Rae Woods: From Advisory Board we're bringing you a Radio Advisory. My name is Rachel Woods, you can call me Rae. Since the onset of the pandemic we've seen a lot of attempts to compare this crisis to crises that have happened in the past, and many continue to use the 2008, 2009 recession as a proxy for the challenges we face today and a means of predicting what will happen next. Rae Woods: But at Advisory Board we believe that the road to pandemic recovery will be very different from the path this industry took 12 years ago. To talk about why we need to throw out the recession playbook I've brought strategy and COVID-19 experts Yulan Egan and Christopher Kerns. Hey Yulan, hey Christopher. Christopher Kerns: Hi. Jinx. Rae Woods: It's been a minute since both of you have been on the podcast, I feel like the biggest question on everybody's mind is have you gotten your vaccine? Christopher Kerns: I have actually, this is the first dose. I got it on Monday. Rae Woods: So you're half vaxed. Christopher Kerns: I am half vaxed, Yes. I got my notice on Friday and I took the earliest possible appointment that I could. Rae Woods: How about you Yulan? Yulan Egan: Not yet, I'm in California and things are supposed to open up to 16 and over on the 15th. So I'll be sitting in front of my computer on midnight on the 14th probably. Rae Woods: Like I think everybody else in the state of California. Christopher Kerns: Exactly. Rae Woods: If I reflect on some of the commentary in the media across the last 12 months there's been a consistent comparison between the COVID-19 crisis and the 2008, 2009 financial crisis. We even made that comparison early on in the pandemic. Why did we initially make that call, that comparison between the two? Yulan Egan: On the surface I think there are some pretty clear parallels, they were both crises that played out on a global stage and that had very clear economic fallout associated with them. Christopher Kerns: And severe economic fallout. Yulan Egan: Yeah, I think there's also the fact that it happened within recent memory, so most of us remember it and a lot of leaders across the industry saw the impact that it had on healthcare firsthand. Christopher Kerns: And if there was something that I kept hearing over and over again it was a reminder of how long it took volumes to recover, how it took three years post 2008 for volumes to recover to their previous highs. And I think there was this relatively constant fear that that was going to happen again. Rae Woods: And now we come around in the opposite direction where 12 plus months later we realize that the two crises are different in almost every way, which I actually think is pretty surprising for folks especially when we think about the economy. So what makes the economic fallout between the pandemic different than the global financial crisis? Yulan Egan: I think one of the clearest things we've seen is related to unemployment. So unemployment obviously skyrocketed at the beginning of the pandemic. In fact we actually reached the highest rate of unemployment recorded since the federal government started recording those numbers in the 1940s. Rae Woods: Wow. Yulan Egan: But that spike turned out to be temporary in nature, so if we look at the latest data that we have as of February of this year it's actually dropped back down to about 6.2%, which is a much, much faster recovery than we saw after the '08, '09 recession. Rae Woods: How long did it take us to get back to a similar number in the financial crisis? Yulan Egan: I was just looking at these numbers, it took about five years, so- Rae Woods: So five years versus one basically? Yulan Egan: Yes. Yep. Rae Woods: So unemployment fared better than expected because it was so temporary, but what else really set this crisis apart? Christopher Kerns: Well the economy in early 2020 wasn't just healthy it was actually thriving, I think it's fair to say. And as a result we've been seeing a better snap back from that, this recession wasn't caused by an overpriced asset bubble or excessive leverage. It wasn't a financial crisis that precipitated this, this was caused by government responses to a major health crisis. Christopher Kerns: So when you're starting from a position of strength you can understand how a number of different factors in the economy would snap back once a lot of those restrictions are lifted. Yulan Egan: And I think we've seen that concretely in a few ways, a lot of sectors of the US economy actually proved to be surprisingly resilient. We've seen a pretty strong stock market. I've been house hunting, I can tell you that the housing market here in California has completely exploded. Rae Woods: Same here in DC. Yulan Egan: Even the retail market recovered more quickly than I think most were expecting as well down the back half of 2020. And all of that has meant that tax revenues didn't take quite as big a hit as they did after the last recession. Rae Woods: So all of this should be really good news, especially to providers. Because if I think about the effects of job loss specifically it tends to come with financial insecurity, insurance loss, ultimately has a big impact on healthcare utilization. That's one of the big things that we saw in the last recession. Rae Woods: So does that mean that we're out of the woods when it comes to volumes? Yulan Egan: I wouldn't say that we're out of the woods but I do think volume recovery is going to look very different this time around. So I wouldn't be shocked if we see a quicker rebound but that rebound's also likely to be much more uneven. And I think financial insecurity is likely to play a smaller role but there's still plenty of forces at play that are going to suppress volumes across the longterm. Christopher Kerns: There were lot of volumes that were suppressed for a while, and as a result you're working through a backlog right now. So for a lot of procedural cases, a lot of diagnostic cases, they are snapping back a lot faster than I think a lot of people would have even expected. But when we look at surveys of planners for example, most don't expect ED volumes to get back to baseline maybe ever. Rae Woods: But let's talk about that, those deferred volumes. I will admit I got this question just a couple of days ago from an organization whose volumes were trickling back up, getting closer to 2019 levels, and they wanted to know could we actually see a volume boom if everybody comes flooding back into the health system. I think they actually likened it to the roaring 20's, but for healthcare services do you actually think something like that would happen? Christopher Kerns: Potentially, but it's going to be time limited. When we look at the surveys of hospital and health system leaders they generally expect that they'll be working through that backlog by August to November. Rae Woods: And to your point, not everything is coming back. Procedural volumes is one thing if you're working through the backlog, but if ED volumes are not coming back, that has implications on future volumes. Christopher Kerns: Right, it just means that providers are going to have to look to alternative sources to be able to get the right cases to come to them, to get better referrals. They're going to have to use a variety of channels, not just their primary care physicians and specialists and ED's but also using their virtual channels that they have built out over the last year. Yulan Egan: I also don't think we can assume that the volumes are going to come back to the same players. I don't know that the distribution is going to look exactly the same as it would have pre-pandemic. And in particular those organizations that can actually really streamline their operating procedures and potentially extend hours to do surgeries on nights and weekends might be able to capture some market share in the short-term, because patients might be willing to switch providers if it means they can get something done quicker. Christopher Kerns: Yeah, there're a lot of lingering fears around the hospital settings so I think they could really position free-standing providers such as ambulatory surgery centers that can attract patients that otherwise might historically have gone to the hospital setting. Rae Woods: We've been talking about the differences on the provider side but I want to switch and talk about the differences among purchasers. If I think about the last recession a big goal of purchasers was to look to healthcare as a source of savings as they think about their own recovery. Is that something that you're expecting to see this time around? Yulan Egan: The simple answer is no, and I think there are two purchaser groups that we've been looking at particularly closely, which are employers and Medicaid, both of whom we expect to take very different approaches this time around. Rae Woods: Okay, so let's start with the employer side. Again, if I think to last time, a big source of cost savings that employers look to was just to shift cost onto employees, in the form of high deductible health plans. But it's hard for me to believe that there's a lot more juice to squeeze there. Christopher Kerns: Yeah, I think you're getting at something important, which is a lot of the efforts to cost shift have already happened and they've happened across the past decade. And increasingly employers were looking to other options such as patient steerage for example as a means of being able to achieve more savings. So I don't think we're likely to see more cost shifting in the form of more HDHP's for example. Christopher Kerns: I also think there is the fact that in 2020, because utilization was down across the board at least for the year, a lot of employers got the savings that they would want simply from lack of utilization. And last, I think you've got this issue of optics. During a pandemic it's pretty bad to actually cut health benefits, so right now we're not seeing a ton of employers that are looking to curb their health spending significantly, at least in the form of shifting cost to patients. Yulan Egan: I think the other important thing to remember as well is that HR leaders have a lot on their plates for this year, they're trying to navigate bringing people back to the office, potentially maintaining a certain percentage of the workforce as remote or working from home. So there are a lot of big decisions that they need to work through this year in addition to figuring out what they're going to do about health benefits. Rae Woods: What about Medicaid, that was also a big target in the last recession? Christopher Kerns: We had originally thought that we would see significant cuts to Medicaid pricing simply because of the collapse of state revenues and tax revenues that had been expected in 2020. Rae Woods: Because people were staying home, because people weren't spending money. Christopher Kerns: Exactly, and we're no longer saying that. Yulan Egan: Yeah, I think our perspective changed when we saw that the tax, the hit to tax revenues had been smaller than we originally expected they would be. I will say there's going to be significant state by state variability here, so on average I think the outlook for Medicaid looks a lot better than we originally expected it to. But I was just looking at the numbers, there were seven states that had revenues that declined by more than 10% last year. So in those areas you would expect Medicaid to potentially be a target. Christopher Kerns: But if you were looking at it by and large funding for Medicaid has stayed fairly stable, and not only do we have the improvement in state tax revenues, we also have the recent stimulus law that is designed to help preserve state budgets. Rae Woods: So would you say that the Medicaid outlook on the whole is actually good? Christopher Kerns: I would say that it's fairly stable, I don't know if I would use the word good. Yulan Egan: Yeah, I think state budgets are an evergreen challenge and so Medicaid is something that states look to on a continual basis to try to find savings. I don't know that the picture looks significantly worse than it did pre-pandemic. Rae Woods: Yeah, and it's important to remember that unlike the federal government most states have to balance their budgets, which is exactly why to your point they constantly end up looking at cutting provider rates. Yulan Egan: Exactly. Rae Woods: I want to come back to the first indicator of economic distress that people were looking at, and that was job loss. We talked about the fact that that was temporary, but if I think about the differences between now and the Great Recession the reality is that today job loss doesn't mean insurance loss in the same way that it maybe would have 12 years ago. Christopher Kerns: Exactly, there are a lot more options now. The Affordable Care Act provided more options in terms of Medicaid expansion in the states that expanded it plus you have the Affordable Care Act Exchanges that provide options for patients who might otherwise have gone uninsured. Yulan Egan: And we don't have hard numbers on this just yet but we do know that the industries that tended to be impacted most by the pandemic were also not the industries that tended to provide health insurance to begin with. So retail, service industries were those that were hard hit, people in those industries are less likely to rely on their employer for insurance. Yulan Egan: So I think the overall impact is going to be a lot smaller than what we saw 10 to 12 years ago. Rae Woods: And what ultimately might that mean for the healthcare industry? Yulan Egan: Well what we saw in the aftermath of the '08, '09 recession is that the uninsured rate hit a new high. I don't think we're going to see that this time around. And in fact it's possible, maybe not likely but possible, that the uninsured rate could actually hit a new low. We've also gotten an administration now that's investing very, very heavily in the public exchanges and Medicaid and really trying to expand coverage even further. Christopher Kerns: In the recent stimulus law we saw new incentives to get states that have been here to for recalcitrant and expanding Medicaid to do so. Rae Woods: Yeah, and made signing up for the exchanges easier and improve cost sharing for folks that might be signing up for a plan on a public exchanges. So maybe... It's interesting that the opposite effect might happen in this crisis compared to the last one in our lifetimes. Rae Woods: It strikes me that perhaps the biggest difference between the two crises is that one was motivated by a financial calamity, this is exactly what you said earlier Christopher, and the other was about healthcare and about a health challenge. So as a result we've actually seen more funding. Billions of dollars have actually been redirected into the healthcare industry, relief funding like we've been talking about, but also in the form of new investments. What does that change actually mean this time around? Yulan Egan: We've been talking about non-traditional competitors for a long time, organizations like Big Tech, the Amazons and Walmarts of the world, technology startups as well that are looking to get into the healthcare space. A lot of those players have actually done fairly well through this crisis. Amazon's probably the prime example of that but startups as well, we've seen an unprecedented level of investment in digital health funding across the past 12 months. Christopher Kerns: And it's a major shift in capital priorities. In fact, when we look at those same surveys I mentioned before of hospital and health system planners, they also are looking to shift their investment priorities into more digital health. It's probably the most significant shift in capital prioritization that we've seen since the mandating of EMR's in the original Stimulus Act in the early Obama years. Rae Woods: So I'm trying to think about the net impact of this year. Does that ultimately mean that the healthcare industry is just poised to get a lot more competitive? Yulan Egan: Not necessarily. It means I think that a lot of these non-traditional players have gotten a boost and they're definitely looking to increase their foothold in the healthcare market, but I also think we're poised to see quite a bit of consolidation within the healthcare industry as well. Yulan Egan: That includes both traditional players like hospitals and health systems but we're already starting to see it with a lot of these digital health companies as well. Rae Woods: And that's probably because cost pressures haven't exactly gone away, even with an influx and boost in cash across the course of this pandemic. Christopher Kerns: And in fact cost pressures are probably more intense than ever. The biggest impact right now is on labor costs, so you've got very traumatized workforce at this point in care delivery. Some of them are just going to drop out of the labor market and that is going to create a much tighter labor market in the short term, we're already seeing upward pressure on wages, not only for physicians but also for nurses and allied staff. Rae Woods: I think the labor pressure piece might actually be surprising to some folks, because if I think about healthcare jobs they're typically thought of as recession-proof. Again, we're making comparisons between two crises, and the last time around healthcare employment grew pretty steadily. Does that mean we're not going to see that this time around? Christopher Kerns: Well I think we've got the challenge of burnout. You've got health workers who have been continually battling a crisis for the past year and many of them are retiring early, some of them are leaving the industry altogether, and it's left a lot of hospitals around the country with severe shortages of staff. And there's just this widening experience gap. Yes, there are lots of people right now who are applying to medical school as inspiration coming from the pandemic, but the reality is we're going to have a lot of new medical workers in the field in a few years and they just don't have the experience of the people who are retiring en masse right now. And in the short-term that leads to a labor shortage and that leads to increases in wages. Yulan Egan: Yeah, so this is another place where I think we're seeing things play out in the exact opposite way that they played out after the '08, '09 recession. Retirements is a great example of that. Last time around people were deferring their retirements, they were staying in the workforce longer. This time we're seeing people retire early. Rae Woods: And again, I think this might be surprising to folks who are seeing a lot of headlines about the Fauci effect, the idea that even living through this crisis is actually pushing folks to apply to medical school and nursing school. But why is that not enough for this shortage problem and ultimately cost problem? Christopher Kerns: Because it takes time. And the reality is that a lot of organizations are going to be feeling this shortage right now but it's going to take years for a lot of these young people to get the training that they need to enter the workforce. So in the meantime we're going to see an industry that suddenly had to rely on technology when people were forced to stay at home. Well, that technology is going to be relied upon again to be able to cope with the labor shortages that they're about to experience if they're not already experiencing them. Yulan Egan: I would say that while medical school applications are important possibly the even bigger concern is the potential nursing shortage, and in particular I'm starting to hear some organizations sound the alarm about the future of bedside nursing in particular. Yulan Egan: So how do we not only get the number of nurses that we need as an industry but how do we encourage at least some of those nurses to work in the hospital setting and at the patient bedside. Rae Woods: And to Christopher's point, make sure that they have the experience necessary to provide a very specific type of care that comes with time and training and is not something that you're going to get immediately upon graduation. Christopher Kerns: The good thing about labor shortages is that once they become known they tend to be a bit self-correcting, but it's that interim period while they're self-correcting where the pain can really be felt. Rae Woods: So staff is one shortage that providers want to protect against because of the immediate concern but also the accompanying cost problem. The other one that comes to mind for me is supplies. Christopher Kerns: Absolutely. One of the effects of the pandemic is a increase in the amount of stockpiling that providers all over the country have engaged in with supplies, moving away from keeping just enough supplies that are needed for a week and are going up to two months for example. So that costs a lot of money and that pushes upward pressure on supply costs. It's definitely true that we hear from executives around the country that they want to push on their overall supply spending this year, especially given that pushing on labor savings is going to be really, really difficult. But the reality is pushing on supply savings is also going to be challenging given the stockpiling mandates that most of them have. Yulan Egan: I think there's a real tension here. On the one hand, if you can't get savings from labor supplies or the natural place to look, on the other hand there's upward pressure on cost into the supply chain as well because of this whole effort to pandemic-proof. Christopher Kerns: I think the third option is to decrease capital spending, but when we talk to executives and when we survey them, most do not expect to decrease their overall capital expenditures. It's just that I think a lot of them are reprioritizing them toward digital health in a way from the traditional brick and mortar investments that they've made in the past. Rae Woods: So none of this sounds good. So what is the net outcome that you all are predicting here? Christopher Kerns: Well, I don't think it's necessarily a bad thing for providers to be investing in digital health, I actually think providing more investment in that sector that patients evidently have very much come to rely on is a good thing over the long-term. But I think that the upshot is that for the provider industry at least across this year, we're likely to see some pretty significant volume recovery in the most profitable volume areas, procedural volumes in particular, we're likely to see higher patient acuity which may or may not be good for the providers, depending on the reimbursement they're getting for that. Christopher Kerns: But given the upward pressures that we're seeing on cost, we would say net net, we're likely to see some modest margin recovery across this year. It won't necessarily reflect the boost that they're seeing in volumes. Yulan Egan: I do worry and I alluded to this a little bit earlier on that this is a recipe for consolidation. Even with modest margin recovery the hospital side of the industry in particular isn't in a great place and they're going to need to find savings and economies of scale somewhere. Rae Woods: We've been talking about the fact that the Great Recession isn't the right playbook and there's all of these differences, in some cases the opposite outcome this time than the last crisis that we lived through. So my question is if the Great Recession isn't the right playbook, is there a playbook that this industry can point to as we move into recovery? Christopher Kerns: The problem with looking at playbooks is that we just don't have these events on this scale happen all that often. The last major financial crisis that we had prior to 2008 was 1929 and the last major pandemic that we experienced at this scale was in 1918. And I think it's safe to say that the playbooks from 1918 and 1929 just have not been applicable in the 21st century. Rae Woods: Right. Christopher Kerns: So I don't think we're going to find the playbook. Rae Woods: Well then I do want to give you a moment to speak directly to our audience, what are then the takeaways that you want leaders in healthcare to focus on and ultimately act on when they look to recovery? Christopher Kerns: Well the first is that they need to find economies of scale where they can, as Yulan mentioned, and it's going to be difficult to do so by finding savings in the labor and supply space, although there's always opportunities there, but it's just not going to be as easily manifested as we've seen in the past. Christopher Kerns: So where does that leave us? It leaves us with trying to find economies of scale on the administrative side. So I think you're going to see a lot more potential investment in revenue cycle technologies in particular I would say, trying to reduce the amount of spending on collecting revenue. That's one opportunity that I think we're going to see the industry start to pursue across this year. Rae Woods: Yulan, what about you? Yulan Egan: I would stress the importance of leaving enough room for burnout recovery, and doing that might actually mean making things worse in the short term. It might mean that we take on some additional financial pain across this year, but I think it'll be really, really crucial for longterm recovery. If we don't get that piece right I'd be very afraid about the future of this industry. Christopher Kerns: And that really means embracing the innovations that we've seen across this past year. We've seen huge investments in digital health, we've seen huge investments in systemness. We have seen a lot of very good things come out of this pandemic, realistically speaking. And as a result I think a lot of organizations are going to have to find a way to sustain those because the challenges that we have seen come up across this past year aren't going away right away. Rae Woods: Yeah, I could not agree more. Rae Woods: Well Yulan, Christopher, thanks for coming on Radio Advisory. Christopher Kerns: Always a pleasure. Yulan Egan: Thanks for having us. Rae Woods: We'll be right back with what our research team is watching this week. Rae Woods: Positive vaccine results continue to come in. Phase three trial has shown that Pfizer's vaccine is safe and effective in children ages 12 to 15, it prevents 100% of infections. On top of that, the CDC has been tracking the efficacy of the Pfizer and Moderna shots outside of the trial setting. Rae Woods: This real world evidence shows that they're 90% effective at preventing infections in adults. But this good news has been tempered with some concerning new COVID trends. COVID cases are up around the world and in many regions here in the United States. 33 states have reported a rise in cases and that reflects the broader pattern we are seeing globally, cases are spiking on virtually every continent. Rae Woods: And this is especially daunting in light of a recent epidemiologist survey in which many believe that Coronavirus mutations could make current vaccines ineffective in less than a year. It's a stark reminder of the importance of a strong international vaccination campaign, stamping out this virus before it's able to spread and mutate to such a dangerous extent. Rae Woods: Late last week President Biden revealed his $2 trillion infrastructure package which includes billions in funding for healthcare related measures. The proposal would allocate billions to upgrade VA facilities, improve air and water quality, increase national bio-preparedness, and strive to establish 100% broadband coverage among other sweeping initiatives. Rae Woods: 400 billion would also go towards expanding access to Medicaid, home and community-based care. Now the administration faces the uphill battle of getting the bill past congressional Republicans and even some Democrats who think that the price tag is too high. And remember, as always we're here to help.