THC MOVING TO THE BENCH, MITIGATING STRATEGIES
We 'triaged" our Position Monitor on March 2nd, and pushed several active longs to the Long Bench. We left THC and put it the bottom slot. At the time we weighed the net increase in high acuity cases among vulnerable COVID-19 cases which could be substantial, against the decline in elective procedures, primarily driven by patients avoiding care. What's changed since then is the probability that mitigating strategies will include prohibitions of elective surgeries. A conservative interpretation of elective is non-urgent, or a procedure that is scheduled, which would presumably include 100% of THC's Ambulatory volume.
COVID-19 Impact
THC guided 2020 Ambulatory EBITDA to $970M to $1,000M with Net Cash from Operations of $1,250 to $1,525 Adjusted Free Cash Flow to $775-$975M. Without the prohibition of elective procedures we think it is reasonable to expect increase COVID-19 volume in the Hospital Segment to offset declines in the Ambulatory Segment. What we can't model is the "prohibition of elective procedures" as municipalities contend with slowing the spread of cases and protect the limited capacity of hospital beds, ICU beds, and ventilators. These strategies may not include ambulatory surgical volume and imaging studies, but odds are increasing daily that they will, creating an exponentially risky situation for THC.
MACRO QUAD 4
As the economy grapples with COVID-19 the storm path for Hospitals will cut through job losses, declines in the insured medical consumer population, bad debt increases, and a deterioration in the mix of private pay. While "social distancing" may include avoiding visiting physician offices and hospitals the young and healthy and least at risk of a severe COVID-19 infection are working from home, concerned about losing their job, and more likely to pull forward medical consumption than before.
Unlike other slowdowns, however, THC and other US Hospitals will be the front line tackling the COVID-19 crisis, and at least for inpatient trends, creating a bridge to the end of the crisis. According to our analysis, COVID-19 appears likely to be a net positive for hospital acute care, depending on the breadth and duration of the pandemic, and the negative impact on elective procedures. As I write this note from my home base of NYC, it is rumored to be implementing a cordon sanitaire beginning this weekend that may or may include prohibiting the movement of people in and out of the city.
In the short term, THC's credit default swaps have risen over 500 bps. The correlation to the JNK ETF is approaching 1.0, and the trend in COVID-19 is deteriorating. There is likely to be a policy effort to protect hospitals given their key role in managing the crisis, although those policies and payments are likely to emerge months after the current crisis peaks.
FINDING THE BOTTOM
Our forecast tools will allow us to track the impact of COVID-19 at both the macro and company level. The shutting in of demand will be apparent across a number of series we track. Both the Ambulatory and Hospital segment Trackers will update as the underlying independent variables update throughout the months to come, in addition to other time series that will indicate current levels of demand.
