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Nonprofit healthcare sector sees negative financial outlook due to COVID-19; positive outlook expected for pharma

Because there's such a high level of uncertainty, the risk of a more severe economic impact is elevated and expenses will rise.

Jeff Lagasse, Associate Editor

The financial outlook for the nonprofit public healthcare sector in the U.S. has changed from stable to negative, primarily because of the effects of the COVID-19 coronavirus outbreak, according to Moody's Investor Service.

The sector will likely see lower cash flow compared to 2019, although it's difficult to estimate a specific range due to the rapid and unpredictable nature of the outbreak. Revenue will likely decline as an increasing number of hospitals cancel more profitable elective surgeries or procedures and halt other services in preparation for a surge in coronavirus cases.

At the same time, expenses will rise, with higher staffing costs and the need for supplies such as personal protective equipment. Moody's is assuming that the outbreak will be somewhat contained by the second half of this year, with the economy gradually recovering by that point. But because there's such a high level of uncertainty, the risk of a more severe economic impact is elevated.

Lingering ripple effects of this challenging economic situation will also drive lower cash flow even after the outbreak is contained. These effects include a reduction in the value of hospitals' investment portfolios and potential rising unemployment or widespread layoffs that result in the loss of health benefits. The difficulties facing hospitals come amid increasing cash flow constraints, such as a greater reliance on reimbursement from government programs and a continued shift in treatment to less costly settings.

WHAT'S THE IMPACT

Advance preparation, protective equipment and testing will play a role in hospitals' ability to curtail staffing disruption.

Hospitals experienced in other pathogen outbreaks, including Ebola or SARS, will likely be better prepared for the coronavirus. The identification of infected patients and staff, established protocols and training, and sufficient PPE will help hospitals treat patients while keeping workers safe.

Inadvertent exposure to the virus will result in furloughed staff and the need for temporary hires or closure of units. Hospitals in regions already experiencing nursing and physician shortages will have a harder time finding replacement staff, and clinicians will likely experience increased burnout, which could contribute to understaffing.

Beyond the loss of elective cases, the total financial impact will be influenced by coronavirus-related reimbursement or special funding. Although commercial insurers have indicated they will pay for coronavirus testing and waive copayments, it is unclear whether hospital reimbursement will fully cover treatment costs.

Currently, there is no Medicare inpatient diagnosis-related group for COVID-19, and many admitted patients will require resource-intensive ICU treatment. That said, the federal government has set aside relief funding for the coronavirus crisis, although it is unclear how much hospitals will receive.

The majority of hospitals will withstand a temporary coronavirus disruption, Moody's found. While cash flow across the sector will likely be lower compared to last year, multi-hospital systems with a substantial revenue base stand to manage the outbreak better than those with smaller scale. Hospitals with stronger operating cash flow margins and days cash on hand pre-outbreak are also better equipped to withstand financial challenges from the crisis.

Short-term debt risks will increase due to market disruptions, and revenue and expense constraints will continue to weigh on margins during the outbreak and in its immediate aftermath, Moody's found. Organizations can expect a less favorable payer mix and a shift to lower-cost settings, including observation units and ambulatory surgery centers.

THE EFFECT ON PHARMA

While the coronavirus situation represents a significant challenge for the nonprofit healthcare sector, efforts to develop treatments for COVID-19 have positive ESG implications for the pharmaceutical industry. ESG -- environmental, social and governance -- may offer investors long-term performance advantages when integrated into investment analysis and the construction of their portfolios.

The approval of any new pharmaceutical products to fight the coronavirus pandemic would
be credit positive for the companies involved. But the revenue opportunities for these
products are difficult to estimate due to the uncertainty surrounding the severity and the
duration of the pandemic, as well as other variables. These include the probability of success,
the ability to scale up manufacturing, the level of competition, and product pricing, which
would likely vary by region.

The coronavirus outbreak is considered a social risk under Moody's ESG framework, given the substantial implications for public health and safety. The pharmaceutical industry, like many others, faces downside risk related to the coronavirus in areas like product and supply chain disruption and the loss of human capital.

But at the same time, the development of pharmaceutical products related to the pandemic would improve the industry's reputation and customer interactions with patients, doctors, hospitals, governments and global health authorities. Several of the companies undergoing clinical trials are providing free samples of the products to regulators, as well as making some experimental products available under compassionate use programs.

Experimental vaccines are entering human studies, but approvals are at least 12-18 months away, according to Moody's.

THE LARGER TREND

The bad news for the nonprofit healthcare sector comes on the heels of a positive financial forecast issued by Moody's in December. That report stated that operating cash flow for non-profit hospitals and healthcare facilities would grow 2 to 3% this year, driven by the highest Medicare reimbursement rate increases in many years, a slight increase in commercial rates, and tighter expense controls, as well as, to a lesser extent, patient volume increases.

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com