Recessions are "sure as sunrise," McKinsey & Co. reminds business leaders in its May 2019 "McKinsey Quarterly," but by studying firms that have successfully navigated economic downturns, organizations can make themselves more resilient.
A new infographic from McKinsey & Co. builds on this research, examining opportunities specific to healthcare organizations in a forthcoming economic downturn. In an email interview, Becker's discussed the implications of a recession with one of the infographic's authors, Aneesh Krishna, a partner at McKinsey in the Silicon Valley.
Mr. Krishna discusses lessons from the last recession and ways hospitals can prepare.
Editor's note: Responses were lightly edited for style and clarity.
Question: With the data available, is it possible to determine a range of time in which hospital leaders can expect another recession?
Aneesh Krishna: We deliberately did not include a time frame — as you can imagine, there are numerous interrelated factors that may result in a wide variety of scenarios. Instead, what our analysis focuses on is the possible implications of a downturn on healthcare stakeholders, what they can do to prepare for that event, possible actions they could take and what lessons can be learned from those organizations that successfully navigated the recession in 2008. The economy has been sending mixed signals recently, and potential legislative changes to major healthcare programs creates some level of uncertainty. Given this, and the fact that we are in the longest period — around 11 years — between two downturns in the last 50 years, we feel it is important for healthcare leaders to invest time in considering the implications and build a resilience plan.
Q: The healthcare industry is much different now than it was during the last recession. However, are there any lessons leaders can pull from years past?
AK: New research by McKinsey on resilience found that the gap between industry leaders and laggards widened in the last recession and continued throughout the recovery period and beyond. These industry leaders, or "resilient" organizations, did three things differently during the 2008-09 recession:
- "Resilients" created flexibility — a safety buffer. They did this by strengthening their balance sheets before the trough, which better positioned them to execute on strategic acquisitions. Resilients reduced their debt by more than others pre-downturn and shifted to mergers and acquisitions, using their higher cash levels, at the first sign of economic recovery. In healthcare, this could mean a pause on expensive acquisitions (e.g., healthcare analytics platforms, care delivery assets), [and] divesting under-performing capital-intensive assets (e.g., underperforming health plans or segments).
- Resilients cut costs ahead of the curve, focusing primarily on operational effectiveness (e.g., clinical labor, medical costs, claims processing, call center) to reduce their operating costs, while maintaining sales and marketing costs.
- Resilients in countercyclical sectors, including healthcare, tended to focus on growth, even if it meant incurring costs. They overdelivered significantly on revenue (e.g., they continued to drive membership growth for payers or continued to drive acute care volume by winning share from competitors), while taking on higher costs. They essentially preserved growth capacity and ultimately grew during the downturn.
Q: What are the most critical areas hospital leaders need to watch for in case of an economic downturn?
AK: In the last recession (2008-09), there was an uptick in elective procedures prior to the downturn as consumers with employer-sponsored insurance utilized elective care in anticipation of employment losses (e.g., members got their annual visits and tests done earlier, scheduled elective surgeries). It is likely we will see a similar trend in the next downturn, but the utilization upticks this time may be dampened relative to the last recession, driven by increased member cost-sharing — approximately 1 in 3 employees are enrolled in high-deductible health plans today. Health system leaders need to be adept at identifying this uptick (which is temporary) versus the underlying growth. Failure to recognize this could result in hospitals taking actions, such as building additional capacity, which could be financially challenging in a downturn.
Q: Is there anything hospital leaders can do to prepare for a recession?
AK: Hospital leaders can start by building "resilience" ahead of the next recession. Based on our own research on resilient organizations, a few actions that hospital leaders and other key stakeholders in healthcare might consider include:
- Align on a set of well-defined recession scenarios (e.g., duration, changes in unemployment rate by state) to test. Leaders will need to quantify risk and opportunities and begin building a "playbook" for each scenario.
- Identify the talent required to build and execute the playbook — e.g., identify a leader for a "Nerve Center," a distinct team dedicated to recession response, that will govern decision-making during a downturn. The Nerve Center focuses on rapid execution by organizing teams into agile, cross-functional units that drive toward clear outcomes, create forums for faster executive decision-making, and monitor the results through value-based initiative-tracking.
- Build out an infrastructure for a Nerve Center. Assign clear owners within the Nerve Center, so that it can be activated promptly once recession triggers have been met.
- Set a target capital level to prepare for a potential acquisition(s) during the downturn.
- Develop a set of communication strategies for key stakeholders early. For example, communicate early with the board to align on high-level strategic priorities during a recession (e.g., align with the board on continuing to invest in "growth capital" during a recession).
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