By Nicole Witowski
There’s been a lot of noise about a U.S. recession this year. Last summer, inflation hit a 40-year high, causing the Federal Reserve to launch an aggressive campaign of interest rate hikes. The cost of capital shot up. Investment slowed down. Many economists warned that a downturn was just around the corner.
But the U.S. economy has avoided a recession (so far) as unemployment drops to a near-record low and wages tick up. That’s not to say we’re out of the woods. Just last week, the Fed warned about another potential rate hike. Job growth is decelerating. Something weird is happening.
Healthcare organizations are still grappling with labor constraints and higher expenses that continue to impact the bottom line, even as health system finances start to move in the right direction. Many healthcare startups built in a low-interest rate environment are now running out of money and facing hard choices.
Here’s what healthcare companies should consider to not only stay afloat but thrive in an uncertain economic climate.
The past as a prelude
Three common indicators of economic strength are national spending, employment, and gross domestic product (GDP) growth. From 1961 to 2021, national healthcare expenditure (NHE) grew at a cumulative annual growth rate of 8.6% in the U.S. That’s nearly three times the average growth rate for the country’s economy as a whole. Even during recessions, national healthcare spending rarely declines. Below, we highlight NHE and GDP growth over time.
NHE and GDP growth from 1961 to 2021
Fig 1 - Definitive Healthcare analysis of National Health Expenditure (NHE) and Gross Domestic Product (GDP) data. Shaded areas indicate U.S. recessions. Sources: U.S. Centers for Medicare & Medicaid Services, U.S. Bureau of Economic Analysis.
When it comes to employment, healthcare is a bright spot in the U.S. labor market during times of a shrinking economy. During the Great Recession (2007 to 2009), national employment dropped by 6.9% or 7.8 million jobs. At its peak, unemployment rose to 10%. In contrast, healthcare employment grew 6.6% during the Great Recession, increasing by 852,000 jobs.
What does this mean for healthcare players?
The healthcare industry has a track record for resilience. Past data shows that demand for healthcare services is relatively inelastic. Illnesses don’t disappear when the economy slumps. But that does not mean the industry is immune to challenges. Healthcare’s historic resilience is being tested on many fronts: investment losses, higher interest rates, supply chain snarls, staffing shortages, high labor costs, and more.
For healthcare startups that bloomed on easy access to cheap capital during the pandemic-driven technology boom, layoffs and shutdowns are culling the field. Biotechnology company Goldfinch Bio, virtual care company Babylon Health, and mental health platform Mindstrong (just to name a few) were among this year’s casualties.
At the same time, the forces challenging the industry could also drive opportunity. To succeed in uncertain economic times, healthcare companies should prioritize these three key areas.
1. Tighten the purse strings in leaner times
During periods of financial constraint, companies have a chance to fine-tune cost management. For care delivery organizations, this means looking closely at areas to cut back on spending without compromising patient care or safety. Renegotiating supplier contracts, optimizing inventory levels, and scrutinizing administrative overhead can help ensure resources are directed where they can make the most impact.
HCA Healthcare cut contract labor costs by 20% year over year, partly by lowering turnover and increasing nurse hiring. Similarly, Tenet Healthcare improved employee recruitment and retention to trim high-cost temporary staffing use, leading to contract labor costs of 4.3%, down from 6.2% in 2022.
The key to cost-cutting is to be strategic. It’s not about indiscriminate budget slashing but rather a focused effort to maximize the value of every dollar spent.
2. Focus on cost-efficient growth and core assets
Even in tough economic times, healthcare organizations can and should continue to invest in growth. Fitch expects capital investments for hospitals to focus on cost-efficient growth as hospitals that pumped the breaks on capital expenditures during the peak of the pandemic play catch-up.
Tenet Healthcare plans to scale up its high-margin ambulatory services business to achieve long-term growth. This is in line with Ascension Health’s investment in ambulatory care and ancillary services as more care shifts from inpatient to outpatient settings. And HCA Healthcare has earmarked $4.6 billion for new hospitals and other development.
When money is tight, life science companies should focus on improving the commercial performance of their current assets. Diversification is smart when resources are abundant, but non-core assets should be shed in leaner days to drive the growth of existing products. Takeda Pharmaceuticals is one recent example of a pharma that has sold a group of products that didn’t align with its core areas for growth. By pruning its portfolio, the company freed up capital for its long-term ambitions.
3. Look for M&A opportunities
Challenging macroeconomic factors can push healthcare companies large and small towards mergers and acquisitions (M&As) for strategic reasons or out of financial necessity. The hospital industry has seen some major deals so far this year, including those between Froedtert Health and ThedaCare, Kaiser Permanente and Geisinger Health, and BJC HealthCare and Saint Luke’s Health System. These cross-regional partnerships will play a key role in the future growth of health systems.
Smaller life science companies facing a funding drought may feel pressured to partner with larger companies or agree to an acquisition. While pharma companies are taking a more conservative approach to dealmaking this year, patent cliffs are looming, meaning they will need to partner with or acquire companies that offer differentiated solutions to overcome upcoming losses.
Most big pharmas will buy companies for the quality of their clinical assets and the drugs needed to fill pipeline gaps. Such was the case with Pfizer, Merck, and AstraZeneca. Cash-rich from its COVID-19 vaccine successes, Pfizer scooped up Biohaven Pharmaceuticals for $11.6 billion, Arena Pharmaceuticals for $6.7 billion, and Global Blood Therapeutics for $5.4 billion in 2022. Merck shelled out $10.8 billion for Prometheus Biosciences, and AstraZeneca bagged CinCore Pharma for $1.8 billion in 2023.
In a tough economy, healthcare companies that proactively manage resources, invest in long-term growth, and consider strategic partners will be better positioned to weather any downturn-related storms and emerge stronger on the other side. But healthcare leaders must focus on the areas that will impact their organizations the most. Healthcare commercial intelligence can provide you with the necessary context to make smarter, more informed decisions. Sign up for a free trial to learn how you can use Definitive Healthcare to discover your next opportunity.