Head: Healthcare, Construction & Hospitality
While on the surface, a medical crisis benefits the healthcare sector, the realities of COVID-19 are far more complex.
The impact of COVID-19 has been far-reaching. Naturally, some industries have been harder hit than others. The extent and length of these disruptions are still uncertain as the country balances flattening the curve versus a material long-term economic fallout.
Even though the healthcare sector is normally seen as a generally defensive sector – and on the surface should benefit from a health crisis – it is also feeling a significant impact from the remedial measures taken, which have removed the majority of revenue outside of COVID-19 treatment.
Private hospitals are exposed to pressure on liquidity
Since the middle of March, when elective surgeries were cancelled, the hospital groups have been experiencing reduced occupancies to as low as 40% from highs of 65% to 70%.
The expectation is that occupancies will continue to fall, and many hospitals may need to be temporarily closed if elective surgeries continue to be restricted.
Surgical cases account for between 50% and 60% of private hospital revenue and generate a higher margin. The loss of electives for the duration of COVID-19 should translate into demand deferred, as opposed to lost.
However in the short-term, this puts pressure on income, and in the absence of being able to meaningfully cut staff, given the dire need of nurses for the pandemic, this leaves private hospitals exposed to pressure on liquidity and covenant levels.
There have, however, been calls from various medical societies to motivate the lifting of the restrictions on some elective surgeries that could lead to possible fatalities should they continue to be postponed.
While it is believed that under strict hygiene protocol there may be some progress in this regard, it is still uncertain the exact stance the government will take post the lockdown moving to Level 4 from the highest Level 5 from 1 May.
The worst-case scenario predicts the peak of COVID is to come in September, and that is a lengthy period for certain patients that require necessary but elective surgeries.
Balancing income, costs and medical necessity
The increasing pressure for surgeries to commence relates primarily to Medically Necessary Time Sensitive ('MeNTS') procedures. This includes treatment of malignancies and other potentially life or limb-threatening medical conditions, alleviation of pain, improvement of function and quality of life and prevention of serious complications of disease progression associated with surgically treated conditions.
Elective also refers to the fact that surgeon and patient can elect the timing and scheduling of surgery without a negative impact on the outcome of the disease progress, yet such surgery is still essential.
In the meantime, with the restriction on electives, private hospitals are relatively empty; Covid-19 patient numbers vary from 10 to 150 people in total in some hospitals.
Related to this, private hospitals have submitted pricing proposals to the government for treatment of COVID-19 public patients, but there has been little clarity on the process and reimbursement scales.
The geographic distribution of private hospitals is also likely to drive the volume of COVID-19 occupancies, which will influence how management reorganises their services in each of those facilities.
Overall, it is expected that the admission of public patients into the private hospitals will be a net positive for the hospital groups, although they are not expecting to recoup more than the basic cost of stay.
It is estimated that the all-in cost of a 20-day stay for a COVID-19 patient would be between R100 000 and R300 000, depending on the allocation to a general ward, ICU or high-care ward.
A continuing concern is the shortage of Personal Protection Equipment ('PPE') and ventilators, which are mostly imported from China and some from Europe. While companies are currently increasing spend on PPE predominantly from offshore, the government is taking steps to support and encourage local manufacture.
Currently, the public sector has about 1 000 ventilators, and the private sector doubles that.
Expectations are that a total of 7 000 ventilators will be required. The balance of about 2 300 for the public and 4 700 for the private sector, therefore, need to be sourced.
While the hospital groups are taking measures to prepare themselves, there will be a need to balance long-term demand and avoid overcapacity post the pandemic with the cost of a ventilator in the region of up to R300 000, depending on the type and specifications.
In addition, given the recent debate on the efficacy of ventilators, companies will be mindful of over-investing at this point.
Consolidation might be on the rise
There will be opportunities for consolidation post-Covid-19 as smaller players in the private healthcare sector may not be able to withstand the continued suppressed revenue and consequent liquidity pressures.
There is also an expectation of a significant demand spike post-lockdown on account of the delayed nature of the procedures.
Some private hospitals groups are already exploring how to build this into their schedules through possible weekend and night surgeries.
However, on the whole, aside from the pressures that increased funder case management and restricted hospital networks will provide, the new normal for the private hospital groups will be about right-sizing their businesses to a smaller and slower growth sector.
The Private Medical Insurance ('PMI') trajectory and its sustainability will be crucial in driving the private healthcare sector's growth. In addition, the viability of the medical aid providers is critical as they remain the largest outstanding to these smaller companies.
The pharmaceutical companies have been less impacted. While experiencing a change in demand in various product streams, they have not yet seen significant interruptions to supply chains, despite several logistical hurdles such as border closures, regional lockdowns and flight restrictions.
Logistics channels within and out of Europe and the East are presently slower than normal, causing delays in incoming raw materials and finished goods.
Production sites and third-party manufacturers of Active Pharmaceutical Ingredients ('APIs'), however, have not been affected and are in full production.
There are however some restrictions to a range of APIs required from India, particularly paracetamol, which is an important API for certain products in South Africa.
China and India are the main suppliers of APIs since local production is just too expensive, with less than 20% of APIs manufactured locally. In general, pharmaceutical companies have several months' worth of supply of API products, but sustained restrictions by India could be challenging.
On the demand side, there has been an elevated need out of Europe for several locally produced anaesthetic products used for sedation and muscle relaxation, both of which are important in the treatment of Covid-19 patients.
Demand has also increased significantly for certain products related to the treatment of Covid-19 symptoms such as pain, cold and flu and respiratory products. Pharma companies are also acutely aware that while China has started to normalise, there is still a risk of a 'second wave' of infections that could result in increased demand for medicines relating to COVID-19.
What can we expect from the upcoming months?
COVID is unprecedented, and while everyone examines the data, no one has a clear forecast view. Delays in elective surgeries will impact short-term demand for related products, but companies need to balance the demand for operating theatre requirements related to COVID-19.
In South Africa, the rate of infection continues marginally upward, but the real trend will only be seen as the country enters this next phase of a gradual lockdown release, which is exacerbated by the winter season.
At least 19% of our population is infected by influenza annually during the winter season, and hospital groups are operating in real-time leading up to this possible forecasted peak of infections in the coming months.