Field Notes | Hospital Capex/Cost Trends | Don't Need No [More] Beds

OVERVIEW

We spoke with the CFO of an integrated system in the South with 3 hospitals (combined ~800 beds), two of which have an average daily census of ~100, and the larger facility ~300. The payer mix is ~50% Medicaid, 25% Medicare, 20% commercial, and the remainder is self-pay (~1/3 of revenue is from the state – e.g., supplemental payments/DSH). The transition to a fee-for-service model is slow. The overall budget is $900MM and the capital budget is ~$70MM for the three hospitals.

We came away from the discussion thinking: 

1. Labor costs – nurses in particular – have been the biggest issue over the past year for hospitals. Nurses that are normally $35/hr. were ~$75/hr. through an agency, and that jumped to over $100 ($120/hr. in some areas) due to COVID. This has moderated to the low $80s/hr. through an agency, but supply remains tight, which should be net positive for AMN.
2. The risk is to the downside for hospital budgets (a 10 bps change in margin cuts $1.4MM from the strategic bucket – every hospital will be different, but we think margins will remain under pressure); 
3. Acuity is up for bad reasons – patients have been scared or overly cautious, and serious conditions are going untreated; however, this trend is starting to reverse (it will likely do so in waves across the country as COVID cases “stabilize” – our contact did not sound concerned about COVID in his area, and the flu has been nonexistent to date; things should return to “normal” in 2021 (springtime).
4. Hill-Rom will likely be facing one of the tougher COVID Comps - so much demand was pulled forward, and they'll need to play for a replacement cycle while competing with Stryker. It’s unlikely that there will be another surge in ICU bed demand. There's a clear focus on necessities or "routine" expenditures.
5. Telehealth/telemedicine spending is likely stable YoY, but the sentiment was mixed (more positive on doctor-to-doctor than direct-to-consumer for our contact).
6. It's amazing - there always seems to be demand for da Vinci systems (upgrades or net new).

We think the setup, as of now, is net positive for TDOC based on the relationships it has with managed care and health systems, and the COVID Comp is coming (it will be difficult to navigate). Regardless, mean reversion should be positive for Teladoc and negative Amwell (AMWL remains on our short bench). For Hill-Rom and others exposed to hospital capex, the outlook depends on the COVID benefit/headwind – e.g., if a health system bought a bunch of $12k ICU beds earlier in 2020 and things revert to a more “normal” state in 2021, there’s a headwind to growth, in our view (see below for more on this).

FIELD NOTES / Q&A

How is the growth of telehealth/telemedicine impacting the need for “physical plant” - medical offices, exam rooms, etc.?  

• When COVID-19 hit, it drove telemedicine visits up 5-fold. Visits have settled back but are still higher than pre-COVID (the expectation is for visits to “stable”). The system is face-to-face driven. That said, our region isn’t as sophisticated as others, and telemedicine doesn’t fit into workflows and decision making that well (not as well as it should). 
• The outpatient clinic(s) see about 300k patients per year, and right now there are about 140 telemedicine visits per day. Overall clinic visits are UP ~20% YoY (net + growth in the clinics/new primary care vs. declines in acute care facilities. 
• Most of the capital investment is in physical outreach – i.e., primary care clinics across the region/in the communities. Note, the system’s roots as a multi-specialty hospital left it behind others that built up a primary care presence in the region, so his system is playing catch-up, doing outreach, etc.  
• Recently built: two urgent care centers, a primary care clinic, and a community health clinic.
• The goal is to: a) keep patients out of the emergency department (ED) and b) offer a place for testing and routine care.
• Patients have been showing up, and when they do show up at the hospital(s) they are more acute because they haven’t received the primary care needed. 
• We spent ~$500k on telemedicine monitors and pushed that out into the community/rural brick-and-mortar. Also, it’s being used for psych/behavioral because it works well for them. For us, telemedicine is more about linking the hospitals/our staff – hospital-to-hospital – to help with care. We are NOT investing in smaller rural/direct-to-consumer [telehealth] because we want the primary care clinics to see those patients.
• Amwell adoption/use by doctors ramped but everyone wants to get back to normal. Again, most of the telemed is one hospital employee helping/assisting with something for another hospital employee (e.g., a neurologist helping a peer w/ an inpatient issue, not outpatient).

How’s COVID trending?

• COVID #s are down – we only have ~25 patients w/ COVID in the main hospital and 10 at the smaller ones (was ~50 and 30 at peak, w/ about 10% on vents, respectively). The COVID admissions have been “steady” for the last couple of months. What we saw was COVID really hitting people with a body mass index over 30 hard, and now it’s relatively healthier people, so lower death and vent rates. 
• Cases are up because we have so many more testers in the field. Watching the severity of cases closely. 

Staffing 

• Over the past 2 years, using round numbers, the system has recruited 160 MDs (net up 80 because ~80 left). Over the same period, it added 360 nurses (net 260). Overall, the number of full-time employees has gone from 3,500 to 4,100 as the system expanded. 
• Labor is my BIGGEST issue. Last year, labor was roughly $17MM over budget due to temp nursing/staffing needs. Part of that was growth and renovations (making rooms private, etc.), so it was an issue even before COVID-19. There’s a finite pool and using an agency we saw an average $75/hr. wage for nurses (vs. $35/hr. normally).
• Budgeted for $3.5MM (agency), spend $20MM+. For this year, bumped to $7MM, and we’re still above budget. There is a risk of closing beds if we can’t afford to staff them.
• COVID hit and rates went from $75/hr. to $115-$120/hr. (the more specialized – stroke, ICU, etc. the higher – easily $125/hr.). Also, nurses started quitting because they could make $200k/year traveling through an agency (vs. $70k/year as an FTE). It was a “double whammy” to deal with. 
• Medicare pays cost, which averages $35/hr., so there’s no way to make money. There was a 20% bump for patient acuity, but it wasn’t enough to cover the cost of agency nurses.
• The cost is now down to ~$81-$82/hr. With COVID down, demand is lower, and I hope the trend [lower] continues. It’s still a bad situation.

How are procedures/specialties recovering? How’s case mix?

• GI is still down ~12% YoY, and cardiac/cath is down too. Those patients are still afraid to come in. ED visits are down ~20% YoY, but that’s offset by growth in the clinics – again, we’re up 20% YoY. The ED was down about 5% YoY heading into COVID. 
• We saw a lot of oncology – chemo – completely stop.
• The case mix index increased 13% YoY – this is a huge increase. Patient acuity is up to 2.1-ish from under 2, which represents the sickness of patients. Demographics haven’t changed and clinical documentation is better, so we know patients are showing up sicker than pre-COVID.
• Insurers could get hit here (MLR), but they raked in premiums while procedures were canceled, so they have reserves. It depends how those reserves are drawn down, how many Mis vs. stents, etc. The curve is starting to go down as people return to the doctor, get screened, etc. I think it’ll normalize by the spring.
• On volumes, we budgeted salaries through Q1 and that’s on target, but supplies are 10% below. That says a lot about where volumes are.
• Overall, we were able to turn on elective procedures 3 months into the pandemic and last month we recorded record gross revenue. We’re back to baseline plus the deferred care.

How will you handle the COVID-19 vaccine? What have you seen with the flu thus far this season?

• We expect it to be available to military and other front line/essential workers in December, but we don’t expect our front-line employees to get it until early 2021, perhaps spring (February/March). To-be-determined if it’ll be mandatory (the flu vaccine is mandatory, and everyone is OK with that given the long history and familiarity with it).
• It’s a psychological thing with the COVID vaccine. It’s brand new and there’s some natural fear. If there are no bad outcomes, I don’t see why it’d be different from the flu vaccine.
  • If it’s no different, we could easily have a COVID-19 ‘21 tag on our badges like the Flu ’20 ones we have now. If you don’t have that, you don’t get into the building.
  • We’ve had no flu issues at all. We usually see it migrate our way and have a 2- to 4-week lead time (in a normal year) – there’s been nothing.

How are you budgeting for / looking at '21 spending-wise?

• There are two categories – routine and strategic. The latter is linked to margin – those are the things we’d like to do/money we’d like to spend but may not.
• For FY’21, which we’re in the middle of, the capital budget was ~$70MM (again round numbers for simplicity’s sake). We trimmed $10MM due to COVID, but then when clinics reopened and federal support came in, we added it back. Of that, about 40% is routine ($28MM), which is committed to maintenance, necessities, etc. The other 60% is strategic and that’s tied to margins (assuming 3%, it stays). If we lose 10 bps of margin, it’s about $1.4MM off the strategic budget. As of now, margins are ~1.5%, so you can read into where strategic spending might be for the FY.
• For FY ’22, starting next July, we would like to spend a bit more - $73MM but it’ll be the same process – mainly expansion funds (urgent care, renovations, etc.). It’s too early to make a strategic call because of COVID, but the CARES Act money, that federal support, was/is HUGE (hospitals are losing hundreds-of-millions due to COVID).
• The expected telemedicine spend is ~$1.5MM and that’s in routine. Again, more for the inpatient setting – hardware, monitors, etc. Also, we did something interesting with Tytocare – it’s free for employees and discounted for patients
• We’ve bought so much big equipment over the past couple of years – 3 new MRIs, a new CT, a whole suite of GE and Siemens equipment. Now, we’re focused on brick-and-mortar and replacement – defibrillators, a GammaKnife for the cancer center, etc.
• We did recently buy two new da Vinci systems (had a very old model, upgraded that and one more). We may need another one for one of the smaller hospitals but need the surgeons first.
• It sounded like our contact took advantage of the leasing program.
• We’re going to be making our own PPE – N95s, gowns, etc. – we never want to be caught short again.

How are you on ICU beds?

• We needed to shuffle service lines around and make room. We moved labor and delivery and some other specialties and made room for 75 beds. The state said they’d cover it, so we made it happen in under 2 months. We ended up buying 72 new $12k beds from Hill-Rom. Those ICU beds are certified as ICU beds and can be used for med surg as well. I think the vaccine and this wave will change a lot. Those beds could go from $12k to $8k or $6k.

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Thomas Tobin
Managing Director


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Justin Venneri
Director, Primary Research


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William McMahon
Analyst


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