Recessions are contractions in economic growth with at least two consecutive quarters of shrinkage in economic output measured by gross domestic product. They have two highly predictable effects on our health financing system: First, recessions cause fiscal crises for state governments, compromising their ability to fund Medicaid. Second, they cause employers to alter their health benefits to protect or restore earnings.

Medicaid: the first mover

Recessions affect Medicaid funding more immediately than employers’ health benefit. Medicaid is the largest single expense in many state budgets or a close second to education. Because it is a safety net program, Medicaid spending expands as people lose their jobs. This invariably coincides with shrinking state revenue from falling income and sales tax revenue. To reduce the state budget deficits created by recessions, Medicaid programs usually implement hasty reductions in hospital and nursing home payments. They also reduce program eligibility where federal law permits, throwing poor people off the Medicaid rolls.

Why the next recession could be troublesome

Thanks to the substantial expansion of Medicaid due to the 2010 Affordable Care Act, Medicaid will be a federal budget problem in a recession as well one for the states. Recall that the federal government initially shouldered 100 percent of the cost of the 10 million new Medicaid enrollees, backing off to 90 percent beginning in the 2017 federal fiscal year. As a result of this expansion, federal Medicaid spending is expected to be approximately $377 billion in the current 2017 fiscal year. It is entirely possible that at the depth of a recession, there could be more than 80 million people enrolled in Medicaid — one in four Americans. Some states may see 40 percent or more of their citizens on Medicaid.

Many providers cannot remember the last cyclical Medicaid funding crisis. That is because in the aftermath of the severe 2008 recession, Congress temporarily increased the federal match for state Medicaid programs. This pulse of federal funding eliminated the necessity of state Medicaid budget cuts. The effect was to avert layoffs in safety net providers like large urban public hospitals and academic health centers, as well as to cushion critical access hospitals in rural areas. The last serious Medicaid funding crisis in which Congress did not play a moderating role was after the comparatively mild 1999–2000 recession.

The next recession’s Medicaid funding problem will cause stress for a lot of new relationships. In the past decade, state Medicaid programs have aggressively offloaded future economic risk by contracting with private insurers like UnitedHealth Group, Centene Corp. and Molina Healthcare to cover their beneficiaries. Some 77 percent of the overall Medicaid population is in some form of managed care. This means that in an economic downturn, Medicaid agencies will likely renegotiate their contracts with a handful of private health plans based on a single number — the rate increase or decrease — and let the health plans sort out the consequences with their care networks. The agencies can do this instead of directly cutting their provider payments and having to fend off hospitals, physicians and nursing homes in the state assembly.

For the very small number of states (e.g., Oregon and Alabama) that have devolved or are planning to devolve financial responsibility directly to care systems through risk contracting, a recession will likely bring an unwelcome downward revision in provider capitation rates.

Tightening employer health benefits: the lag effect

Employers are also affected by recessions because, like state governments, they experience revenue compression as a result of downturns in sales. When they do, many employers seek to reduce the growth in their health benefits costs. The last few years have seen markedly reduced health insurance premium cost increases.

Health benefit costs, however, remain a hot-button issue with many employers. Some smaller employers will likely drop their health plans altogether in the event of a recession, facing the uncomfortable trade-off between maintaining health coverage and laying off workers. This is part of the reason the number of uninsured rises during recessions, placing pressure on charity care and creating bad debt for hospitals. Over time, there has been a steady drop in the percentage of small employers offering health coverage, from two-thirds of all firms in 1999 to a little more than half in 2016.

Employers that remain committed to their health benefits will probably change their benefit strategies, attempting to shift cost and future cost risk to their workforce, insurers or both. Past recessions catalyzed the growth in HMO and preferred provider organization enrollment, which shifted risk to care systems through insurers’ network contracts. In the aftermath of the most recent recession, we saw a near quintupling of enrollment in high-deductible health plans, which now cover nearly 30 percent of all workers receiving employer health benefits. These plans have had a direct effect on increasing self-pay collection problems for care systems and in increasing their bad debts.

How to prepare

Rigorous cost management and productivity enhancement. Anticipating these revenue pressures will require health care enterprises to learn to run on regular gas. Depending on a health system’s local economy and payer mix, a major recession will slow revenue growth or even shrink top-line revenue. Having top-line revenues growing at 4 percent or less while having expenses growing at 7 percent to 10 percent is a recipe for running out of cash.

If there are productivity enhancement opportunities afforded by all those expensive clinical information technology investments, it is high time to find them. Furthermore, special scrutiny of physician compensation and productivity will be vital given the expanded role of hospitals in employing physicians. Reducing layers of management and rigorously scrutinizing contractual relationships both in supplies and services will also play a large role in bringing expense growth in line with revenues.

Tuning up the revenue cycle. Recessions will increase hospitals’ self-pay-patient financial exposure, both insured and uninsured. If collecting the patient’s portion of costs is not managed more effectively, hospitals will experience erosion in their cash flow. Tightening up revenue cycle functions — improving coding and documentation, better communication with patients regarding their self-pay liabilities, better tracking and management of denied claims for those who have insurance — will play an important role in coping with a tightening economy. Hospitals will also need to tune their clinical IT systems to reduce duplicative documentation requests to physicians and the care team. Doing so will take advantage of automation opportunities in assigning codes to clinical services as well as reduce demands on clinician time, thus improving health system operating cash flow.

Strengthening public health collaboration. If, as expected, the number of patients without health insurance rises in a recession, an increasing percentage of them will find their way into the public health system (including public hospitals and clinic systems, and federally qualified community health centers). These health systems are the first line of defense in reducing avoidable illness and acute care use. How hospitals relate to and exchange information with the public health system will become more important as the public sector’s footprint expands. Reducing emergency department use and identifying social problems that contribute to illness will become vitally important in ensuring a humane and proactive response to rising demand for care.

Making the case for policymakers. The Medicaid expansion was a key part of the Affordable Care Ac, and accounted for at least half of the reduction in uninsured people since 2014. Hospitals were enthusiastic supporters of health reform and have worked tirelessly to advocate for Medicaid expansion after the Supreme Court made it “optional” in 2012.

Hospital advocates must impress on Congress, state legislators and governors that they remain committed to providing high-value and thoughtful care for the poor and disabled, and that the commitment was not merely for a single economic cycle. Hospitals must insist that policymakers keep their commitments when times are tough.

(Editor's note: this column was written prior to, and therefore without knowledge of, the results of the 2016 presidential election.)

Jeff Goldsmith, Ph.D., is a national adviser to Navigant Healthcare and an associate professor of public health sciences at the University of Virginia, Charlottesville. He is a regular contributor to H&HN Daily and a member of Health Forum's Speakers Express.

The opinions expressed by the author do not necessarily reflect the policy of the American Hospital Association.