Hospitals face consolidation wave

Hospitals face consolidation wave

While we have used the US as a reference point in this article, we suspect this is applicable across many health systems globally.

A recent report has shown that hospitals in the US are struggling with covid-19, due in part to normal operations drying up in response to the pandemic. In dollar terms, during March and April, hospitals were losing millions in revenue; American Hospital Association estimated that hospitals were down about USD 50bn per month. On a regional level, hospitals at UC San Francisco are expected to lose about USD 600mn to USD 700mn in revenue by YE20.

In theory, the US healthcare system should be thriving during a pandemic as its services are in high demand, but that is not what we are observing. The structure of the US healthcare system is largely to blame; hospitals are paid based on the volume of procedures they perform “whether that’s surgery or X-ray at their imaging center”.

During the pandemic, hospitals had to suspend elective care to make space for an influx of Covid-19 patients; and emergency room (ER) visits dried up due to growing ‘consumer’ concerns over the spread of the virus. ER visits funnel a lot of revenue in the form of tests and procedures, accounting for around 40% of non-Covid revenues of a hospital.

In some cases, hospitals were hit because they had to suspend all revenue-generating activities in the expectation of a dam-burst of Covid-related cases, which did not happen.

There is a growing concern that, although hospitals will be able to absorb the Covid-crisis strain – especially if no second wave occurs in the winter – normal operations could shut down and not all US hospitals will make it out of the other side of the crisis. Many ’standalone hospitals’ will not survive as an independent enterprise; also some hospital groups could face the risk of bankruptcy and we expect to see some consolidation in the coming months.

At the same time, we have seen an explosion of innovative tech (telehealth) that can solve some the pandemic created challenges hospitals now face at the operational level. The pandemic has accelerated the more or less inevitable shift to remote care. However, there is an investment catch here.

Digital solutions providers such as telemedicine companies have been performing well in stock market terms, but telemedicine does not generate as much revenue for hospitals as in-person care. The question is whether or not the loss of revenues to hospitals can be recovered through improved margins from a valuation or working capital perspective.

Although, there have been some significant margin improvements; with the federal government and some commercial health plans providing greater reimbursement for online care, these policies have not entirely compensated for falling revenues driven by telemedicine. In-person care generates revenue and margin from facilities use, technical expertise and procedure fees. Telemedicine reduces these fee volumes and so margins.

As the risk of Covid reduces, many healthcare systems are gradually returning to normal operations, elective care and ER visits are expected to surge, but the pandemic has left a scar – accelerating the move to Telemedicine. Our long-term view is that strategies that promote flexibility in healthcare systems will only increase and that pandemics are unstoppable forces that even the hospital lobby groups cannot prevent or delay from accelerating these changes.