As a business leader, it is important to be optimistic and make the best of any situation in order to lead your organization to success.
Obviously, this task is beyond challenging during a pandemic. But the truth is, organizations need to function, especially those within our healthcare system. Focusing on solutions to our current situation, or even new opportunities, will help stabilize jobs and keep the economy growing. The following outlines the current state and forward-thinking business insight for twelve key areas that function within the healthcare industry.
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COVID-19 Data Visualization Map & Tracker
Developing a strategy for any healthcare sector around the COVID-19 pandemic starts with timely county-specific insights into trends involving infections, deaths, testing and other data. The VMG Health live COVID-19 Data Visualization Map & Tracker puts national, state and county-level data at your fingertips, all presented in an easy to navigate United States map format. This tool is updated in real time throughout the day and connected to data from the CDC, WHO and Johns Hopkins CSSE to help healthcare leaders easily obtain critical data.
Acute Care Hospitals & Health Systems
The market is gradually gaining greater visibility on the financial and operational impact of the pandemic to hospitals and health systems. In its recent earnings call (on April 21, 2020), HCA leadership indicated a decline of 30.0%, 50.0% and 70% for inpatient admissions, ER visits and outpatient surgeries, respectively for April year-to-date compared to prior year. HCA was the first to report Q1 results, but similar results are largely expected to be echoed by the rest of the industry. The CARES Act provided some relief to many sectors as outlined in CARES Act: What's Included and How are Healthcare Providers Impacted?, and it appears additional funding will be approved for the healthcare industry soon. That said, there will likely be some healthcare companies that go through major changes or become acquired.
Prior to the pandemic, many healthcare systems were focused on growth, building out their delivery network and infrastructure to gain market share and prepare for the future. Although the pandemic put a halt to those strategies, priorities are beginning to move to a recovery phase. This will involve a build-out of delivery networks, which may be accelerated by the financial toll the pandemic has brought to independent physicians and ancillary providers in their markets, many of which are highlighted below. The importance of financial strength and flexibility will be a continued theme in the future and the organizations that emerge from the pandemic with a strong balance sheet will be in a position to accelerate their mission.
Ambulatory Surgery Centers
Due to their substantial focus on elective care, COVID-19 has ground the surgery center industry to a near complete standstill. The pandemic has placed ASCs squarely in survival mode – pursuing temporary workforce reductions, deferring lease and loan obligations, tapping into credit facilities and applying for relief grants and Medicare advancements from the federal government. ASC managers and physicians are actively planning for the recovery phase, which will involve the gradual reopening of centers with appropriate contagion controls in-place and a longer-term focus on flexible capacity to accommodate what is hopefully significant pent-up demand. As the focus shifts to recovery and operations return to normal or near-normal, ASC equity stakeholders will understandably seek to understand what will be COVID-19's Impact on ASC Operations & Valuations and to ASC Buy-Sell Provisions.
Behavioral Health
The behavioral health industry has received reprieve through the CARES Act and reduced regulation through CMS’ blanket waivers and other state and local regulations. That said, the behavioral health industry is unlikely to remedy the ongoing issue of scarcity of qualified providers and inadequate access to inpatient and outpatient services. For those Americans who faced mental health illnesses pre-COVID-19, these health issues are likely to persist post-quarantine. Those who did not show signs of depression, anxiety or substance abuse may be at a heightened risk of developing tendencies in this new COVID-19 environment. Therefore, an increased demand for these services in a segment that is already short-staffed is expected to continue. There is hope that further public acknowledgement of mental illness will create market reimbursement alignment and greater access for patients. More details on this and other market factors are outlined in Behavioral Health Industry: Impact of COVID-19.
Dialysis
Dialysis clinics, which provide life-saving services to patients, have remained open during COVID-19, as they cannot defer or cease treatments without considerable risk to the patients they serve. There is reason to expect these standard treatment protocols will trend to home dialysis over the short-term and potentially continue in the long-term. The largest US dialysis operators are already transitioning to more prevalent home dialysis offerings. That said, smaller facility operators may not be as capable in responding to changing market conditions that require a shift to home dialysis. Faced with the potential for declining market share, such operators may become obsolete or acquisition targets, ultimately driving even further consolidation in the dialysis marketplace. For additional insight on this shift, please see Will Current Dialysis Treatment Trends Accelerate under COVID-19?
Home Health
With COVID-19, lawmakers identified the need to relax regulations on certain physician certifications for paperwork to aide home health agency operators in their internal operations. This temporary pullback in regulation will help market participants operate more efficiently when they need it most. However, as the COVID-19 pandemic continues, regulations and payment models seem to be changing rapidly within this sector. With the stay-at-home orders and post-COVID-19 environment, most would agree home health services should grow. However, a key for home health operators to thrive will depend on how they adapt to the continually evolving regulatory framework. For further insight on this segment and the applicable COVID-19 waivers, please see CARES Act Impact on Home Health Agencies.
Imaging
The COVID-19 pandemic has caused many imaging centers to have a material decrease in scan volume due to a reduction in elective scans. In addition, with expected levels of unemployment and loss of personal wealth, consumers may delay having elective scans/procedures for an extended period that they otherwise would have had pre-COVID-19. The COVID-19 impact will not be identical for all Imaging Centers due to specific risk factors, including the types of procedures the center supports and geographical market dynamics. For further insight on this segment, please see COVID-19’s Impact on Imaging Operations and Valuations.
Inpatient Rehabilitation
Inpatient rehabilitation facilities accept and transfer patients out of an acute care hospital into an alternative acute care setting. The decline of non-COVID-19 patients in the health systems has had a material impact to this sector from a volume standpoint. However, the existing CMS Waivers on a short-term basis could help the industry recover quickly once patients come back into the health system on a normal run rate basis. In addition, the CMS reimbursement for FY 2021 for these facilities is budgeted to be close to 2.9%, which will be considered a stronger reimbursement relative to the prior 10 years annual reimbursement growth.
Oncology
For oncology providers, COVID-19 has disrupted the delivery of patient care and caused declines in new referrals as a result of reduced diagnostic testing. However, new opportunities may present themselves during the recovery phase. Since cancer is not elective, facilities may see elevated volumes later in the year, possibly helping offset current losses. Furthermore, providers have the opportunity to reduce overhead with the trend of providing telehealth or infusion in the home setting. Finally, operators with stable balance sheets may be able to capitalize on opportunities to expand through acquisitions, partnerships and affiliations, enabling them to create value in the long run. More on the immediate challenges to oncology providers and comments on their path moving forward can be found in Oncology and COVID-19: Impacts and Outlook.
Physician Alignment
The ban on elective procedures, combined with patients cancelling scheduled appointments during the COVID-19 pandemic, has significantly impacted revenue for physician practices, creating potential opportunities for new alignment strategies. Some practices, including those that are private equity-backed may not qualify for the Paycheck Protection Program (“PPP”) relief under the CARES Act. More details on this hurdle can be found here Obtaining CARES Act Funds May Be Challenging for Certain Physician Groups. Without additional access to capital, these practices may be looking for new strategies or be at risk of losing non-owner physicians to larger health systems. There may also be some larger groups that could consider lowering their overall financial risk post-pandemic. This new environment will inherently provide Alignment Opportunities with Independent Physicians Due to COVID-19 for health systems.
Health systems are also faced with Managing Physician Compensation Through a Pandemic. This has been a major source of discussion since most physicians have productivity as a component of their compensation plan. This may be a good time to update compensation plans and include value-based components, such as quality and savings, since these were two prominent themes prior to COVID-19 and will be critical for physician alignment in the future.
Real Estate
With owned real estate as one of hospitals’ largest balance sheet items, a strategic approach to real estate considerations is more critical than ever. The Stark Law waivers have temporarily increased the potential array of options available from a regulatory perspective, with some health systems offering broad based deferment or abatement to physician tenants while others have approached the situation on a tenant by tenant basis. REIT and third-party investor landlords are also rapidly evaluating their options and assessing tenant requests for rent relief. The immediate need for liquidity has caused some providers to evaluate sale/leasebacks in order to monetize owned real estate.
Expiring leases, purchase options, and real estate arrangements under negotiation also may need to be reevaluated from both a business perspective and a regulatory perspective, as overall volatility creates variability from market to market and in different healthcare verticals. Residual, longer-term impacts also need to be evaluated, with telemedicine and remote work potentially altering tenant demand. For additional discussion of immediate issues observed in the healthcare real estate markets, please see COVID-19 and The Healthcare Real Estate Market: Immediate Reaction.
Telehealth
The demand for telehealth solutions has grown exponentially during the COVID-19 pandemic. Prior to the pandemic, telemedicine has been a critical resource for health systems under financial and operational stress who are in need of finding cost effective solutions in expanding access to care. The telehealth reimbursement landscape, along with its inherent value of connecting providers and patients, has thus far proven to be an efficient way for many healthcare providers battling COVID-19, as further discussed in Telehealth Value Surge in Battling COVID-19.
Historically, telehealth capabilities have not been heavily used by home health, hospice and other post-acute service providers, like outpatient therapy. With the onset of COVID-19 and the subsequent passage of the CARES act, CMS expanded the scope of services covered by Medicare, encouraging the use of telecommunication systems. The pandemic is now providing a proving ground for utilizing telehealth technology for post-acute outpatient services. If the results of utilizing this technology are positive, this may result in telehealth being more broadly adopted across more healthcare sectors post-COVID-19.
Urgent Care
Visit volume in urgent care centers has waned recently, even more so than the typical, seasonal summer slowdown. The problem has been both demand (e.g. stay-at-home orders, perception that medical facilities are vulnerable to COVID-19) and supply (e.g. lack of tests and protective medical equipment). Should a second wave of COVID-19 arrive this winter, the use of urgent care centers as a time-sensitive care setting may be part of the solution. Urgent care centers reside in convenient locations and have qualified medical personnel to help quickly diagnose and triage patients. For more details on this sector please see Urgent Care Center Valuations in Turbulent Markets.
VMG Health Take-Aways
It is clear this pandemic will impact every healthcare sector, and leaders will be considering ways to mitigate losses and evolve. The financial impact and potential opportunities may significantly change many sectors’ financial performance, strategy and projections. It will be important to understand possible outcomes when considering strategic affiliations or acquisitions.
Lastly, the COVID-19 Pandemic will present significant financial reporting implications as indicators of a “triggering event” become more apparent. The healthcare industry has experienced record revenue declines related to non-emergency and elective procedure cancelations and delays. Once the industry returns to a level of normalcy, management teams will need to consider if COVID-19 qualifies as a “triggering event”. If so, impairment testing should be considered for Goodwill (ASC 350), Indefinite-lived Intangible Assets (ASC 350) or Long-lived Assets (ASC 360).
VMG Health has a multidiscipline valuation team with experts in every sector, as well as financial reporting expertise to assist healthcare systems and accounting firms with their transaction advisory needs during these turbulent times.