
Figuring out the best way to survive and maximize your company’s performance during the downturn is the next step. Resilient companies are going to monitor and maximize their cash position. This is often done by reducing or postponing spending and by placing a focus on cash inflow.
One way to achieve a better cash position is to move from a fully-insured to a partially self-funded insurance arrangement. Assuming that you may have already done this, examining both of your Individual and Aggregate Stop Loss amounts will be next. Depending on what your population looks like as you enter the economic downturn, your plan may benefit by having higher amounts of coverage, allowing you to spread risk.
An overlooked area to review would be in provider management and creating incentives for employees to use providers that are high in quality outcomes and low in costs.
In addition, another category to review is the coordination of drug treatment therapies that could be lower in cost and more effective. A one-time charge for gene therapy that could cure a disease could be cheaper than having to pay for less effective treatments year after year. There are also some instances when companies can save in healthcare costs by reducing or eliminating the cost for generic drugs.
Results-based pricing should not be a forgotten strategy, that links payments to measurable customer benefits resulting from use of a product or service.
These approaches can be altered in their severity of aggressiveness, but the ultimate goal is to reduce cost and increase efficiencies in all of your spending, including health care and pharmacy costs. Consequently, it is imperative to monitor and maximize your cash position, by using a disciplined management system.
Q: What does timing look like? Should a company wait until more data is released?
A: Create a management system and execute quickly.
A strong economy doesn’t last forever. Going back through history, the economy has ebbed and flowed every 5-9 years, with more years of growth than decline. Resilient companies prepare for these economic changes and act accordingly.
The process that is laid out should yield a number of promising initiatives. It will be imperative to carefully prioritize and assess each initiative based on urgency, overall financial impact, barriers to implementation, and risks that the initiative might pose for the business (workforce). The result will be a portfolio of actions with the right blend of short-term and long-term focus.
For some companies, the outcome of this process will be a program of immediate actions that represent an expedited version of business as usual. For others, it will be a painful realization that nothing short of an urgent makeover will suffice.
Now is the time to pursue a comprehensive review of your current suppliers and procurement practices, which undoubtedly will prompt new initiatives.
How can you gain long-term advantage?
The best companies do more than survive a downturn. They position themselves to thrive during the subsequent upturn, guided again by a number of broad objectives.
A downturn also provides a great opportunity to invest in people. Whether it is to upgrade the quality of your management teams or hire from your competitors, competition for top people will be less fierce.
Finally, it is important to remember to invest for the future. Investments made today in areas such as population health, healthcare technology, and pricing transformation will always generate an ROI. Even if the ROI occurs after the economic downturn, it will put your company in a better position than your rivals.
Sources
- Deloitte, January 10, 2019, “Tariff and gridlock expectations stoke recession fears in fourth quarter: Deloitte CFO Signals™ Survey,” https://www.prnewswire.com/news-releases/tariff-and-gridlock-expectations-stoke-recession-fears-in-fourth-quarter-deloitte-cfo-signals-survey-300775947.html.
- McKinsey, July 2019, “Recession and resilience: Preparing healthcare leaders for the next economic downturn.”
- Strategy&, November 15, 2010, “Zero-based cost management: A holistic approach to managing budgets.”
- SHRM, October 8, 2009, “HR leaders rethink strategies during recession.”
- Harvard Business Review, February 2009, “Seize advantage in a downturn.”
- Harvard Business Review, April 02, 2019, “Companies need to prepare for the next economic downturn.”
- https://www.prnewswire.com/news-releases/tariff-and-gridlock-expectations-stoke-recession-fears-in-fourth-quarter-deloitte-cfo-signals-survey-300775947.html
Alan Wang is the President of UBF and serves as the lead consultant. He has delivered the UBF solution set throughout the world and is highly regarded for his areas of expertise. You can follow him on Twitter @UBFconsulting.