The global spread of novel coronavirus (2019-nCoV) and the COVID-19 pandemic has had unprecedented and universal effects. The virus’ emergence was initially observed in China in late 2019. In February, the occurrence of COVID-19 began increasing worldwide as the number of cases grew rapidly in countries including Iran, Italy and South Korea. The United States began to see exponential growth in cases in early March. On March 11, the World Health Organization designated the COVID-19 outbreak as a global pandemic. As of May 27, 2020, there were over 5,640,000 cases of coronavirus worldwide, with over 1,700,000 in the US alone.
In an effort to mitigate spread of the coronavirus, individuals have been forced to forego travel and adhere to social distancing practices. These measures have created drastic changes in business and economic performance as supply and demand have significantly contracted. Markets have seen significant volatility, with the S&P 500 dropping over 12% in March before increasing over 12% in April and just over 3% through May 27. In April, the S&P Healthcare index had the best performance of all the S&P 500 industry sectors, dropping less than 4% for the month March, while performing in line with the S&P 500 in April and through May 27. Life sciences and pharmaceuticals companies have offset the significant losses suffered by provider organizations, who have been on the frontlines battling the crisis, particularly acute care providers who have had to forgo a primary revenue stream – elective surgeries.
Beyond the implications of a recessionary economy, uncertainty remains as to how the business environment will change once the lockdowns begins to lift. Here are some perspectives on the ramifications to healthcare providers:
- Financial Pressures for Providers: Despite the relief measures put into place by the CARES Act- including $100 billion in stimulus funding for hospitals- healthcare providers are facing immense financial pressure from the crisis. Cancellation of higher-margin elective procedures and increased supply chain costs have severely pushed down margins. Credit ratings have been downgraded for hospitals and health systems across the board. Not-for-profit organizations and rural hospitals are likely to be hit the hardest as a byproduct of their relatively low operating leverage. Similarly, senior housing providers are facing intra-community outbreaks and potential slowdowns in new admissions, while also seeing increased labor and supply costs. This could prove devastating to smaller and less cash-rich long-term care organizations.
- Impacts on the M&A Landscape: M&A activity is currently seeing a slowdown, as both strategic and private equity acquirers are putting the brakes on in-process deals for the near-term. With this slowdown expected to be in effect for the coming months, even as states begin to slowly open up, we are likely to see many organizations with strong balance sheets take advantage of inorganic growth opportunities at depressed multiples. One space that will likely continue to see acquisitive activity is provider organizations, as cash reserves deplete and scale economies become even more crucial for survival of many hospitals and physician groups.
- Demand Effects for Physician Services: With the focus currently on coronavirus-related services, pent-up demand for lower-acuity visits is likely to result in heightened patient traffic for months following the outbreak. Combined with an increase in preventive visits as a fallout of the pandemic, demand for primary care physicians could see accelerated growth. In 2019, the Association of American Medical Colleges had projected a shortage of 47,000 – 122,000 physicians in the US by 2032; this projected shortfall could be quite a bit higher now.
- Systemic Uncertainty: The effects of this outbreak on the US healthcare system are likely to last far past 2020. With payers aiming to cover the majority of COVID-related costs, both government and private insurers will be under financial pressure in the aftermath of the crisis. As a result of the more than 40 million Americans who have filed jobless claims as of May 2020, a rate not seen since the depression, payer mix will also likely see a shift. Increased premiums, reimbursement challenges and an enhanced focus on value-based care initiatives will likely be observed going forward.
- Accelerated Implementation of Digital Health: One of the areas primed for growth prior to the coronavirus outbreak was telehealth, which is now being implemented by providers nationwide in order to comply with social distancing guidelines. The increased utilization of telehealth services will likely be observed even after the pandemic subsides, as a result of heightened patient caution and the tighter payer budgets discussed above. There has been federal impetus on increasing reimbursement for telehealth services amidst the crisis, including $185 million in CARES act relief funding and a $100 million allocation for a three-year pilot program from the FCC. This focus is likely to remain in place past the crisis, as the need for value-based care only increases in the face of a widening budget deficit.
Sources: AAMC; Becker’s Hospital Review; IBISWorld; Mergermarket; S&P Global Market Intelligence