A recession could impact federal and state funds for Medicaid programs, many of which undertook deep provider rate cuts in the last recession.


July 14—Provider pay is among the range of healthcare cuts that the federal government and state governments are most likely to apply when the next recession hits, according to several healthcare economists and policy analysts.

The country has not had a recession since the start of the massive healthcare policy changes required by the Affordable Care Act (ACA). And the unusually long time since the last recession makes the next one highly likely to occur within the first term of the next presidential administration, say some healthcare economists.

Charles Roehrig, PhD, a fellow and founding director at Altarum’s Center for Sustainable Health Spending, noted that since World War II there have been only two instances when the United States has gone 10 years without a recession—and the country is entering its eighth year since the last economic downturn.

“A betting person would say, ‘Sometime in the next four years there will be a recession,’” Roehrig said in an interview.

The next recession also will come amid an increasingly gloomy long-term fiscal situation for the federal government, creating pressure to control spending on Medicare, Medicaid, and ACA marketplace plan subsidies.

“It could be that Medicare prices are held flat or cut,” Roehrig said. “The one thing that the federal government can control is prices; it can’t really control utilization.”

And Medicare spending on providers is likely to be the most attractive target for cuts.

“Hospital prices, physician prices, those are the big-ticket items,” which may make them the most likely targets, Roehrig said.

Eugene Steuerle, a fellow and the Richard B. Fischer Chair at the Urban Institute, agreed that provider rates are the most likely to face cuts in the next recession.

“All of the other reforms, like trying to bundle goods and services or some of the experiments that are going on, those are much more long-run,” Steuerle said in an interview. “In a recession, if they start cutting healthcare spending, it’s going to be the things they can do then and there. I’m not saying that’s the right long-run pressure, just that that’s where they’d have some controls.”

The potential rate cuts would come as healthcare provider price increases have been at or below inflation for the last five years due to Medicare spending reductions required by the ACA and the Budget Control Act of 2011, Jeff Goldsmith, a national advisor for Navigant Healthcare, said at a recent Altarum event.

“What was so different about this time was that providers were unable to shift costs onto private payers to recoup those loses,” Goldsmith said. “Why? Because of the fear factor surrounding the emergence of all of these narrow-network products that were put together for both public and private exchanges.”

That situation previously arose in the 1990s, when providers accepted 20 percent price cuts from preferred provider organization plans to garner a volume surge that never appeared.

“You had a lot of craziness during the rollout of all these exchange products that is now clearly over,” Goldsmith said, referring to providers that agreed to deep rate cuts in return for inclusion in new narrow-network plans.

Many leaders in the healthcare industry thought the individual insurance market was going to triple under the ACA. Instead, ACA marketplace enrollment stalled at 11 million people, which was about half the number projected for this point by the Congressional Budget Office. Additionally, private exchange enrollment has leveled off at 8 million and likely will fall well short of the 40 million once projected by Accenture for 2018.

“I believe the pricing pause ends in 2016,” Goldsmith said. “The purpose of all of that provider consolidation was to push back hard; people are going to look at the narrow network contracts and say, ‘We didn’t get any business to offset the discounts,’ so when the insurers come back and want great big further cuts, the provider community is going to say, ‘Go pound sand.’”

ACA Impact

Steuerle noted that it may be tempting for Congress to respond to a deep recession by cutting the high federal funds for new Medicaid populations covered under the ACA.

Additionally, states could again undertake aggressive Medicaid provider rate-cutting, as they did in the last recession, including a notorious 10 percent provider rate cut in California.

Roehrig expected the federal government to help cushion the impact of the next recession on states by temporarily increasing the rate at which it matches states’ Medicaid spending. That rate, known as the federal medical assistance percentage, varies from 50 percent to 74 percent per state, according to U.S. Department of Health and Human Services data. States pay a much smaller, but increasing, percentage of Medicaid costs for enrollees made eligible under the ACA.

“Once you’ve expanded eligibility, I don’t think you can reverse your policy,” Roehrig said.

The next recession also is expected to increase fiscal pressure on federal subsidies for ACA marketplace enrollees. First, the massive layoffs that usually accompany recessions are likely to increase enrollments in the marketplaces as workers lose their employer-provided insurance, according to Roehrig. Because many of those new enrollees are likely to qualify for income-based subsidies, federal spending on marketplace plan subsidies would balloon at precisely the point when federal tax revenues decline.

Drug Prices

The fiscal pressures of a recession could help push Congress to pass authority for Medicare to negotiate drug prices, Roehrig said.

However, not all economists think drug price negotiations are a good idea—even for the high-profile hepatitis C cure, Solvadi, which Gilead purchased relatively cheaply but for which it charged a high price to the public.

“We’re OK as individuals buying low and selling high on the stock market, but we’re not OK with a pharmaceutical company buying low and selling high,” Amitabh Chandra, a professor of Economics at Harvard University, said at the Altarum event. “So there’s a whole lot of emotion in these debates that really hasn’t been thought through.”


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C. office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Thursday, July 14, 2016