An omnipresent COVID virus and an impending recession could have significant repercussions on the UK’s private health care sector. A prolonged recovery is likely to impact both providers and insurers.
Where are we now?
In March, access to independent providers of healthcare in the UK was effectively suspended as capacity was re-purposed to support the NHS’ response to COVID-19. Almost overnight an ‘at cost’ reimbursement model replaced almost all health insurance and self-pay activity with dramatic effects.
Healthcode, who supply billing services to most hospital groups and insurers in the UK, reported that billing volumes were 77% lower in May 2020 compared to May 2019. Their analysis for June and July suggests a near 50% decline, with orthopaedic activity particularly badly affected. While this may be a recovery of sorts, it is not without some complications.
As independent sector providers begin reopening for private patients it appears that the processes necessary to protect staff and patients have in some cases acted to reduce productivity. Therefore, the near absence of private activity for the preceding 4-month period and relatively low utilisation levels may mean some provider operating margins are not so much squeezed as squashed this year.
What do the coming months have in store for private healthcare in the UK?
While June and July billing volumes may indicate the start of a recovery, we expect localised increases in COVID-19 infection rates, however temporary, to combine with more general concerns about the risks of accessing healthcare, and suppress demand across the remainder of 2020, more especially in admitted elective caseload. Notable exceptions are likely to be cancer, cardiac and fertility services (as well as the associated outpatient-based diagnostics) given the time-critical nature associated with accessing these specialities. Therefore, while health insurance companies could well see average claims costs increase, we expect any increase to be more than offset by an overall reduction in claims volumes.
In our view, broader macroeconomic performance will replace COVID-19 as the prime constraint on demand from the Autumn onwards.
The size of the economic challenge now facing the UK is huge. UK GDP declined by 2.5% between January and March and a further 20% in April. A modest increase of 1.8% in May, below some commentators’ predictions of 5% growth, points to a pro-longed recovery. In terms of unemployment, the OBR’s Fiscal Sustainability Report published in July paints a worrying picture. Rates are expected to increase from 3.9% to either 9.7% (upside scenario), 11.9% (central scenario) or 13.2% (downside scenario) as the Coronavirus Job Retention Scheme comes to an end. Contrast these figures with 2008 where ONS data shows that the UK’s GDP declined by 6% across five successive quarters, taking 5 years to recover; while UK unemployment rose to 2.7m or 8.4%, taking until 2015 to recover.
Noting that there is variation in the prevalence of health insurance between sectors, one worrying consequence of the 2008 economic downturn was the reduction in the number of people covered by a health insurance policy.
Sectors most immediately affected in 2020 are expected to include pubs, restaurants and high street retail. These sectors are likely to have a relatively low proportion of workers with healthcare insurance policies therefore, we do not expect rising unemployment levels here to have a material effect on the total number of covered lives in the UK health insurance market. However, in sectors with a higher proportion of employees that have access to health insurance cover, for example airlines, oil and commercial property, we except the impact to be more significant. Further pricing pressure on policies could also arise as employers seek to reduce the cost of their employee coverage policies.
The medium to longer-term outlook for both providers and insurers is therefore, a cause for concern.
Will rising waiting lists and wait times in the NHS impact demand?
While not necessarily a causal relationship, increases in NHS waiting list sizes and wait times seem to stimulate enquiries from those wanting to understand the cost of funding healthcare themselves.
NHS England’s data for May 2020 showed 3.9 million patients waiting to start treatment, of which 1.48m were waiting longer than 18 weeks; the volume of patients waiting longer than 6 weeks for a diagnostic test had increased by 520,000 compared to May 2019. The Royal College of Physicians (RCP) has suggested that the backlog of NHS clinical work will take up to two years to address in some specialities, assuming no further COVID-19 outbreaks.
Therefore, while self-pay enquiries are likely to increase, at this stage we remain unconvinced about a ‘V-shaped recovery’ in domestic self-pay caseload. In our view, reduced consumer confidence and perceptions related to personal safety will interact with negative earnings growth, declining residential property values and more stringent personal loan terms to subdue demand for admitted caseload. We envisage a recovery that is more tick-shaped, especially where independent sector capacity forms part of national-level plans to reduce NHS waiting list sizes and times.
Will we see regional variation?
We believe there will be significant differences in the shape of a recovery between geographic markets. Specifically, we expect providers in London to face significant challenges. The ONS observed that around half of all employed adults worked from home in April, something which is expected to become increasingly acceptable to employers. Savills indicate that this could give rise to people moving to village and country locations in search of greater open and indoor space. Taken together, it seems that footfall into London could well reduce.
We are also predicting a sustained reduction in international inbound caseload. Travel restrictions, many of which continue to apply to countries from which citizens had historically travelled to the UK for medical treatment, will continue to impact the largely London-based market well into 2021.
Time will tell but we believe that the following activities will be necessary to mitigate some of the emergent risks:
- Putting in place programs that deliver significant reductions in both pay and non-pay costs, for example:
- Re-aligning clinical capacity and costs with revised activity and revenue plans;
- Reducing support services costs, either through consolidation or a shift to managed service models;
- Revisiting existing service contracts to determine the ability to successfully negotiate revised terms
- Review capital investment plans and values to protect short-term cashflow
- Reconsidering asset, service and geographic market expenditure plans that are unrelated to patient safety;
- Securing improved value from existing suppliers;
- Ensuring sufficient leadership of these change programs whilst continuing to empower rather than disenfranchise their teams.