Janus Henderson Investors: COVID-19 - Understanding the science & investment implications

Key Takeaways

• The US federal government has provided much-needed emergency funding to hospitals through the CARES Act to relieve some of the strain on the health care system in the US, with additional funding currently being negotiated in Congress.
• Trends that were already gaining a foothold before the COVID-19 pandemic – particularly telemedicine – will likely see broader usage and continued innovation after we emerge from the crisis.
• With the costs to fund a Medicare For All program estimated at US$30 trillion over a 10-year period, a universal health care solution is likely on the backburner for now, considering the US$2 trillion being allocated for COVID-19 relief. However, key provisions of the Affordable Care Act could greatly reduce the number of uninsured, despite high levels of unemployment.

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Michael McNurney: Hi, this is Mike McNurney from Janus Henderson. Today in the third part of our series on the COVID crisis, we are going to discuss how the healthcare system has responded to the COVID crisis and how hospitals and providers [in the US] in general are capable of responding based on the assistance that they are receiving, both from the US federal government and from the private insurers.

Joining me today is Rich Carney, the Health Care Analyst that focuses on the services component of healthcare. Rich and I are going to talk about these critical aspects of healthcare as it seems that we feel like we are moving away from this crisis a little bit and turning our focus on how to reopen the economy. There are still critical components that need to be achieved. In future discussions, we are going to talk a little bit about the therapies and the vaccines that are being developed, we are going to talk about the long-term economic impacts. But right now, maybe the crucial aspect to consider is how our hospital systems and the payers are responding to this crisis [in the US]. Rich, thank you very much for joining us today.

Rich Carney: Thanks, Michael.

COVID-19: What are your thoughts on the current system in the US?

McNurney: You know, I think the first thing that is important, we know there was about US$100 billion set aside as a part of the CARES Act [Coronavirus Aid, Relief and Economic Security Act – enacted to address the economic fallout of the COVID-19 pandemic in the US] that was associated with this COVID crisis, set aside for hospitals to help keep them liquid through this transition. We also know that some of the Medicare* payments have been able to be pulled forward, which are allowing these hospitals to focus on the healthcare component of this crisis as opposed to the financial ramifications of this crisis. Can you talk a little bit about how the government has responded and how the private insurers have been able to assist these providers?

Carney: Yes, absolutely, Mike. To summarise, what we have seen since the COVID crisis surfaced is a very quick response from the government to get much-needed funds to the hospital system. As you know, starting in late March, nationwide [in the US], all elective procedures were shut down in the hospital system, and these are some of the most profitable business lines for hospitals. In addition, you had societies like the American Dental Association saying, “No non-emergency procedures,” and as a result, we have seen  unprecedented volume declines in parts of the health care system that are normally considered very stable. So, for example, we know now in April, inpatient and outpatient surgeries in hospitals are down around 50 to 70%. We are even seeing surveys from dentists seeing revenues down about 90%. This has put a big strain on the hospitals. And so as a response to this, in the first tranche of the CARES Act, US$100 billion was appropriated toward or granted to hospitals for funding. About US$70 billion of that money has [already] gone out based on the market shares of hospitals and there has also been some emergency funding for some of the more rural hospitals and some of the hot spots of the COVID outbreaks.

As we speak, the next portion of the CARES Act is being negotiated in Congress and there looks like another US$75 billion in funding coming for hospitals, which will be much needed. Now this is not going to make up for everything for them, but it certainly puts them on a better footing and prepares the system to be open, to be ready to rebuild things like personal protective equipment and lab testing. Now I will say, in addition to the grant money that came forward as you mentioned, the Center for Medicaid and Medicare Services fast-forwarded about US$30 billion of payment of revenues that would have been received, but will ultimately need to be paid back, which has also helped for cash needs. And we are seeing an amazing partnership between the payers, the managed care companies like United Healthcare, Humana and CIGNA, fast-forward some payments, insurance claim payments to healthcare providers in addition to help them with some of their cash needs. So overall the system looks like it is on a good footing [in the US] and will be prepared to open, and that is a good thing.

The rise of contact-free healthcare and its shifting structure

McNurney: Thanks, Rich. As you talked about that, it occurs to me that the way that we are having to practise medicine is probably going to change as a result of the COVID crisis. So, can you talk to me a little bit about the longer-term structural changes that you think will be a result of this crisis?

Carney: There are two things I will mention. First, there were some areas where trends, emerging growth trends were happening, and I think those are going to likely accelerate. The foremost example of that is telehealth, telemedicine. The second is, there have been some problems in the system as a result of COVID, there are potential worries about pharmaceutical supply chains, access to raw ingredients to make pharmaceuticals, and also for key supplies like masks, ventilators and parts that go into that.

McNurney: You know, I think it is interesting that you mentioned telemedicine. One of my sons yesterday had a dermatology appointment via telemedicine. And I have to tell you, from my standpoint, being able to have him seen without going to the doctor’s office, obviously for safety concerns, is great. But also, for convenience, it was terrific, so if that is an option for me going forward, I am sure I will do it. Is it convenient and effective for the doctors as well?

Carney: That is a great question. Telemedicine was already … the train has already left the station. Over 100 million people in America already have access to a telemedicine platform through their employer, their health plan. And what we saw through the crisis is in some cases over 100% growth in just, month-over-month from April [compared] to February, as a result of people not being able to access physical locations. We saw it used broadly: dermatology, telepsychiatry, in addition to some of the acute cough and cold usages that it normally sees. Now, not all that usage is going to stick, but in a survey, a recent survey, we saw that at least 70% of people are likely to try it again, use it again. And so I do think we will see more usage of it, and it is better for the system, because patients find it is more convenient, it is cheaper. It is just as good for the providers, it allows them to free up time, and they can triage patients in a more effective manner. And also for the system, it is just less costly. So I think telemedicine is definitely here to stay.

McNurney: Now one of the other things you talked about is supply chain issues that maybe this crisis has shined the light on a little bit. How do you think the health care system responds to those issues that have been identified?

Carney: I think it is two things. I think we are going to have a closer look at where we source raw ingredients for supplies. I think health care IT (health care information technology), is going to play a big part in this. We have to better look at the supply chain, we have to understand where the weaknesses are, and I think you are going to see increased spending by hospitals and providers on health care IT.

On the affordability debate, that is always going to be a debate. But what I would say is the health care system has done pretty well here in the COVID crisis. You know, we have seen the pharmaceutical companies rush to look for therapeutics and vaccines, and the insurance companies forego payments and waive fees for consumers, we have seen the rise in telemedicine, which has been great. And we have seen the hospital system respond in just unprecedented ways and those have really been our heroes during this whole situation. So I think that the role of innovation is the most important thing going forward and the private sector has looked very, has done very well throughout this crisis. As I mentioned, you know, drug companies, pharmaceutical companies, hospitals, labs, they have all shown, they have all done very well here. So I would like to think that going forward the debate would be more about the tightness of public and private partnerships and I think the private sector is going to have a good role to play in that.

Navigating attractive healthcare ideas

McNurney: I think it is remarkable, because the key tenets of our investments across health care have always been about companies that are innovating, meeting medical needs, which certainly we have seen the private sector respond very well here. And the other piece is those companies making health care more efficient, and you have talked about a lot of those, including, like you said, telemedicine. I think that is a great example. One last question for you, Rich, as we close this out, as you talk to portfolio managers at Janus Henderson, what do they really want to know about the services sector and the opportunities that might exist there going forward?

Carney: Just like our focus in therapeutics and medical device areas, we are looking for companies that are meeting high unmet medical needs. In the services sector, we are looking for companies that are making the system better, and we approach it with the ‘three Ps’: is it good for physicians, is it good for patients, is it good for the payers? And if it meets all three and it is trying to find a solution to make the system better, then that is what we are focused on. And that is generally where portfolio managers at Janus Henderson have their efforts and focus in the service sector.

McNurney: Rich, thank you very much for spending the time with us today in our ongoing series on the COVID crisis.

Carney: Thank you, Michael, appreciate it.

Glossary

CARES Act: The Coronavirus Aid, Relief and Economic Security Act is legislation from the US federal government that seeks to address the economic fallout in the US from the coronavirus pandemic.

Medicare: US Federal government health insurance programme that subsidises healthcare services. The plan covers people over age 65, younger people who meet specific eligibility criteria, and individuals with certain diseases.