Kent Ivanoff remembers the Great Recession 12 years ago and tells us what we might expect to happen now and how healthcare providers can respond.
As the US entered the Great Recession in 2008, I was responsible for the majority of Capital One Financial’s domestic credit card portfolio. Leading up to the recession and certainly during the recession itself, we saw significant shifts in consumer payment behavior. As I began working in the healthcare market in late 2009 and into 2010, I had the unique perspective of seeing healthcare-specific client data collected during that same time period to understand how the dynamics that existed within the consumer credit market compared to the US healthcare market. Many of the lessons we learned then are relevant today, especially in what we expect to be a recessionary environment spawned by the current COVID crisis.
The Great Recession of 2008-10 was the first time that we saw the consumer payment hierarchy flip: historically, mortgages always dominated, followed by auto loans and then credit cards. Since the nature of the recession was driven largely by the real estate market turning upside down, we saw consumers paying their credit card bills before they paid either auto bills or mortgages. Because of this, we asserted two things. One, people were underwater on their mortgages, so they simply turned the house keys over to creditors to avoid the debt. Two, people prized flexibility when economic times were tough, and a credit card was one vehicle by which they could keep their households afloat. We felt this was due the more flexible, though costly, payment options available through credit cards when compared to other forms of consumer debt.
Assuming a great number of households will find themselves under financial duress as a result of the economic turmoil that will surely follow COVID-19, the first lesson for healthcare providers in 2020 is that the more we can be flexible and lenient with consumers acutely impacted by COVID-19, the better. We also saw that the Great Recession impacted nearly every facet within every asset class of Capital One’s consumer finance portfolio, whether deep subprime, prime, or super-prime consumers. The increase in delinquencies and slow pays was more acute on a relative basis in the mid to upper ends of the market. Our belief was consumers represented within the subprime portfolio were often subject to living in a stressed economic scenario and were less shocked by the recession itself. That new economic reality was harder for consumers in the mid-market and above to adjust to.
Our belief was that uncertainty in the economy causes the entire market to behave differently, and especially those not used to dealing with adverse circumstances. We learned that the effects of deep recession impact all facets of a portfolio and not just the people most acutely hit. For that reason, we believe the broader learning is that the more providers can create flexibility for the entirety of their consumers during uncertain times, the more likely they’ll be able to manage patient payment dynamics effectively.
The second learning concerns payment rates. It seems unlikely that the economic downturn we’re anticipating will pass in the course of the three or four months that will likely characterize the widespread shutdown of the global economy to flatten the COVID-19 infection curve. The downturn’s impact on patient payments could last a year or longer. Even though many might say that the Great Recession was deepest for about a 12-month period, I posit that the deepest point was the third quarter of 2009 when unemployment peaked, even though the equity markets began recovering almost six months earlier. Delinquencies in credit cards and auto loans spiked for almost two years while mortgage delinquencies were elevated for almost four years. Even as the market was restoring itself and employment was rising, people paid their bills with a recessionary mindset for years later.
At this stage, it would be prudent for health providers to plan for a protracted period of reduced payment rates if patients aren’t offered flexibility in how they pay. Likely far fewer people are going to pay in full, and many more will need to pay over time. With healthcare debt unlikely to be the consumer’s top priority, the likelihood of receiving payment will increase with more flexible payment terms offered over the longer term. The key to managing provider cash recovery while taking care of each consumer’s need for help is knowing who to offer the right amount of flexibility to, and when and to do it, in a way that resonates with the consumer. That means–now more than ever–a tailored approach delivered one consumer at a time in a fully-automated delivery system that enables patient self-servicing is critical.
We’re still in the early days of this battle, and undoubtedly many more changes and challenges are yet to come, both immediate and long-term. From those, we will learn more, together. In future blog posts I’ll cover the changing nature of recessions as they relate to long-term employment, and trends from a macro-economic level.
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