Commercial risk will be a critical catalyst of progress – it’s complicated, but is it possible? We think so.



How Covid-19 will impact the financial outlook for the health care industry

    As the country unfolds various plans to slowly reopen, health care leaders are shifting their focus from the short-term effects of the Covid-19 pandemic to the downstream impact they can expect in the months ahead.

    The financial ramifications of the virus will manifest differently for every sector of the industry, as well as for individual organizations within each sector, as they depend on a multitude of industry, geographic, and company-specific factors.

    To help health care leaders assess what the Covid-19 pandemic will mean for their organizations, our team analyzed the critical factors that will determine the financial outlook for different segments of the industry.

    Use the interactive menu below to read a quick summary of the most important questions that will shape the financial impact of Covid-19 on each sector and for link(s) to more detailed analyses.


    Analysis by Ben Umansky

    1. How will Covid-19 cases directly affect hospital finance?

    Main factors determining financial impact: Covid-19 caseload, surge capacity expenses, general productivity losses during crisis

    Wild card: Further changes to payment rates

    Inpatient Covid-19 cases will fall into a range of DRGs, according to the treatment delivered. Early estimates suggest that the average revenue for a Covid-19 admission, weighted by likely distribution across DRGs and by payer mix, will be about $15,000. Outlier cases could pay substantially more, but with accordingly higher expenses for hospitals. Advisory Board expects that Covid-19 cases will tend to cover variable expense and yield a positive contribution margin, like most hospital admissions do. However, spending on Covid-19 preparations and surge capacity, including above-normal rates for clinical labor, may erode that margin. Furthermore, the massive reallocation of attention and effort toward Covid-19 will reverberate throughout the health system. There will be generalized productivity losses elsewhere. While those losses may not be observable, they’ll be significant, even if the cost of that time is never directly attributed to Covid-19 cases.

    This outlook could change as public and private payers adjust reimbursements for treatment related to Covid-19, whether by increasing reimbursement directly or by covering patient obligations. Regardless, most health systems will see moderate but not overwhelming Covid-19 caseloads. And the revenues and expenses associated with treating those patients will pale in comparison to the other financial consequences outlined below.

    2. How deep a hole will health systems find themselves in after cancelling so many elective procedures?

    Main factors determining financial impact: Length of elective delays, extent of social distancing, ability to flex down expenses

    Wild card: Consumer attitudes toward supposedly non-elective services

    Health systems in all markets, regardless of Covid-19 incidence, have seen huge reductions in the volume of other services. To preserve personal protective equipment and other resources, most hospitals have delayed or cancelled an overwhelming portion of procedures deemed “elective.” Judgments about what is truly elective vary widely, and so do judgments about what restrictions to impose. Advisory Board modeling and early anecdotal evidence both suggest that around 50% of inpatient surgeries and upwards of 80% of outpatient procedures are subject to provider-directed cancellation or delay.

    But emerging evidence suggests that demand for supposedly non-elective services has also fallen. At least some of the reduction may be due to truly reduced clinical need. Social distancing reduces the transmission of influenza as well as Covid-19, and there are fewer car accidents with fewer drivers on the road. But other reductions have been less expected—and more concerning. Unusually low volumes of stroke and heart attack patients suggests that social distancing or fear of Covid-19 may be dampening consumers’ willingness or ability to seek appropriate care. These patterns, should they persist, would mean a deeper hole for hospital finances as well as worse outcomes for patients.

    The financial consequences of such a sudden drop in volume have been immediate and immense. Elective procedures are among hospitals’ most important economic engines. The deferral of so much revenue has put severe pressure on cash flow and cash reserves. In response, systems have begun to furlough staff, but the heavily fixed-cost nature of hospital operations means there are limited options to preserve margins in the short term.

    3. Will health systems be able to recapture and serve their backlogged cases?

    Main factors determining financial impact (on a service-by service basis): Excess supply, patient loyalty, sustained site-of-care shifts

    Wild card: Asymmetric competition

    The magnitude of an institution’s financial decline depends on market-level factors such as the length and breadth of social distancing measures and the persistence of the Covid-19 threat. But the recovery path will be shaped by system-level realities. Systems that can quickly accommodate backlogged demand and can keep queued patients from dropping out or defecting to competitors may make up most of their losses over time.

    Systems that normally run near or at capacity for a given service should consider whether a capacity surge above normal levels could be advantageous in the immediate period after restrictions are lifted. Ironically, systems with the lowest productivity before the Covid-19 crisis may be in the best position to accommodate backlogged demand (since there was slack in the system to begin with). Nevertheless, most systems can expect to face further supply constraints as shortages of personal protective equipment, anesthetics, and other key supplies linger. And for some services, backlogs in precursor services like specialist evaluations, imaging, and lab work will need to be cleared before procedural volume can return. Restarting a shuttered service will be more like turning a dimmer switch slowly upward than simply flipping from “off” to “on.”

    Regardless, all the supply in the world will not matter if a competitor has reopened first and taken a share of the backlog. Services that can be delivered outside of a hospital setting are especially vulnerable, and we may well see permanent shifts of patient and clinician preference toward freestanding, home-based, or virtual options. System leaders face delicate choices about reopening quickly enough to save or even gain market share, but not so quickly as to put safety or reputation at risk.

    4. How will the broader economic consequences of Covid-19 affect health systems?

    Main factors determining financial impact: Sustained unemployment rates, employer benefits strategies

    Wild card: Further coverage expansion, non-operating income

    Over the coming months—perhaps even years—the economic fallout from our prolonged national and global shutdown will continue to erode health system finances. The mechanics of that erosion are numerous:

    1. Job losses will shift patients from employer-sponsored coverage to Medicaid, insurance exchanges, or self-pay, thereby reducing average revenue per case.
    2. Patients with no or limited coverage will use fewer health care services, reducing volume as well as price.
    3. Even patients who do not lose their jobs may see reductions in health benefits. As this is the first downturn since coverage expansion under the ACA, employers may find it more palatable to cut back knowing there are safety nets in place. Less generous benefits would also depress utilization and revenue per case.
    4. Lower income and higher uncertainty even among the employed may also depress demand.
    5. Lower state tax revenues will add pressure to Medicaid budgets.

    As in any downturn, some markets and some industries will recover faster. Single-market health systems may fare much better or much worse than average depending on their local conditions.

    Systems that are heavily dependent on non-operating revenues to sustain total margins face particular uncertainty. While the stock market has rebounded somewhat from its sudden collapse in March, the prospect of a sustained economic slowdown is likely to drag down performance across many investment classes.

    There are encouraging signs that philanthropic donations, an important source of non-operating revenue for systems of all sizes, are currently strong. But it remains to be seen whether enthusiasm and generosity will persist beyond the peak of the Covid-19 crisis through the longer economic challenges to follow.

    5. Will the government continue to extend special support to hospitals?

    Main factors determining financial impact: Congressional appetite for further spending, agency-level rulemaking

    Wild card: Provider-side financial and policy savvy

    This is perhaps the most important and most uncertain question in the short to medium term. Many health system CFOs credit Medicare’s advanced payment program with forestalling a dire cash flow crisis in the early weeks of elective shutdowns. In addition, funding from the CARES act and PPP are of significant value to hospital solvency. But any new appropriations for health care providers will need to compete against the needs of many other disrupted sectors. Furthermore, obligations to repay advance payments loom, as does the prospect of audits for relief funds and the need for careful documentation. As with any government program, a health system’s ability to successfully navigate the terms and conditions may matter as much as the overall size of the funding pool.

    6. What is the endgame for Covid-19 itself?

    Main factors determining financial impact: Time to widespread vaccine, herd immunity, effective treatment for high risk patients

    Wild card: Unforeseen long-term complications

    The financial consequences of the first wave of Covid-19 and the resulting economic downturn are daunting enough, but the long-run picture could be even more complicated depending on how the disease develops. If a vaccine remains elusive, recurring waves of infection could force additional shutdowns and deepen economic pain. In worst-case scenarios, excess mortality associated with Covid-19 could even change demographic distributions significantly enough to affect overall demand and payer mix. Even in less extreme scenarios, the longer Covid-19 persists as a serious threat, the more likely that consumer preferences and attitudes toward health care will change permanently. Whether or not those changes are to providers’ economic advantage will depend on strategic aptitude.

    Finally, the long-run demand picture may be affected in unpredictable ways if Covid-19 survivors develop lasting complications—or if the physical and mental health burdens of social isolation prove sadly durable.

    What to do next:

    Medical groups

    Analysis by Rachel Woods and Daniel Kuzmanovich

    1. How can groups maximize telehealth visits in the near term? And how can they carry that momentum profitably into the future?

    Medical groups have moved quickly to mobilize virtual services to triage possible Covid-19 patients, remotely monitor and treat other cases, and allow providers to social distance. This necessary experimentation means more providers and patients are using telehealth than ever before. As a result, many patients will expect telehealth to become a normal part of their health care experience in the future. At the same time, Covid-19 has exposed physicians to the value of virtual care delivery, proving it can be a reliable form of care delivery that still allows for meaningful patient interactions. The obvious challenge with telehealth will be balancing an increase in demand for virtual services with the realities of reimbursement.

    2. Will delayed and deferred care lead to access challenges?

    Medical groups have seen huge reductions in volume of services, regardless of the incidence of Covid-19 in their market. Most organizations have delayed or cancelled services deemed “elective.” When social distancing measures are lifted, groups will face access challenges as a significant backlog of patients attempt to seek care. Recovering lost volume will require medical groups to maximize provider capacity, but they’ll need to do so with little to no increase in staff. One advantage for hospital-employed medical groups is their ability to increase downstream value by connecting patients to high-priority and high-margin services.

    3. How do physician groups support a workforce suffering from stress, burnout, and trauma directly or indirectly related to the pandemic?

    Physician leaders will grapple with how to support a workforce dealing with the direct and indirect effects of practicing during a pandemic. On the one hand, physician leaders will need to offer direct support to providers on the front lines of surge markets who are feeling burned out, stressed, or even distrustful due to challenges like PPE shortages. On the other hand, groups will need a plan to support providers who have been on the sidelines, seeing lower volumes or a lack of work altogether. Those providers may be feeling financially vulnerable and have their own feelings of distrust and insecurity.

    4. How will Covid-19 impact physician recruitment and acquisition strategies?

    Cash-crunched groups will be forced to be make difficult decisions around staffing and recruitment, which may include reducing the size of the medical group or slowing growth goals. As the same time, groups that make it past the immediate cash crunch are likely to see new opportunities for physician partnership as small, capital-constrained groups seek to be acquired.

    Independent practices will need to assess their access to the capital and resources necessary to remain independent. Leaders should determine the circumstances in which they would consider partnering with a health system, payer, or other large independent group—and at what point they would consider a capital influx from private-equity investors.

    5. Will the relaxation of restrictions around APPs be made permanent? How will these and other changes impact groups’ approach to care team design and deployment?

    Prior to the pandemic, advanced practice providers (nurse practitioners, physician assistants) were a rapidly growing part of the provider workforce and were increasingly accepted as autonomous providers in primary and specialty care. The relaxation of practice restrictions has, in some cases, dramatically increased the acceptance of autonomous APPs by patients and physicians. In the post-Covid-19 period, groups will need to consider how they can preserve APP autonomy and grow the ranks of APPs to meet pent up demand and fill physician shortage gaps.

    6. What changes should groups make to their risk profile in the next year? In the next several years?

    Perspectives on the future of value-based care vary. Some people believe the movement to value-based reimbursement will be permanently derailed, while others believe that the crisis will accelerate payment transformation. The pressing issue is how providers will alter their risk strategy in 2020 and in 2021. In the short term, Covid-19 is likely to stall value-based efforts and offer more flexibility in reporting to insulate providers from potential negative ramifications. Longer-term implications are less clear. The divergence between medical groups willing to take on risk and those digging in their heels is likely to be significant.

    What to do next:

    Skilled nursing facilities

    Analysis by Monica Westhead and Carolyn Buys

    1. Will the temporary waiver of the three-day stay rule be made permanent?

    The value of the Medicare three-day stay rule, indicating that patients must stay in the hospital for three days before qualifying for a SNF benefit, has long been the target of industry questions. The rule is intended to avoid unnecessary SNF utilization, but it can have the unintended impact of creating avoidable acute care hospital days. While the rule is waived within ACO models and the BPCI Advanced program, the waiver associated with Covid-19 is the first of its kind impacting Medicare fee-for-service patients. Providers are already using the opportunity to admit patients to SNFs directly from the ED, freeing up hospital beds.

    If the waiver does not result in excessive Medicare SNF spending and reduces inpatient hospital utilization, CMS may make the waiver permanent following the pandemic. Should that happen, existing discharge patterns could change significantly to favor avoiding a hospital stay entirely for certain SNF patients.

    2. How will nursing home outbreaks impact perceptions of the SNF industry and patients’ willingness to be treated in skilled nursing facilities?

    There is no question that nursing homes are in the middle of a perfect storm. Medically fragile patient populations, densely occupied facilities, and low staffing ratios have made them prime for catastrophic and heartbreaking outbreaks. These outbreaks—especially at the beginning of the pandemic—have been well publicized, and the reputation of the SNF industry has suffered as a result. Patients and families, along with referring physicians and hospitals, may prefer to avoid SNFs out of fear of infection. Until there’s vaccine for Covid-19 (likely not for 18 to 24 months), SNFs will have trouble convincing families and referral sources that they are safe, even with the best infection prevention protocols in place.

    3. How long will reductions in elective procedures last?

    Health systems have drastically cut or eliminated elective procedures to increase hospital bed and staff capacity for an influx of Covid-19 patients, and to conserve scarce supplies for emergent needs. As elective surgery patients, particularly joint replacement cases and some less-urgent cardiac cases, have often gone to SNFs to recover, those volumes have dried up. This results in lower overall volumes and a higher ratio of complex medical patients in SNFs. Fortunately, the Patient-Driven Payment Model (PDPM) has adjusted SNF payments so that those patients are reimbursed more appropriately, but they are still more challenging to manage in the SNF than relatively healthy, elective surgery rehabilitation cases.

    Hospitals are also suffering financially from the reduction in profitable elective cases. The effectiveness of social distancing at “flattening the curve” will likely determine when hospitals feel secure enough to begin to schedule elective cases again, and then sending those patients to SNFs.

    4. How will visitor bans impact therapy contracting?

    Many SNFs use contract therapy vendors to provide therapy to their patients and residents. In some areas, however, contract therapy staff have been caught up in bans on visitation in SNFs, intended to reduce the likelihood of infection by limiting the number of contacts within the facility. SNF leaders may take this opportunity to reevaluate therapy contracting—not necessarily to move to an employed therapy model but to ensure continued access to therapy staff in other lockdown-type scenarios. This may include revising contracts to limit the number of facilities at which an individual therapist can work.

    5. How will the availability of staff change in the long run?

    SNFs struggle from high staff turnover rates—41% per year, according to an Advisory Board survey—even in normal times. It remains to be seen how the pandemic will impact staff turnover, as burnout and fear of infection are likely to cause some staff to leave the industry. In addition, infection control guidance has led some SNFs to ask their staff to commit to working only at a single facility, reducing the availability of shift-work staff, who often are employed at multiple buildings at the same time. Leaders should focus now on supporting and stabilizing staff in the short term, but be prepared to switch to active retention or potentially recruiting as the pandemic begins to improve.

    What to do next:

    Home health

    Analysis by Monica Westhead and Carolyn Buys

    1. How many of the new regulations that have enhanced access to home health will hold across the long term?

    To support more patients at home amid nearly nationwide stay-at-home orders, CMS has enacted several new provisions aimed at improving access to home health care. These changes include allowing non-physicians to order home health and allowing the initial face-to-face visit to occur over telehealth. Because the former was included as part of the CARES Act, it's more likely that advanced practice providers will be able to sign home health orders beyond the emergency declaration period. And if that happens, home health providers could expect to see higher volumes and a more efficient intake process in the future.

    2. Will new telehealth waivers finally be extended to home health during the pandemic? Or will agencies continue to provide telehealth and virtual care for their patients without direct Medicare reimbursement opportunities?

    The ability to conduct the initial face-to-face visit over telehealth is an overall win for the health care industry. But CMS has been slow to extend telehealth opportunities to home health agencies. While other settings of care have seen both new reimbursement opportunities and relaxed regulations for telehealth, the CARES Act mandates only that HHS consider how to provide home health agencies with the same opportunities. Many home health providers are already providing some level of telehealth because of reduced staffing, limited PPE, and patients’ reluctance for in-person visits. But they are taking a financial hit on reimbursement for these services in the short term. If new regulations about telehealth are released, they would have significant implications for the scalability and cost of home health services in the long term.

    3. How long will skilled nursing facilities continue to restrict admissions? And to what extent will patients and family members want to avoid facility-based settings in the future?

    The Covid-19 pandemic has hit skilled nursing facilities and long-term care communities especially hard. This has led many facilities to completely bar new admissions, and many patients and families want to avoid these facilities entirely. Both of those barriers are likely to stick with the industry for a while. If they do, home health agencies may benefit from increased volumes and even higher acuity patients—with higher reimbursement opportunities—in the future.

    4. How long will patients and family members feel reluctant to let home health workers into their residences?

    Many home health agencies are already feeling the impact of reduced volumes due to patients forgoing services over fears of infection being spread by providers entering their homes. Even when stay-at-home orders are repealed, it’s likely that this concern over having providers in the home will linger for at least a few months. To mitigate the impact of reduced volumes, providers will need to find ways to assure patients, families, and other health care practitioners that they’re following all the necessary precautions to reduce the risk of infection.

    5. How will Covid-19 effect the home health workforce?

    Home health agencies across the country traditionally struggle with high turnover rates among staff. That trend may be accelerated by the current Covid-19 pandemic due to increased staff burnout, staff illness, and the reluctance of potential new hires to enter the industry. The CARES Act provides funding for workforce development programs for home health aides and other allied health professionals. But home health leaders will also need to double-down on their support for staff now to reduce any immediate threats to workforce stability and set themselves up for a stronger workforce in the long term.

    What to do next:


    Analysis by Rachel Sokol and Natalie Trebes

    1. Will plans tap into reinsurance or reserves? And how will that impact allowed premium prices for next year?

    While not all plans will see a spike in care related to Covid-19, many will—and they likely haven’t priced for it when setting premiums. Future rate setting will depend on how plans are able to use their reinsurance policies, their risk corridors, or their own reserves. Regulators will also need to consider previous and future Covid-19 care as they approve payers’ requests.

    2. Will delayed and deferred care cause an expected or unexpected spike in next year’s utilization due to pent-up demand and exacerbated chronic conditions?

    Providers have postponed all non-emergent care to keep hospitals and offices free for Covid-19 cases and to limit exposure. While some of this care will be fulfilled in 2020, much will stretch into 2021 as facilities are unlikely to be able to shift all care to the second half of the year. In addition, some members may face worsening chronic conditions if they can’t see their regular care team, and this new uncertainty will be difficult for actuaries to model.

    3. How diverse is each plan’s membership mix with regard to line of business and geography?

    So far, Covid-19 has disproportionately impacted Medicare-aged members, particularly in large urban areas like New York City, New Orleans, and Detroit. It has also started to shift people from the employer-sponsored market to the Affordable Care Act (ACA) exchanges or Medicaid due to the economic crisis. Predicting the next hot spot for Covid-19 is difficult, but it’s clear that diversity in terms of age, line of business, and geography will spread out a plan’s chances of facing an onslaught of cases.

    4. Due to providers' poor finances, how will acquisitions—both physician groups and hospitals—impact plans’ future ability to contract favorable rates and try new payment models?

    Provider finances are threatened by the reduction in elective care and limits on regular visits. While some plans, including CMS, are offering advanced payments to shore up cash flow, it may not be enough for smaller provider organizations. These groups are likely to seek out new strategic partners, and who they choose could drastically impact their willingness to contract or collaborate with plans.

    5. Will larger, for-profit plans draw on additional cash reserves that are unavailable to non-profit plans to support themselves and their network providers?

    While local market knowledge can be an advantage, it is likely that larger, for-profit plans may weather this financial crisis more easily than smaller organizations. In particular, larger budgets and cash reserves could be used to continue investing in digital innovation or other community partners.

    6. How will employers adapt their benefits for the recession knowing that the ACA is in place?

    In contrast to the 2008 recession, now the ACA provides incentives for members to remain covered, like exchanges, essential health benefits, and individual mandates. Even so, employers will likely offer less generous benefits in the current recession. It’s important to note that money-saving ideas, like cost-shifting to employees, have had limited effects so far. In the coming year we may see employers turn to less-common methods to save money, such as direct primary care, reference-based pricing, or care navigators.

    7. Which telehealth policy changes, such as parity payment and licensure, will remain and create an environment where providers compete across a broader geographic area?

    Providers have drastically accelerated their telehealth adoption to continue providing care during social distancing. Plans and regulators supported this by quickly approving changes to who can provide telehealth, the technology they can use, and what they would be paid. While providers will likely revert to office-based care after the Covid-19 crisis, some may view this as an opportunity to expand their reach into new markets and offer a new service.

    8. How do plans engage and onboard a large influx of new members to quickly manage their care given the likely churn in individual, employer, and Medicaid populations?

    Today’s rising unemployment claims mean that more individuals are losing their employer-sponsored coverage and choosing to enroll in Medicaid or in the ACA exchanges. Plans will need to quickly identify underlying chronic conditions among new members to avoid future unexpected expenditures.

    What to do next:

    Pharmaceutical companies

    Analysis by Katie Schmalkuche

    1. What happens to clinical trials and approvals as a result of Covid-19?

    Trials for non-Covid-19 products will become slower and more expensive as providers prioritize Covid-19 and patients largely avoid seeking care. We’re already seeing trial delays and cancellations as pharmas are forced to reprioritize late-stage development. To lessen the impact of trial slowdowns, we’re likely to see experimentation with digital trials and recruitment (like with Apple and J&J), and use of real-world evidence, where feasible.

    2. How do Covid-19-related disruptions reorient which active pharmaceutical ingredients (APIs) and drugs are made, where they’re made, how much is made, and how easily they’re transported globally?

    The pandemic is already causing some near-term API shortages. In response, organizations are building more expensive and duplicative manufacturing and supply chain capabilities. When a treatment or vaccine is approved, we can expect the production of those products to crowd out other manufacturing for a while.

    3. How might Covid-19 influence the role of PBMs and pharmacies?

    Social distancing could increase patient preference for mail-order pharmacy, allowing PBMs to win and retain mail-order customers over the long term. At the same time, financial pressure on health systems may cause them to double down on in-house retail and specialty pharmacy businesses, as well as physician buy-and-bill, as sources of profitable revenue.

    4. What impact will the Covid-19 crisis have on federal price regulations and how open states, payers, and IDNs are to innovative contracting models?

    This is probably the most high-beta scenario for pharma. One or more helpful treatments will dramatically accelerate government attempts to regulate prices and use Netflix-like contracting models. Otherwise, it’s still unclear if pricing pressure will go up or down. And public perception of “big pharma” in a post-Covid-19 world could play a significant role in how and when federal pricing legislation happens.

    5. How does the grounding of field personnel and destabilization of small physician practices affect pharma’s commercial model?

    It is likely that the number of sales reps will decline, as digital detailing and deployment of medical science liaisons (MSLs) and key account managers (KAMs) becomes more important. The rise in telemedicine and disruption to small practices could prompt pharma to rethink who their highest priority clinical customers even are.

    6. What impact will Covid-19 have on prescription volumes?

    Whether or not prescriptions are written or refilled depends on what happens with the economy. Factors like losing a job or insurance, access changes deployed by payers in response to Covid-19, and whether delayed elective procedures prompt some patients to choose medication-based interventions will all affect prescription volumes. But since we don’t know what will happen in these areas, it’s difficult to gauge the impact on prescription volume overall.

    What to do next:

    Medical device and supply companies

    Analysis by Jessie Goldman

    1. How many elective surgeries shift to an alternative site or are rescheduled to later this year?

    In the short term, widespread cancellations or delays of elective procedures will depress demand for surgical products. Over time though, states will loosen social distancing guidelines and individuals’ health conditions may worsen. Thus, procedures that might be have been considered elective in March may no longer be considered elective come May. Moreover, it remains to be seen which procedures will be rescheduled for a later date or take place at an alternative site like an ASC.

    2. Will Covid-19 accelerate the shift to outpatient surgery sites in the long run?

    For years, we’ve talked about the shift of surgical services to the outpatient or ambulatory setting. Even before the outbreak of Covid-19, we saw aggressive site-of-care steerage by payers and employers. Now some health systems are or will soon be desperate to free up beds for Covid-19 patients. Those systems may voluntarily shift procedures to alternative sites of care, accelerating the shift to outpatient procedures—with the resulting implications for reimbursement.

    3. Will the forward buying of beds, ventilators, and monitors dry up demand for years to come?

    Once the current crisis has subsided, demand for reusable products like masks and gloves will likely return to historical patterns. But as hospitals scramble to acquire enough beds, ventilators, and monitors to manage the influx of Covid-19 patients, device companies may sell years’ worth of equipment in a single month. After this initial spike, it’s possible that hospitals will be so oversupplied that demand might evaporate for the foreseeable future.

    4. Will the innovation pipeline begin to favor products that enable care at home?

    The Covid-19 pandemic has forced providers and patients to get more comfortable with care at home than we otherwise would have predicted. If this widespread willingness to use telehealth sticks, the next wave of product innovation may be centered on remote diagnostics or monitoring rather than acute care implants.

    5. Will more health systems think differently about standardization and supply chain efficiencies?

    Many health systems were caught flat-footed by this crisis in terms of access to adequate amounts of medical devices and supplies. This may not only change demand in the near term, it may also lead systems to rethink their overall supply chain strategy. For example, it’s possible that some providers may decide it’s worth paying a higher unit cost to ensure more inventory or locally sourced manufacturing. And after years of limiting the number of vendors they work with, some systems may pivot to become less dependent on a single supplier or adjust contract terms to protect against future production shutdowns.

    6. Will this experience elevate the importance of supply chain in health system strategy?

    Many VPs of Supply Chain have historically struggled to break from the notion that their job was solely to achieve cost-efficacy in the procurement and distribution of medical products. The Covid-19 crisis, which has clearly exposed the importance of inventory and supply chain management, may elevate supply chain leaders as integral drivers of care variation reduction and risk-mitigation efforts.

    7. Will this change the role of the sales representative or the perceived value of “extra” services?

    Hospital limitations on non-essential visitors and heightened fears about virus transmission have limited the provider-supplier interactions that have been the backbone of suppliers’ commercial strategy. While some exchanges have been moved online, it’s worth watching how providers react to these changes once normal operations resume. This time of crisis may push leaders to question the role of product representatives. Or it may become clear that certain services, such as training, are invaluable aspects of the provider-supplier relationship but may be conducted virtually.

    8. Will the Covid-19 crisis be followed by another wave of device and supplier M&A? If so, how will that wave be characterized?

    Any of the scenarios presented above can impact suppliers’ growth forecasts or cost structures to such a degree that future commercial viability could be called into question. Therefore, we may see rounds of M&A in the coming years. But big-to-big transactions are not the only ones worth watching. Whether to build out their portfolios or gain redundant manufacturing capabilities, established players may try to acquire smaller device or biotech companies that emerge as heroes in this crisis.

    What to do next:

    Clinical labs

    Analysis by Chris Gifford

    1. Will labs be able to process the national demand for Covid-19 testing?

    The nation’s testing capacity is insufficient for the demand for Covid-19 testing. This is causing lab leaders and teams to work longer, more frequent shifts; hire surge staff; and purchase additional testing systems. The current surge in demand for diagnostics and the temporary costs associated with ramping up capacity will smooth out in the coming months. But labs may build up excess capacity that leads to higher cost per test in the long term.

    2. How many routine tests will be deferred (or forgone), and for how long?

    In the short term, certified labs capable of running molecular or serology tests for Covid-19 are likely to be overwhelmed by demand. For regional and hospital-based labs, this testing may subsidize lower test volumes from other services. But large commercial lab players and health systems will see significant losses from forgone testing because of deferred routine or elective care during the pandemic.

    Test volumes in the medium and long term are likely to exceed pre-Covid levels, as labs across the industry test for pre-symptomatic Covid-19 cases to enable ongoing disease surveillance. Meanwhile, volume from routine testing is likely to slowly return as physicians resume patient consults.

    3. Will prolonged social distancing and adoption of virtual/home-based care accelerate at-home testing for non-Covid-19 diagnostics?

    Physicians are avoiding ordering non-essential lab tests during this crisis. In the medium term, urgent testing needs, like HbA1c for diabetics, will require creative solutions like drive-through blood draws, mobile phlebotomists, or potentially self-administered at-home tests until social distancing measures loosen. As a result, heavy consumers of diagnostics may come to view convenient and concierge-like testing services as a standard in the long term. Less diagnostic-dependent consumers will likely wait to return to status quo.

    4. Will Covid-19 activate consumers to proactively manage their wellness?

    The jarring nature of the pandemic—and sudden focus on “underlying conditions”—may spur previously apathetic consumer segments to more closely monitor their health. This could lead to greater demand for direct-to-consumer tests and an uptick in lab referrals from physicians. However, fear about in-person health care could loom large and cause many to continue to forgo routine care.

    5. Will Covid-19 inspire the next generation of med techs?

    Unprecedented challenges often serve as catalysts for innovation. The pandemic has exacerbated the shortage of skilled medical lab workers in the industry. But now the limitations (and heroics) of lab workers have been thrust into the limelight. Covid-19 may draw the attention of students and health professionals to either pursue a career in diagnostics directly or develop innovative solutions in AI or automation to address the pending labor shortage. Otherwise, employing skilled medical lab personnel in a competitive labor market will be more and more expensive as wages increase.

    6. Will labs’ response to the pandemic stave off reimbursement pressure?

    Planned reimbursement cuts from Protecting Access to Medicare Act (PAMA) are poised to force labs to do more with less. But labs are proving the critical nature of their work during this crisis. In the short to medium term, CMS will hold back further cuts to the Clinical Lab Fee Schedule, but the pressure of reduced payments is likely to return in the long term.

    7. Will the crisis accelerate or stall the lab consolidation trend?

    In recent years, the lab industry was nearing the brink of consolidation, but Covid-19 has underscored the value of a competitive clinical lab market. The financial ramifications of the pandemic could spark M&A, if buyers have sufficient liquidity. National commercial labs may look to augment their testing capacity or new test development capabilities by acquiring their regional peers, but consolidation won’t be limited to large transactions.

    Health systems could go either way. Those that do not consider lab a core strength may evaluate outsourcing to recoup cash. But health systems that have seen their own labs play a critical role in managing outbreak response will be less inclined to outsource. As health system labs have helped meet regional demand for Covid-19 testing, their potential to fill that need in the future could preserve their independence for years to come.

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