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April 28, 2020
Coronavirus (“COVID-19) has impacted every segment of the healthcare industry, however not necessarily in a uniform fashion. It has been well publicized that “non-essential” care has largely been postponed (through both mandate and consumer behavior) across the country. Entities such as ASCs, diagnostic imaging, orthopedics, etc. have had operations slow materially. Industry observers may initially believe that oncology, which is generally not considered elective, may experience a minimal impact from the pandemic. However, the oncology sector has in fact seen significant changes to current operations and the industry’s outlook.
Patients that were diagnosed pre-COVID-19 have largely continued their existing treatment regimens since cancer is life threatening and not elective in most cases. While cancer patients may be concerned with leaving their homes as they are among the most vulnerable patient populations to COVID-19, many centers across the country have implemented strategies to mitigate the likelihood of their patients contracting COVID-19. Based on these factors and our discussions with industry professionals, current oncology volumes have remained somewhat consistent with historical levels when compared to peers in other verticals.
However, the volume outlook going forward is uncertain. Cancer centers across the country are currently experiencing significant declines in new consult volumes. With “non-essential” healthcare such as colonoscopies, mammograms and physicals being canceled/deferred due to COVID-19, fewer patients are being diagnosed with cancer. Furthermore, there is usually a lag between diagnosis and the beginning of treatment, and as a result, VMG Health expects cancer center volumes to be negatively impacted in the near-term.
From a medium to long-term view, hopefully COVID-19 is contained, and patients begin routine screenings again which will enable cancer diagnoses to occur. VMG Health expects pent-up demand as cancer cannot be postponed indefinitely, which may cause providers to experience temporarily elevated volumes compared to historical levels. Providers may have to open extended hours or on weekends to increase capacity and service the incremental volume. These elevated volumes may drive additional profitability in Q3 and Q4, helping to mitigate the losses being experienced today.
In addition, the delay in diagnosis may cause patients to begin treatment in later stages of the disease than what was experienced historically. With a more developed stage, certain treatments such as surgery may no longer be possible, changing the options available to facilities providing care. As a result, the modality mix may change temporarily, until the diagnosis cycle returns to normal. This could present opportunities for radiation oncology or chemotherapy to capture temporary market share at the expense of surgery.
As mentioned, cancer patients are some of the most at-risk populations for COVID-19 as they are generally older and have compromised immune systems. Based on this dynamic, in-person visits have declined as providers wish to minimize patient’s exposure to COVID-19. Cancer centers have pivoted to using telehealth services and allowed for infusion to happen in the home setting rather than in a clinic infusion suite. This trend could persist even after the pandemic passes as the infrastructure is in place and physicians begin to feel comfortable providing care in this fashion. As a result, VMG Health expects telehealth and in-home infusion to continue to grow as a share of providers’ business. This trend may present an opportunity for providers to possibly reduce overhead over time. For example, with more of their patients receiving care virtually or in the home setting, medical oncology practices may be able to reduce their clinic footprint with fewer exam rooms and smaller infusion suites. In addition, with fewer in-person visits, required support staffing levels may decline. Finally, efficiency from telehealth/homecare could drive additional productivity for each physician driving additional revenue, economies of scale and expense savings.
Over 22 million people have filed for unemployment as of the date of this article, and job losses could continue to accelerate. Furthermore, the broader economic impact from COVID-19 is uncertain. Household income, GDP and employment may continue to be severely impacted for the foreseeable future. As a result, center payor mixes could deteriorate as patients that historically had commercial coverage through their employer are now reliant on government programs or un-insured altogether. Finally, the federal government is expected to have record deficits in 2020 and the national debt as a percentage of GDP is expected to increase significantly. This will put pressure on the government to reduce deficits and with healthcare spending one of the largest outlays in the federal budget, there will be continuing mid to long-term pressure on reimbursement.
VMG Health expects cancer center balance sheets to be impacted as working capital deteriorates with declining volumes and more debt is incurred to fund operations in the short-term. As a result, even if volumes/revenue return to historical norms, centers will likely be more highly levered than before the COVID-19 crisis. This may cause centers to defer the purchase of expensive equipment such as LINACs, CTs, etc. Finally, equity values may be reduced with higher relative debt to EBITDA. However, if facilities due realize a large amount of pent up demand in the later part of the year, balance sheets may be able to repair some of the damage that is being experienced today.
Since cancer treatment is not elective, VMG Health expects volumes to return to normal at some point in the future and even be elevated for a period. Payor mixes may deteriorate, capital expenditures may be deferred, and higher debt loads will drive lower equity valuations relatively speaking. Based on these dynamics, VMG Health expects COVID-19 to drive consolidation as entities severely affected may seek to sell or partner with a stronger counterpart as financial performance declines. Furthermore, given the high fixed costs of cancer center operations, centers with lower throughput may not be able to survive long-term on a stand-alone basis, driving additional transaction activity. However, smaller entities partnering together may form larger, more efficient businesses that are better positioned to drive value in the long-term.
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