How Will COVID-19 Impact the Healthcare Economy?

The healthcare industry is typically immune to recessions and nationwide economic struggles—but not this time. How will the pandemic impact the healthcare economy?

Note from the editor: This post was originally published in July 2020 and last updated with new information in February 2021.

The ongoing effects of COVID-19 in the United States will be felt for years, on both the healthcare and economic fronts. Amid nearly 27 million coronavirus cases and nearly 470,000 deaths, millions of Americans have filed for unemployment insurance after being furloughed or permanently losing their jobs; normal activities have been severely curtailed; and businesses have closed, many of them never to reopen.

But how about the economic effects on the healthcare industry itself?

In an April 2020 commentary for the American Medical Association’s JAMA Health Forum, David Cutler, Ph.D., of the Department of Economics and Kennedy School of Government at Harvard University, pointed out healthcare’s historic immunity from recessions stems from the relatively constant demand for medical care and the fact that health insurance tends to keep care affordable for most people.

The “COVID-19 recession,” however, has brought about notable economic changes for the industry, Cutler says, including:

• Efforts to keep medical offices clear to reduce disease spread
• Less-generous private insurance with higher deductibles
• Postponement of all kinds of medical care
• Frozen or reduced salaries and furloughs for clinic staff
• Rising unemployment insurance claims by healthcare businesses

These developments affect patients as well as providers, creating a situation that “feeds upon itself,” Cutler says. Medical offices face many of the same risks from a sustained shutdown as other businesses do. As people stay away, income is lost, often leading to furloughs or even closings. It can become a vicious cycle: job losses and wage reductions lead to fewer dollars to spend, and that causes further job losses and wage reductions. Some businesses can recover while others never will. Although medical facilities have hopes that primary care visits, surgeries and other services will eventually be rescheduled, some hospitals and practices still face the threat of being shuttered.

The Senate’s $2 trillion coronavirus relief package set aside more than $150 billion for the U.S. healthcare system. That included $100 billion for hospitals overwhelmed by COVID-19, along with funding for research, treatment, and the Strategic National Stockpile of personal protective equipment (PPE) such as ventilators and masks and other necessary supplies. But many have questioned whether this package provides enough relief.

Making Up for Lost Volume

A survey of more than 100 health system executives in mid-June 2020 by healthcare consultancy Advis found that about 70% of respondents said their main concern was replacing lost patient volume and revenue. A similar percentage planned to focus on marketing, education and patient outreach in their efforts to restore that lost volume.

Participants in the poll expressed concern about patients who might put off treatment of lingering health issues, which might then worsen, putting further stress on the system. One example of this was a reported decline of 86% to 94% in screenings for breast, cervix and colon cancer in March of this year, after Americans were urged to delay routine mammograms and colonoscopies to help curb the spread of the coronavirus. Meanwhile, not-for-profit hospitals have been concerned for months about lost income from profitable elective surgeries that they canceled to make way for high-cost COVID-19 patients, even as they deal with rising costs for staffing and supplies. They also were bracing to treat more unemployed workers and anticipating investment losses.

The Ripple Effect on the Healthcare Economy

The analysis by Harvard’s Cutler discussed the two types of recessions: V-shaped (short, with rapid recovery from downturn) and U-shaped (with a longer period before recovery) and the harm posed to the economy from the reluctance of many people to re-engage amid a lack of adequate testing capacity.

A long recession leading to massive numbers of permanent job losses would reduce employer-provided insurance coverage, resulting in more people who are uninsured or on Medicaid (with its lower payment rates), in turn stretching state and local budgets and forcing governments to cut Medicaid fees and payments from the insurance plans of public-sector workers. That could bring a need for more government relief. This ripple effect is likely to be felt for years.

Weathering the Storm With Value-Based Payments

One bright economic light for many healthcare providers has been value-based payment arrangements. The pandemic “has highlighted like never before the pitfalls of paying for healthcare based on the number of patients seen and services rendered,” according to a June 13 story in Modern Healthcare. “It simultaneously reinforced the benefits of financing healthcare in a way that’s tied not to volume, but to value.”

The magazine cited anecdotal evidence from physicians, medical group administrators, health insurers and others indicating that providers in value-based arrangements have been better equipped to weather the storm than have those relying strictly on fee-for-service arrangements. These practices benefited from a steady source of income even as they maneuvered to meet industrywide challenges such as unprecedented call volumes, major appointment backlogs, supply shortages, limited virus testing capabilities, and the loss of revenue from elective cases.

Previous investments in care management, technology, telehealth, analytics and programs to address social determinants of health have helped ease these providers’ way through the pandemic. Some providers that have taken steps along the value-based path expressed a desire to move farther in that direction, while others that had been hesitant to do so have been motivated to reconsider.

Although the long-term effects of COVID-19 on the healthcare economy remain to be seen, it is becoming steadily apparent that all players must be ready to look at new ways of doing business if they are to stay healthy amid a crisis with no clear end in sight.