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

Tax exemption and government support are intended to insulate non-profit hospitals from business cycles, who are expected to provide stable community benefits. This paper documents erosion in the stability of this social safety net. The rising popularity of high-deductible health plans (HDHPs) reduces insurance risk sharing and increases the cyclicality of hospital operations. Realized income shocks induce more ex post procyclical responses in hospital revenues and utilization in markets with higher pre-shock HDHP penetration. Claims data confirm that HDHP enrollees reduce inpatient visits in downturns. Ex ante, hospitals hedge this exposure by cutting staff, investment, uncompensated care, and Medicare admissions. Surprisingly, mission-driven non-profit hospitals hedge more aggressively, reflecting their lack of geographic diversification and internal capital markets compared to large for-profit systems. Counties with higher pre-pandemic HDHP prevalence and non-profit dominance experienced greater COVID-19 mortality.