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The economic crisis: Tipping point for healthcare consumer behavior?

With their own money on the line, consumers are beginning to use the same value criteria for healthcare decisions – service, price, experience, brand equity and more – as they do with other purchasing decisions. To date, however, the new healthcare “consumerism” has not led to a widespread change in consumer behavior. But this nation’s current economic crisis may well be the tipping point; the driver of fundamental change in how and when consumers engage hospitals and health systems.

The Tide is Turning
In 2007, roughly 10% of those with health insurance had some form of consumer-driven coverage, defined as an HRA, HSA or other high-deductible option. Combined with the uninsured, adult U.S. consumers with significant skin in the game are still in the minority. But given the accelerated adoption of consumer-driven plans and the current economic crisis, dramatic change is coming. Consider the following:

• Many predict adoption of consumer-driven plans will rise to 15% in 2009. According to Clayton Christensen, author of “The Innovator’s Prescription: A Disruptive Solution for Health Care,” that adoption will likely hit 50% by 2013, and 90% by 2016. (His book “The Innovator’s Dilemma,” cites research that shows the rate of adoption of innovation typically starts slow, then hits a tipping point when wide-spread use skyrockets.)
• Tough financial times are causing more employers to drop health insurance altogether. A new survey by Hewitt Associates shows that 19% of employers are planning to stop offering health benefits over the next three to five years, a response nearly five times higher than the previous year.
• The economic crisis has led to growing unemployment (8% nationally at this writing). Many expect that number to reach 10% before the end of 2009. This restructuring of the national economy is ratcheting up the number of uninsured and underinsured.
• Even those that have avoided job loss are tightening their belts in significant ways. Not only is income being threatened, but the old fall-back resources of home equity lines and credit cards are drying up. Many are watching every penny as their spending resources dry up, and pulling back on spending “just in case” of job loss, medical emergency or other dire situations.

All of these trends are causing an increase in exposure to out-of-pocket healthcare costs for consumers, and the impact has been significant. According to a recent Kaiser Family Foundation Health Tracking Poll, 53% of respondents said their households had cut back on healthcare in the previous year due to cost concerns. A recent Wall Street Journal online piece noted that retailer CVS is closing 90 MinuteClinics for the season, to “align with consumer demand.” Many hospitals and health systems are reporting dramatic drops in utilization. Summing it up recently was David Wessner, CEO of Park Nicollet Health Services in Minneapolis, who was quoted in a recent Minneapolis Star Tribune story on the financial ills of hospitals. Wessner said: “We’re seeing that demand is far more elastic than it was in other years.”

Of course, much of the drop in healthcare utilization attributed to the economic crisis could be seen as short-term. When the economy recovers, consumers will return to regular healthcare usage, and all will be fine. But chances are many of the changes we’re seeing will become permanent.

A permanent shift
Economic crisis has driven societal behavior change before. For example, those who lived through the Great Depression of the 1930‘s (often referred to as the “Greatest Generation”), were very cautious with their money. Debt was considered bad, as was spending beyond your means. The norm was to save carefully to buy a home, car and to have a significant cash reserve at the ready to meet unexpected, emergency expenses such as the need for medical attention. Economic crisis taught this generation (the youngest of which are in their 70’s now) the critical importance of making smart financial decisions, of not over-extending themselves, and the value of saving first and spending later. These financially conservative attitudes did not change until the next (Baby Boomer) generation.

Will we see the same shift in financial attitudes as a result of this crisis? A recent article in Time talked about how consumers are walking into stores with a new level of negotiating power:

“Store owners will tell you horror stories about shoppers with attitude, who walk in demanding discounts and flaunt their new power at every turn. They wince as they sense bad habits forming: Will people expect discounts forever? Will their hard-won brand luster be forever cheapened, especially for items whose allure depends on their being ridiculously priced?”

Once new consumer habits are formed, it’s very difficult to change them. Given how most of us have been blind to the true cost of healthcare our entire lives, it’s not surprising that old habits in choosing care die hard. Note the struggles of Carol.com in the Twin Cities market, which had trouble convincing enough consumers to shop for care through their innovative web site. Could the shift of greater out-of-pocket exposure to more and more people trigger a permanent change in healthcare behavior?

The impact on healthcare providers
The economic storm will pass eventually, but what if the newfound value priorities of healthcare consumers stick around? The impact would be profound for healthcare providers:

• The current drop in volumes may be a permanent reduction of utilization, as consumers avoid non-essential treatment, stretch out physician visits, and find lower-cost alternatives (alternative medicine, “home made” remedies and more). Of course, the wave of Baby Boomers and their increased need for care may cancel this out, or override it altogether.
• Price shopping will become the norm, as consumers carefully consider their alternatives and negotiate for lower costs whenever possible.
• While price will be one value driver, others such as convenience, experience and service will continue to grow in importance, relative to clinical quality, as patients demand more for their money.
• Competition in the healthcare market will become even more intense, while the resources to grow market share, increase volumes and build brands become increasingly scarce.

The healthcare hurricane is coming
The potential impact of consumer-driven healthcare on providers is like a hurricane forming in the Gulf of Mexico. The storm is out there but no one knows where it will hit: North, South or direct? Will it stay at its current level of strength, fizzle out before reaching shore, or grow to a Category 5 “killer”? Until recently, the “consumer-driven” hurricane was too small and too far out at sea to be a major cause of concern for providers. But depending on what happens with the economy over the next few months, it could rapidly grow in power and race toward shore. Is your hospital or health system ready?

Potentially-related posts:

1. Elasticity in healthcare demand, fo sho
2. Weak times = brand opportunities
3. Healthcare is hurtin’

This article was posted by Chris Bevolo on Monday, March 16th, 2009 at 10:44 pm, and was filed under Competition, Pricing, Strategy, Trends.

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