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5 Factors that Will Make the
Next Recession Different from 2008
March 20, 2020
By Richard Rollo
Last year, an analysis by Hammond Hanlon Camp LLC (“H2C”) regarding the potential impact of a recession on the nation’s acute care hospitals suggested that the 2008 to 2011 recession had little, if any, impact on hospitals’ operating financial performance. Our analysis—based on a review of California hospital data from 2006 to 2013, just before the Affordable Care Act took hold—concluded by stating that future recessions are unlikely to be so kind.
As we now enter unprecedented territory with the emergence of the COVID-19 pandemic in which many hospitals are already halting elective surgeries and experiencing shortages of certain key supplies—alongside an extremely volatile market, with many raising the prospect of a global recession or even a depression—it is time to revisit this subject.
In addition to the adverse impact on hospitals’ invested capital, there are five ways the looming recession will be much harder on hospitals than in the past:
Cost trend vs. government reimbursement. Since 2008, hospitals’ costs have risen at much faster rates than government reimbursement. This means that more hospitals are losing more money on Medicare and Medicaid. Demographic changes, such as the increasing number of Baby Boomers aging into Medicare, compounded by the high probability of a greater share of the population qualifying for Medicaid, will likely lead to higher volumes of government-insured patients. In this environment, hospitals will need to cost-shift even more aggressively—if they can.
Commercial insurance rates. Over the past decade, commercial insurance rates have, on average, risen at or near double-digit rates. There is growing evidence among our clients that health plans are able to exert much greater downward pressure on rate growth than in 2008. This makes cost shifting increasingly difficult.
Commercially insured volume. One clearly evident adverse trend from the 2008 recession that will certainly be repeated during the next recession is a decline in commercially insured volume. A decreased ability to raise rates, compounded by a much greater reliance on cost shifting today, means any reduction in commercial volume will be magnified in its effect on hospitals’ bottom line.
Revenue cycle operations. Since 2006, the average case mix index of California’s hospitals has risen 30 percent. The population did not, in fact, become 30 percent sicker, although there is a distinct trend across the country toward increasing comorbidity. Instead, the higher case mix index is primarily the result of increasingly aggressive revenue cycle activities. Is this party over? Probably. As such, revenue cycle improvement initiatives cannot be counted on as a source of increasing revenue per unit of service to the extent they once were.
Increasing out-of-pocket exposure. Commercially insured and other patients must now bear a much higher burden of their healthcare expenses than they did previously, both through increased deductibles and a rise in out-of-pocket costs. With increasing unemployment, hospitals can expect a larger share of revenue will become uncollectable than during the previous recession.
There is no way to sugarcoat it: Hospitals, on average, will feel considerable pain in the expected coming recession. However, there are important steps hospital management can take:
Seek protection against market distress. There are several proactive strategies hospitals could consider, such as maximizing liquidity and hedging rates within the next six to 36 months; increasing and utilizing lines of credit; and evaluating liquidity covenants in debt agreements. For a full list of strategies, view our recent “State of the Capital Markets” brief.
Stress test your organization. As with the banking industry in the prior recession, it is imperative that the healthcare industry’s senior leaders and boards stress test their organization’s operating and capital positions and insist on looking underneath these stress tests to understand their essential implications.
Become serious about efficiency improvement. This will be an extremely serious undertaking for many hospitals.
Consider your prospects realistically—and act accordingly. In this environment, partnerships may be critically important to access resources, expertise, and the experience of others that enable organizations to effectively serve their communities and respond to the challenges ahead.
Is your organization considering what moves to make in a turbulent environment? We can help. Contact us.
ABOUT THE AUTHOR
Richard Rollo is a Managing Director for Hammond Hanlon Camp LLC, where he is a leader for the firm’s Healthcare Strategic Advisory and Mergers & Acquisitions (“M&A”) teams. Richard has more than 25 years of experience as a senior executive leading corporate finance, strategy, planning, M&A, and development functions in health care, energy, and
financial services. Contact Richard at email@example.com.