Editor’s Note: We are adding to this end of week note, a “Top of the Funnel” section of names and relevant developments that support our thesis on major health care themes like labor, inflation, risk management and federal funding. We have eliminated the section on rules but will flag any, once published that are material to these themes. Let us know if you have any comments on the change.
Top of the Funnel | Earnings Commentary
Labor: The most significant labor commentary came from HCA, SYK and JNJ. What I am sure will mark a generational inflection point in health care, HCA reported they are hard at work developing alternative care models to support nurses. Elements include technology, telemedicine and other tools to deliver “the capacity we need.”
I cannot emphasize enough that health care providers are going to have to get more efficient or get run over. The truck driver is most likely to be HCA.
SYK and JNJ reported health system resources constraints (read: labor) as a driver of reduced device sales. At the same time SYK has a strong order book on capital products like MAKO, suggesting the thing we have been waiting on for years, replacing labor with capital, is here.
Inflation/Deflation. HCA acknowledged significant migration to outpatient settings which is supported by both the employment increases that have been accruing in ambulatory care and higher ASC sales for SYK robotics and JNJ implants. HCA acknowledged the lower reimbursement for outpatient surgeries but believes they can make it up by taking share.
SYK has experienced significant supply shortages especially in the critical inputs of electronics, steel and transportation. They do not expect the pressure to abate until 2H 2022
DHR reported they now have an installed base of 40k Cepheid instruments. That is up from about 30k in 4Q 2021 and 12-15K pre-pandemic. The proliferation of the molecular diagnostic solution closer to the physician (i.e., not at a large reference lab) poses a threat to DGX and LH’s high margin MolDx business post-COVID. For providers that purchase Cepheid equipment, it means a new revenue stream (we discussed this trend in greater detail on Wednesday).
Meanwhile, DHR is reporting a robust pipeline of biopharma work in COVID therapeutics and vaccines that is expected to persist for years. It is a very rational conclusion due to the not insignificant amount of money the federal government has poured into the industry.
Risk. ANTM joins the growing list of health insurers that do not want to be health insurers. They report that 60% of business is at risk in some form. To accomplish a de facto exit from taking risk themselves, ANTM is considering solutions large and small, similar to their MyNexus and Aspire acquisitions.
Congress
Budget Package. The February deadline to fund the government is upon us and as the post-COVID demands stack up, there are a lot of hands out to address labor cost and availability, among other things.
Workforce. There have been a few bills drawing attention to the labor crisis in health care. The theme is similar for all of them, loan forgiveness and other incentives to encourage public health department employment. While well intended, public health employment will not solve the myriad issues facing the larger health care workforce.
For that reason, the American Hospital Association is asking for dispersal of the remaining funds in the Provider Relief Fund, plus an additional $25B appropriation to the fund; an extension of Medicare’s sequester relief; and a repayment extension for Medicare Advance Payments.
As noted previously, the American Hospital Association is asking the Federal Trade Commission to investigate potential anti-competitive behavior by nurse staffing agencies.
Note that of the guidance we have seen to date, the underlying assumptions have been that COVID-relief programs will wind down and the Public Health Emergency will end in early 2Q. We think both are unlikely given the labor shortages and other problems in the health care system.
It will also be difficult to unwind what amounts to two years of rapid deregulation without some thoughtful consideration of the costs and benefits, something, as far as we can tell has not occurred.
Telehealth Extensions. The industry is asking for a two-year extension of pandemic telehealth waivers. The additional time will permit the collection of data on utilization and outcomes that could inform future policymaking. The big policy challenge in the past has been the additional cost estimated by the Congressional Budget Office. With pandemic and post-pandemic data in hand, the hope is that the CBO will be more “informed” when scoring future legislation.
It is difficult to see a complete extension of the waiver as there is opposition from several groups including physicians and benefit groups. On the other hand, there is widespread and vigorous support for behavioral telemedicine, provided there is a physician relationship. For all primary care? Not so much.
Medicaid Gap. Whether it is via Build Back Better 2.0 or a Continuing Resolution to extend FY 2022 funding of the federal government, there appears to be some consensus building around filling the Medicaid Gap. Recall that in 12 states that did not expand Medicaid, childless adults with incomes at 0-138% of the Federal Poverty Threshold have no coverage options outside of commercial insurance and are not eligible for premium subsidies. This provision would fix that.
Also note that HCA made the point this week that exchange enrollment was helped payer mix – no doubt due to the COVID relief provisions to extend premium assistance to those with incomes at 400+ plus of the Federal Poverty level. A similar benefit would be evident if Congress proceeds with the Medicaid fix.
The White House.
Exchange Enrollment. The White House boasted the highest ACA exchange enrollment ever. The 14.5M enrolled can be credited to the increased subsidies under the American Rescue Plan Act that made exchange insurance more attractive and viable for workers, especially in the higher income levels. These enrollment level represent a tailwind for providers but, depending on how sick enrollees are, could be a headwind for insurers.
Other Stuff
Employment Cost Index. The ECI is am important component of Medicare's annual reimbursement update methodology. It took off in 4Q. Unfortunately, the Medicare calculation is on a lag so it may not make it into updates in the spring.
PCE - Personal Consumption Expenditures in Health care ticked up a bit in December, reflecting the depressed utilization in late 2020 and the increased Omicron hospitalization in late 2021
Private Investment in Capital. Spending on Medical Equipment reaccelerated in 4Q 2021 after a slight pause in 3Q 2021. There are several components to that trend but chief among those is the hundreds of billions of dollars being made available for testing and research. Another factor has been the shortage of labor that has inspired the purchase of capital equipment that saves times, improves outcomes and improves throughput. Included in that group would be things like SYK's MAKO system.
Recent Events
The Persistence of Testing Part II; Swimming in Capacity
IPOs + SPACs
Quiet week in IPO and SPAC land. Access SPAC spreadsheet here.
Have a great weekend.
Emily Evans
Managing Director – Health Policy
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