Healthcare Services

Managing the new dynamics of change in health care services

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Key Points

  • Post-COVID, the consumerization of healthcare continues to change the relationship between patients and providers.
  • Tech-enabled operational efficiencies are creating a more unified care system and patient experience.
  • Significant declines in patient volumes has put pressure on providers. Innovations in telemedicine can answer many problems, but not all of them.
  • In terms of M&A activity, many companies are in hibernation mode.
  • Fundamentals across the sector mean it will bounce back more quickly than other industries.
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The factors influencing the delivery of healthcare services has changed. Patients are consuming healthcare differently in today’s market than in the past, and taking a far more active role in their own health and expecting to shop for quality as they do when buying other services.

It’s a change driven largely by technology. The shift to high-deductible healthcare plans has forced individuals to consider costs. Technology has enabled consumers to comparison-shop, learn about their diagnoses, manage their condition, research treatment options and analyze provider choices. In a recent UnitedHealthcare survey, 80% of respondents use the internet and apps to comparison-shop for healthcare procedures or service rated their digital experience as “helpful”.

This empowerment means that patients now want a relationship of equals with their providers, where health and care are discussed, rather than just a passive acceptance of what’s being offered.

Providers and Patients Benefit From Tech-Enabled Operational Efficiency

Providers are also using technology in new ways to be more efficient in their operations and tracking outcomes in a more integrated and effective manner, delivering demonstrable quality care at a reasonable cost.

Patients now expect a more unified care system, where they can transition through different aspects of care more efficiently. From hospitals to physician practices, from pharmacy clinics to online services, patients now expect providers to have a full picture of their health. Patients and providers can achieve better outcomes and lower costs if care can be better coordinated through multiple providers using data and analytics.

Providers that can leverage technology to coordinate care can go “at risk” for patient care – where they essentially receive a fixed payment from a payor, like an insurance company, and are responsible for all care under this payment mechanism. Those that manage their “at risk” populations more efficiently are, as a result, more profitable. The cost-savings of these changing business models provide a huge incentive for healthcare services to embrace technology.

“Even as the economy reopens, the question remains as to what extent patients will return to physical premises.”

- Marcus Ricciani

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Healthcare Can’t Go (Totally) Virtual

In the midst of this sea-change, the world is currently experiencing an unprecedented health crisis. Although some may think the healthcare services sector is less adversely affected by the economic effects of the COVID-19 shutdown, they are mistaken.

Because people are concerned about accessing healthcare in physical spaces where they might encounter the disease, there has been significant decline in patient volumes. A recent research report by TransUnion Healthcare found that hospital visits overall declined 33-62% between the weeks of March 1-7 and April 12-18. This is evident particularly in elective and primary care and will impact short-term cash flow for healthcare services firms. In the longer term, the general health of the population may suffer as people fail to get the care they need, putting added pressure on providers.

Telemedicine is an answer to many of these problems, but not all of them. A patient can’t have a tooth pulled online or undergo any kind of surgery. Healthcare remains a face-to-face interaction in the majority of cases and many of our clients are facing reductions in revenue which, depending on leverage and capital structure, could lead to liquidity issues.

Even as the economy reopens, the question remains as to what extent patients will return to physical premises.

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Government Aid: A Double-Edged Sword?

Many providers are also being offered various forms of government assistance. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) made $100 billion available to the Public Health and Social Services Emergency Fund to reimburse eligible health care providers for health care-related expenses or lost revenues that are attributable to coronavirus. Some of this relief is in the form of a grant that providers won't have to pay back, but some relief is an advance on future reimbursements.

That kind of package could cause a liquidity crunch, and the ongoing financial pressure in the sector will be challenging as various advances and government assistance comes due. It’s also likely that the government programs will be renegotiated, because the short-term payback period is extremely onerous. At some point, however, providers will have to budget for that debt. This is exacerbated by the many capital expenditure deferrals and vendor payment delays that will need to be met in order to catch up to pre-crisis levels of funding.

Providers Focus on Inner Strength

In the face of these economic headwinds, providers are very inward-focused. They are managing employees and furlough schemes and trying to be as compassionate as they can. They need to be able to get back on their feet quickly when the market does re-open, but they also need the goodwill of both employees and the people seeking their services.

There will be a flight to quality for many healthcare workers. Some of them have been thrust into highly compromising situations, lacking the required personal protective equipment. Companies that failed to send the right messaging, in terms of what they’ve asked of employees, will suffer a higher turnover.

Most M&A processes have been delayed until stability has returned to the market. Processes that are well advanced are generally trying to see if they can keep going and get to the finish line. Buyers are still looking at opportunities, but many are distracted and focused on their own businesses for the time being. M&A is not the top priority. Notwithstanding the current M&A market weakness, good businesses remain good businesses and it is unlikely the long-term fundamentals have been impaired.

“Once stability hits, the stronger providers, or those that survived the downturn in a better position, will return to the growth game and seek acquisitions.”

- Daniel Stewart

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Healthcare Fundamentals As the Crisis Passes

The fundamental and essential nature of the healthcare services sector does mean it will bounce back more quickly than other industries across the economy. And as the economy reopens, buyers and sellers are going to have more conviction around healthcare businesses. Once stability hits, the stronger providers, or those that survived the downturn in a better position, will return to growth and seek acquisitions.

As many providers are in hibernation mode, it’s likely going to take a period of normal market environments to begin considering an M&A transaction or big investment. We were already in the phase where providers and insurance companies were thinking about investing in technology that increases their efficiency and demonstrates ROI. Once companies get to a safe situation – where they’re under pressure but have a little bit of money to spend to try to react to that pressure – technology is the likely beneficiary.

Opportunities Through the Cycle

For those interested in investing in healthcare services, there are going to be high-quality companies that are pressured in the next 6-12 months. Whether it’s companies looking to build-out an integrated platform, or private equity looking for blue-chip assets that have long-term attractive profiles, the opportunity to buy will be there.

There is also likely to be consolidation as independent providers and outpatient facilities close, but demand ramps up in the post-COVID-19 economy. While demand accelerates, there will also be other challenges.

More mental healthcare will be needed for both employees and those who have endured long isolation or shelter-in-place directives. Providers will need to change supply chain management policies and make capacity management more flexible to avoid the shortfalls we have seen in the crisis. Meanwhile, consumers will be seeking ever-more sophisticated digital services.

Public perception will be also be key. Those companies who come through the COVID-19 crisis with a measure of success will be lifted by positive feedback, while those who do poorly will see consumer confidence drop.

As healthcare continues to consumerize, it will also democratize, and consumers will vote with their wallets for providers they trust and respect.

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