Key Takeaways
- Healthcare embodies several inherent characteristics that protect it from market downturns.
- Historically, the healthcare sector has fared well during recessions, even garnering attention and more investments that have helped facilitate growth.
- Although AI in healthcare is not yet ubiquitous, investors are working steadily to make that happen, motivated by healthcare sector defensive characteristics, growth potential, and diversification benefits.
In the uncertain landscape of economic cycles, healthcare has consistently demonstrated remarkable resilience, often performing better than most other sectors during economic downturns. This resilience stems from the fundamental nature of healthcare services—they are essential, non-discretionary expenses that consumers cannot easily forego, regardless of economic conditions.
Understanding Healthcare’s Recession Resistance
Healthcare’s resistance to economic downturns stems from several key characteristics:
- Inelastic Demand: Unlike discretionary purchases that can be postponed, healthcare services are often urgent and necessary regardless of economic conditions or income changes.
- Demographic Trends: The aging U.S. population creates sustained demand for healthcare services. The number of Americans aged 65 and older is projected to nearly double from 58 million in 2022 to 82 million by 2050.
- Government Funding: A significant portion of healthcare spending comes from government programs like Medicare and Medicaid, which historically have continued during recessions and may even expand during economic downturns as safety net measures.
- Innovation Pipeline: The healthcare sector’s continuous innovation in treatments, technologies, and pharmaceuticals creates new market opportunities even during economic contractions.
Historical Performance During Past Recessions
Comparing the broad market with a broad healthcare index:
The 2001 Dot-Com Recession: The burst of the dot-com bubble resulted in the S&P 500 losing approximately half its value by Q4 of 2002. In contrast, healthcare stocks, as measured by the Health Care Select Sector SPDR Fund (XLV), declined by 0.75% during the same period.
The 2007-2009 Great Recession: While the market plummeted by 38.5% from its peak, healthcare stocks declined by about 23%. More impressively, the healthcare sector was among the first to recover, returning to pre-recession levels well before the broader market.
The COVID-19 Recession: The COVID-19 pandemic created a unique situation where healthcare was simultaneously at the center of a global crisis and an economic recession. While certain segments like elective procedures experienced temporary declines, the sector remained resilient.
Notably, companies involved in vaccine development, telehealth, and diagnostic testing expanded substantially and investments within the healthcare sector, specifically healthcare technology (healthtech), increased overall. In 2020, digital health funding reached record levels, with $14.1 billion invested, according to Rock Health’s annual report.
A Look at HealthTech and AI
Current market performance has shown us that there may be an artificial intelligence (AI) bubble, which may call into question whether healthcare will maintain its resilience in uncertain times.
However, it’s important to understand the purpose of healthcare AI: to solve problems, reduce inefficiencies and streamline workflows. Many of the companies utilizing the technology are not foundational AI companies (i.e., they are not developing the AI engine). Instead, they are taking the technology and capabilities and applying them for use in healthcare settings.
Staffing shortages have led to increased use of AI-enable technology helping with administrative tasks; AI algorithms are being developed and used to create, improve, and expand protocols that help expedite necessary patient care; AI-supported data analysis has been used to improve utilization and increase patient throughput in hospitals.
AI in healthcare is not yet ubiquitous, though investors are working steadily to make that happen. Last year, $1.5B was invested into AI patient diagonistics; Venture capital funding for healthcare AI reached $7.2B in 2023; 1 out of 4 VC dollars is allocated into AI.
Other Reasons that Healthcare May Continue to Be Recession Proof
In addition to the factors mentioned above, several ongoing trends suggest healthcare will maintain its recession-resistant characteristics:
- Chronic Disease Prevalence: Rising rates of chronic conditions like diabetes, heart disease, and obesity create ongoing demand for medications and treatments regardless of economic conditions. The CDC reports that over 90% of our $4T+ healthcare expenditure goes towards treatment of chronic illnesses.
- Healthcare Innovation: Breakthrough treatments, especially in areas like gene therapy, precision medicine, and biologics, continue to create new market opportunities. The FDA approved 55 novel drugs in 2023, maintaining a robust innovation pipeline. In addition, in 2023, the FDA approved the use of hundreds of AI/machine learning (ML) supported healthtech innovations, paving the way for technological advancements in clinical care.
- Healthcare Reform: Government policies aimed at expanding healthcare access typically increase overall healthcare spending, providing stability during economic downturns. Current economic reform is pending, with potential upcoming budget cuts; however, healthtech may help bridge the gaps in care wherever possible.
Investment Implications
For investors seeking recession-resistant opportunities, healthcare’s defensive characteristics offers the advantage of providing diversity to portfolios and stability during market downturns. Other factors to consider:
Growth Potential: Unlike some defensive sectors, healthcare also offers significant growth opportunities through healthtech innovation and expanding global markets.
Diversification Benefits: The healthcare sector encompasses diverse subsectors that may respond differently to economic conditions, providing built-in diversification.
Conclusion
The historical evidence strongly supports healthcare’s reputation as a recession-resistant sector. This resilience stems from the essential nature of healthcare services, demographic trends, consistent innovation, and the significant role of government funding during these periods. While no sector is completely immune to economic cycles, healthcare’s unique combination of defensive characteristics and growth potential makes it a compelling area for consideration during economic uncertainty.
As economic cycles inevitably continue, healthcare’s recession-resistant properties will likely remain a valuable characteristic for both the stability of investment portfolios and the broader economy.
Sanjana Vig MD, MBA
Dr. Vig is a co-founder and Chief Marketing Officer of Langar Holdings. She is a board-certified anesthesiologist specializing in Perioperative Management. She is also the founder The Female Professional, a website geared toward empowering professional women in life and their careers.
