The coronavirus (COVID-19) has dominated the news since the outbreak began in China early this year. As the situation evolves, health care companies and organizations should monitor four important risk areas: supply chain, patient demand, workforce supply and their t function.
According to Premier Inc., a large group purchasing organization, 100% of the active pharmaceutical ingredients (API) for two vital products—penicillin and heparin—are exclusively manufactured in China. Many drug manufacturers built up supply ahead of the Chinese Lunar New Year holiday, which began in late January. Recent satellite images of pollution from China suggest manufacturing is ramping up to normal levels. We are optimistic that API inventories of critical medical products will survive the disruption. Even so, health care leaders should be prepared in case they do not.
If COVID-19 spreads significantly in the United States, we anticipate patients and their physicians will delay scheduled surgeries and likely increase utilization of virtual health services. Providers in affected geographies can also expect a rise in the volume of in-person visits (both scheduled and walk-in) as affected people seek treatment.
Providers can then expect to see pent-up demand unleashed as patients recover and the virus is contained. In the meantime, we encourage providers, payers and employers to encourage patients to utilize virtual health services. We have seen an increase of almost one million virtual visit volumes in China as a result of the outbreak and, despite the unfortunate circumstance, the virus may help drive similar increases domestically.
Sensible remote work arrangements for non-clinicians
Many industries are embracing more remote work policies to deter the spread of COVID-19. And though many clinicians do not have this option, we encourage health care companies across the ecosystem to explore additional remote working flexibility for administrative staff. Such a move could meaningfully help to slow the virus’s spread also prove a useful organizational experiment on remote work. Broader adoption of remote and flexible work arrangements after the outbreak is contained may also help attract and retain top talent.
Additionally we encourage organizations to be aware of the effects of requiring employees to continue to come into work, especially if we see additional school or day-care closures. The additional strain on your employees must be part of the overall remote work decision.
A prolonged outbreak will could extend or even improve the favorable interest rate environment many health care organizations have enjoyed over the past 15 months. Indeed, in a rare move the Federal Reserve cut the benchmark rate 50 basis points on March 3, which was not on a scheduled meeting date of the FOMC. We believe markets could be pricing in three additional cuts by the end of the year for a total reduction of around 80bps.
Demand for municipal debt has also driven down high-risk debt rates. According to the Bloomberg Barclays Muni High Yield to Worst, which tracks rates for municipal debt generally consider to be riskier, the rate at the end of February of 2020 was just over 3.3% (a 190bps premium to the US 20 year).
The current rate environment is prompting more not-for-profit providers to issue taxable debt instead of the more traditional non-taxable municipal debt. Taxable debt carries fewer restrictions on the use of proceeds, which many issuers find useful especially as they adapt to the fast-changing health care digital delivery environment.
On the other side of the equation are the equity positions in the portfolios of many health care organizations, which have been beaten up pretty badly since the latter half of February, with the S&P 500 now down 15% since its record high.
Many health care organizations take a long-term investment strategy; however, the unrealized losses that will be experienced by many health insurers and hospitals in the first quarter of 2020 could result in a different way of thinking about the second quarter and beyond.