What benefit administrators can learn from the Great Recession to guide them through the COVID-19 recovery
Published on June 4th, 2020
The world is dealing with its second major economic downturn in just over a decade. After 10 years of growth following the Great Recession, the economy has taken another punch to the gut due to COVID-19’s monumental impact on businesses and everyday life.
Although the causes of these two economic downturns differ drastically, benefit administrators can turn to the recent experience of the Great Recession for clues about business impact and recovery. Here we discuss several economic factors that matter to benefit account administrators as they navigate the COVID crisis and how each can help predict what is to come.
Projected job losses and impact on CDH participation
The Great Recession led to the loss of 8.7 million jobs and was marked by the collapse of the banking and housing markets. So far, the COVID-19 pandemic and the subsequent stay-at-home orders have led to a staggering 42.5 million jobless claims, wiping out nearly all jobs created since the Great Recession.
While the total number of job losses offers a stark comparison, the biggest factor for the consumer-directed healthcare (CDH) industry may come down to the types of jobs lost in each downturn. The Brookings Institute points out that small businesses accounted for 62% of net job loss during the Great Recession, but that “the early stages of the COVID-19 economic crisis suggest that job losses will fall even more disproportionately within the small business sector.”
Furthermore, while the Great Recession hit the construction and financial services industries hardest, COVID-19 has taken aim at restaurants, retail, travel and other sectors. After lockdowns took effect in March 2020, the service industry lost 419,000 jobs, 60% of the total jobs lost that month.
The number of small businesses and the sectors impacted matter for the benefits industry because of the relationship to employer-sponsored health insurance. Anne B. Martin, an economist at the Centers for Medicare and Medicaid Services, points out in this Business Insider article that the Great Recession “caused many people to lose employer-sponsored health insurance and people cut back on their use of care.” This may not be felt as acutely during COVID-19, however. Only 56% of small businesses offer employer-sponsored health insurance, and less than one-third of restaurants do.
It is also important to understand the socio-economic profile of the jobs most impacted. The average salary of all those who lost jobs during the Great Recession was $43,700, and so far 86% of jobs vulnerable to COVID-19 pay less than $40,000 per year – an income bracket that is perhaps less likely to adopt and contribute significantly to an HSA. Forecasting from the Society for Human Resources Management seems to support this presumption. They estimate that approximately 35% of those unemployed due to COVID-19 do not have a CDH account.
Takeaway for benefit administrators: Most of the current industries hit hard may not have a significant number of employees enrolled in tax-advantaged accounts to begin with, effectively muting the impact on the CDH industry to approximately 50%. Download our guide Assessing the Impact of COVID-19 on Your Benefit Account Business for more detail.
What will the path to recovery look like?
Economists have varying interpretations of the Great Recession’s recovery path. Some think it reflects a U-shaped recovery – a period of months or years between decline and recovery – while others consider it a longer L-shaped recovery because it took double the length of the recession to recover lost jobs.
Although there’s no way to know yet how the COVID-19 economic downturn will pan out, various experts have offered their predictions. According to a survey from Ernst & Young, 54% of executives believe a U-shaped recovery is most likely. Just under half of 45 economists polled by Reuters in early April agree. In contrast, only 38% of executives in the E&Y survey believe a V-shaped recovery – where a severe downturn bounces back quickly – is possible.
Another possibility: a W-shaped recovery, or one with peaks and valleys over the course of several quarters. Some experts believe this could happen due to premature attempts to lift stay-at-home restrictions and subsequent outbreaks of the virus, especially during cold and flu season.
Finally, a McKinsey & Company white paper considers a combination of several recovery types, accounting for virus resurgence and slow, long-term growth. In this scenario, the GDP wouldn’t return to pre-crisis levels until the first quarter of 2023.
Takeaway for benefit administrators: At this point, most executives and economists agree that a COVID-19 recovery could take at least several quarters to play out. We believe the economy will not be fully recovered until Q1 of 2023, backed by the McKinsey & Company white paper mentioned above. Download our guide Assessing the Impact of COVID-19 on Your Benefit Account Business for more detail.
Impact on healthcare spending
Healthcare spending growth decreased during the Great Recession, but then stabilized and remained a large part of the overall GDP. So far during COVID-19, healthcare spending hasn’t merely experienced slowed growth – it has declined. In the first three months of this year, healthcare spending declined at an annualized rate of 18%, the biggest contributing factor to the overall 4.8% decline in GDP in the first quarter. This drop can be attributed to the postponement of elective surgeries and non-urgent medical care, as well as people avoiding medical care in general due to stay-at-home orders.
CDH has felt this impact, with an approximately 50% decline in spending versus the early part of 2020. Recent weeks have shown stabilization, however, and current levels are likely to remain for the foreseeable future. In addition, a provision of the CARES Act made over-the-counter medicines HSA-, FSA- and HRA-eligible without a prescription, which could give a slight bump to benefit card transactions.
Takeaway for benefit administrators: Expect CDH account spending to plateau after a significant initial decline. We also predict that by the end of 2020, HSA, FSA and HRA spending will return to 90% of pre-virus levels, and that OTC spending will surpass pre-virus levels. New HSAs – brought on by the push for HDHPs – could be responsible for offsetting the decline, as well. For more specifics on spending predictions, download our guide Assessing the Impact of COVID-19 on Your Benefit Account Business.
Retooling for success with high-deductible health plans (HDHPs)
During times of major cutbacks, employers often turn to high-deductible health plans (HDHPs) as a cost-savings opportunity. The Great Recession and Workers Health Benefits study found that during the Great Recession “the enrollment rate of high deductible health plans (HDHPs) among workers covered by employer-sponsored health benefits increased more among firms in industries that experienced severe recession shocks.”
The cost-savings for employers comes in the form of lower monthly premiums for each of their employees. In fact, an analysis by Alegeus found that employers moving from PPOs to HDHPs could save up to $2,000 per employee.
Benefit administrators can expect to see a similar acceleration in HDHP adoption during the COVID-19 downturn. Employers that are not offering HDHPs and HSAs today may shift their benefit plan designs. And employers that already do, may seek to refine their strategies to offer them in ways that boost participation, even if traditional plan options are still available – such as plan design adjustments and employer seeding strategies. We may also see a rise in full-replacement strategies.
Analysis of enrollment data suggests that more than 65% of consumers would save money with an HSA-qualified HDHP vs. traditional coverage. Yet, for a variety of reasons – including low fluency, fear of shock claims, reticence to move away from plans they already know, and more – only 35-40% of the population is currently enrolled in HDHP plans. As employers make the switch to HDHPs, benefit administrators will be pressed to educate and engage employers with the right materials and tools (like the Alegeus Smart Account Mobile App) designed to take the guesswork out of healthcare decision-making.
Takeaway for benefit administrators: Now is the time for benefit administrators to shift their focus from notional accounts to the HSA market opportunity. By pushing the cost-savings message to brokers and employers, they have the opportunity to strengthen and build their book of business. Download our guide Assessing the Impact of COVID-19 on Your Benefit Account Business for specific strategies on how to retool for success.
Knowing what we do from having recently endured a deep recession, several strategies can help benefit administrators weather the storm and retool their business for success. For several concrete strategies and next steps, download our guide Assessing the Impact of COVID-19 on Your Benefit Account Business.