Hedging or Healing: How Business Cycle Exposure Affects the Safety Net

Abstract

Tax exemptions and government support are intended to insulate nonprofit hospitals from business cycles, as they are expected to provide stable community benefits. This paper documents an erosion in the stability of this social safety net. The rising prevalence of high-deductible health plans (HDHPs) reduces insurance risk sharing and increases the cyclicality of hospital operations. Realized income shocks generate more pronounced ex post procyclical responses in hospital revenues and utilization in markets with higher pre-shock HDHP penetration. Claims-level evidence confirms that HDHP enrollees reduce inpatient utilization during downturns. Ex ante, hospitals hedge this exposure by reducing staffing, capital investment, and uncompensated care. Surprisingly, mission-driven nonprofit hospitals hedge more aggressively, reflecting their limited geographic diversification and lack of internal capital markets relative to large for-profit systems. Counties with higher pre-pandemic HDHP penetration and greater nonprofit hospital dominance experienced higher COVID-19 mortality. Joint paper with Kimberly Cornaggia and Zihan Ye.