Is Health Care Immune to a Recession?

Investors looking to position themselves defensively often turn to market segments that are perceived as less economically sensitive. Health care is a sector that is often thought of as recession-proof. But is that reputation deserved? I sat down with Alex Morozov, an equity analyst on Morningstar's health-care team, to find out.

Sonya Morris: Have you done any work to see how sensitive health-care stocks are to the changes in the overall economy?

Alex Morozov: Yes. I dug into some historical data to see if that has been true in the past. The data show that there has been no significant statistical relationship between growth in health-care spending and gross domestic product growth for the past 40 years, which was as far back as my data extended. Growth in health-care spending outpaced GDP growth over the vast majority of that time frame. In fact, the largest gaps between health-care spending and GDP growth occurred during recessionary periods, indicating that consumers spend money on health care even when the economy is bad.

SM: Is it possible that there is a lag between the beginning of a recession and a downturn in health-care spending? Maybe it takes some time for an economic downturn to affect health-care spending.

AM: To test for such a lag effect, I adjusted the time frame of my study by looking at spending one year into a recession. That adjustment had little effect on the result. Health-care spending and economic growth remained uncorrelated.

SM: What do you think has contributed to the sector's resilience?

AM: Intuitively, health care should be less sensitive to economic cycles. It's one of the most basic needs that humans have, so demand for health-care services is very inelastic. It should be less economically sensitive.

I also think there have been industry forces that have contributed to its strength during bad economic times. For example, out-of-pocket expenditures as a percentage of total health-care spending have declined steadily since 1965, when Medicare and Medicaid were signed into law. Government and private health insurers have been picking up more of the tab. Consequently, health-care spending is less dependent on the consumer, and the sector is less exposed to consumer cycles as a result.