Since 05/11, Strata Decision Technology, a healthcare focused financial analysis & analytics enterprise software provider, has been publishing a weekly report that tracks volumes at 228 hospitals across the country. The latest report shows ER visits and inpatient admits declined by ~1-1.5% over the latest 7-day period as of May 16th, vs. ~-8% in the prior week, pointing to a slowing of ER / inpatient volume decline towards mid-May. Meanwhile, outpatient visits continued to increase w/w with ~3% volume growth over the latest 7-day period vs. +6% in the prior week. Over the last 30 days, ER visits were down ~1%, inpatient admits up ~3%, observation visits up ~13% and outpatient visits up ~23% - see exhibits 2 on page 3. Overall, hospital volume metrics appear to be stabilizing / improving towards mid-May albeit at a more moderate pace vs. what HCA, THC and UHS have communicated recently.
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Following the reopening of states and the rescheduling of elective procedures, early hospital volume metrics have been improving in May. HCA, THC and UHS all provided metrics which indicate that volumes have begun to improve from their COVID induced April trough levels. While the early results are encouraging, managements have expressed caution in terms of visibility around volume improvement trends over time. Focus for hospitals largely continues to surround assuring patients of their safety and restoring confidence in resuming normal HC routines. Additionally, recent volume data provided by Strata Decision Technology (inpatient / outpatient volume), The Commonwealth Fund (ambulatory care volume) and AHCA (FL hospital capacity) all pointed to an improvement in May vs. the trough levels in April – more below. Overall, the directional improvement is not surprising, with the main question being if/when providers return to 100% of typical.
Yesterday (05/12/20), House Democrats unveiled a new $3T COVID-19 relief package which includes provisions to aid state fiscal budgets, support for providers, as well as significant COBRA subsidies. While many COVID-19 related provisions were built upon the provisions from the previous $2T stimulus package, the new package adds more health insurance protections, including full COBRA premium subsidies until Jan 31, given the continuing surge in the unemployment rate. According to Politico, the House is expected to vote as soon as this Friday, but the White House and Senate Republicans expressed there hasn’t been enough time since the last package to determine whether new legislation is necessary. Senate Majority Leader Mitch McConnell has said there is no “urgency” likely pushing any actions until after Memorial Day. Overall, while we expect there will absolutely be further stimulus, we expect there will be a robust debate on components and thus would not be investing on the assumption that the House bill in its entirety is what will eventually pass.
CMS released the Medicare FY2021 Hospital Inpatient Prospective Payment Systems (IPPS) proposed rule. Before accounting for Medicare Disproportionate Share (DSH) payments CMS estimates that industry rates would increase by 2.5%, with proprietary (for-profit) rates increasing by 2.6%. Rates for Rural hospitals (+2.3%) are slightly lower than Urban hospitals (+2.5%). Key drivers of the +2.5% include a market basket update of +3.0%, productivity cut worth -0.4%, documentation and coding benefit of +0.5% and other proposed adjustments worth -0.6%. CMS estimates that changes to uncompensated care / new technology add-on / capital payments will lower rates by 40ps. We would expect all-in reimbursement for the industry of +210bps and +220bps for the for-profits based on the proposed rule. These rates are slightly below the +340bps/+290bps seen by for-profit hospitals in FY19/FY20 but still solid in our view. See impact table on Page 2 Exhibit 1.
Hospital payer mix is a key determinant of economic results given employers pay 30-40% more than exchanges and 3x Medicaid in our view. With employer-based coverage clearly declining thru 2020 and into 2021 our recession model drives payer mix changes off estimated unemployment thru YE’21. In addition, our conversations with payers / providers have skewed increasingly toward concerns that utilization will take longer than expected to “normalize” despite clear pent up demand from deferrals. Our hospital recession model assumes utilization does not revert to 100% of “normal” until the second half of 2021, adding additional pressure to provider economics next year.
Following the initial infusion of $30B earlier in the month, the administration has now laid out a plan for how to distribute the remaining $70B to providers. Same as the $30B initial infusion, $20B out of the $70B is general funding which will be distributed to all facilities & providers but importantly this time the fund will be allocated “so that the whole $50 billion general distribution is allocated proportional to providers' share of 2018 net patient revenue”. Recall that in order to quickly distribute the fund, HHS distributed the initial $30B based on 2019 Medicare FFS revs. This means that during this second round, providers with smaller % of revs from Medicare FFS (like children’s hospitals) will receive a greater proportion of the additional distribution compared to the last round. It is unclear at this point how the allocation methodology will impact the distribution to hospitals vs. the initial distribution but we plan to follow-up as we get more clarity here – see exhibit 1 on page 2 for our est. (HCA / DVA are actual) of $ providers received from the initial $30B distribution.
HCA did a solid job on the call of laying out a multi-layered view of the environment facing the hospital sector both in the near, intermediate and longer-term and what the company sees as responses to various outcomes. That said, there was little in the way of quantification around factors under the company’s control such as cost cutting. Mgmt. did give a capex cut # of $1.0-$1.5B from previous $4.0B+ run-rate and discussed a multi-phased cut to costs going forward dependent on the length and depth of utilization disruption and economic / payer mix impacts. We thought CEO Sam Hazen was extremely balanced and thoughtful regarding the environment and uncertainty around structural changes to demand and supply across the healthcare structure post COVID-19.
HCA announced 1Q20 adj EBITDA of $2.20B (-13.4% y/y), below WR / Consensus estimates of ~$2.56B / $2.46B due to COVID-driven deferred utilization. As expected, the company noted “patient volumes across most services were significantly impacted in the last two weeks of the quarter as various COVID-19 policies were implemented by federal and state governments.” Cash revenues were $12.9B (+2.7% y/y), below WR / Consensus $13.5B / $13.1B. Not surprisingly, HCA withdrew its latest 2020 guidance, citing the adverse impact from COVID-19 will be driven by many factors, “most of which are beyond the Company’s control and ability to forecast” and the company also suspended its dividend.
On Friday HHS announced the eligibility criteria and distribution methodology of the initial $30B in relief funds to providers, which is part of the larger $100B package from the CARES Act. These funds will go to all facilities & providers (including physician groups like OptumCare) that received Medicare FFS reimbursements in 2019 – see below for more details. Providers have been distributed the initial $30B based on their share of total FFS reimbursements in 2019, which totaled ~$484B leaving payments at 6.2% of FFS. For the remaining $70B, HHS notes it will prioritize distributions to “providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured.”
The American Hospital Association wrote a letter yesterday (03/31/20) to HHS / CMS to immediately distribute a portion of the $100B Public Health and Social Services Emergency Fund to hospitals directly. Specifically, the group is asking for $25,000 per bed, and $30,000 per bed for “hot spots”, which will total to ~$23B, not including the additional funding for hot spots. We believe this is only a portion of the total funding that hospitals are expected to get from the Emergency Fund as the AHA initially estimated $65B will be allocated to hospitals, according to CNN. Based on the disclosed # of beds by each hospital under our coverage universe, we estimate that HCA / UHS / THC will see a 12% / 8% / 15% benefit to their COVID-19 unaffected 2020 EBITDA with the $25,000 per bed direct funding. If hospitals indeed get a total of $65B and these get distributed evenly by bed count, which at this point is difficult to assume, we estimate HCA / UHS / THC would see a benefit of 33% / 24% / 42% to their EBITDA – see exhibit 1 on page 2. These dollars are needed to offset significant elective utilization deferrals across the country which we expect will significantly pressure hospital economics over the next several months as indicated in our previous work on potential COVID-19 impact to hospital economics across our group.
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