This article is part of Bain's 2021 Global Healthcare Private Equity and M&A Report.
With its sweeping health effects on the global population and the attendant restraints on much economic activity, the Covid-19 pandemic disrupted the entire healthcare ecosystem more than any event in recent memory.
Most visibly, the stress on acute care capacity combined with lockdowns forced delays or cessations of both preventive and elective care, resulting in delays to disease diagnoses and cancellation of procedures such as joint replacements that healthcare providers depend on for their profitability. The traditional efficiency-minded hospital model, with limited intensive care unit beds, nurses, and care sites, faced dramatic shortages at a time of surging patient need. With the added concerns around the safety of acute facilities and the ability to obtain care there, the ongoing shift of patients accelerated to alternate sites or modes of care, including telemedicine.
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Other repercussions have rippled through healthcare as well, including these:
- Supply chains were disrupted, especially in critical equipment and medicines.
- The industry was exposed as lacking fully developed technology to enable at-home care and diagnostics, or to track patient health outside traditional care settings.
- The biopharma pipeline came under intense but short-lived pressure as traditional clinical trial processes using in-person activities were largely put on hold.
Three healthcare demand scenarios to consider
To understand how this broad array of changes and pressures on the healthcare system could play out, we have built simplified demand scenarios for periods during the pandemic, immediately after it wanes, and then the longer-term outlook. Should the pandemic extend longer before populations reach herd immunity, the effects on demand may extend out as well. While these scenarios represent a simplified model, they can help executives understand how various segments within healthcare will be affected and the implications for investment.
In some subsectors, companies might be able to address pent-up healthcare demand in 2021, while in others, the unmet demand will have been permanently lost. Demand responses can be sorted into three categories: bounce-back, gradual return, and permanent change. Let’s look at each in turn (see Figure 1).
Covid-19’s effect on demand will vary by healthcare sector and presents new opportunities
The bounce-back scenario envisions short-term positive or negative demand shocks, followed by a reversal as backlogs or stockpiles clear, and an eventual return to the pre-Covid trajectory.
Early in 2020, several sectors experienced severe demand shocks that later flipped as supply caught up or the need quickly dropped. Over time, services and products in this category could experience a net zero shift in demand as they return to pre-Covid levels of need.
As an example, demand for certain health equipment central to Covid-19 treatment, such as ventilators, spiked early in the pandemic. As governments and businesses rolled out virus containment efforts and a surge in production met initial demand, demand for many of these products quickly dropped. Demand for additional equipment may continue to be low as the market soaks up potential oversupply.
In the opposite scenario, moratoriums on deferrable procedures caused the cancellation of many scheduled elective surgeries, such as joint replacements. Volume dried up early in the year and extended over time as patients needing implants actively avoided visiting healthcare centers. As facilities reopen, we expect pent-up demand for joint replacements that will need to be cleared before activity returns to baseline levels.
In the gradual return scenario, short-term dislocation is followed by a gradual return to the near prepandemic trajectory. Here, we don’t expect pent-up demand, but rather any activity that stopped during the pandemic will simply be skipped. Several segments have taken or may take a slow return to normal levels of demand, and like the bounce-back scenario, both positive and negative effects exist.
Behavioral health visits benefited from the Covid dislocation, rising quickly early in the pandemic as more people sought professional mental health support. Demand for this service will likely persist in the medium term, but return to baseline levels over time as normal activities recover.
On the other hand, demand for imaging equipment such as endoscopes took a sharp hit during the pandemic, given the fall-off in diagnostic procedures. However, as these operations slowly return to normal levels, we expect a gradual return to near baseline demand for imaging instruments—but no pent-up demand from the missed procedures during the pandemic.
In the permanent change scenario, initial dislocations become a qualitatively different postpandemic demand trajectory for some healthcare segments. This scenario applies to segments that went through a step change in how they are used or viewed as a result of the pandemic, based on new consumer needs or priorities. As with the prior two scenarios, we see both positive and negative examples of this shift.
Emerging nontraditional care models stand out as one positive example. While people used to view home health visits, virtual pharmacy, and telemedicine practices as niche channels for care, the pandemic forced many people to try virtual options. Given the greater willingness to use emerging forms of healthcare, we expect demand for these types of alternative channels to increase.
Conversely, a negative example is the demand for hospital-based elective procedures that were already shifting to outpatient settings (such as ambulatory surgical centers), a shift that accelerated during the pandemic. We expect this movement to continue over the long run, and overall demand in short-term acute hospitals to remain below pre-Covid levels.
As with most crises, the upheaval caused by the pandemic creates potential opportunities for companies or investors that prepare for and are capable of seizing the moment. Here, we highlight four major opportunities.
Alternative sites of care take hold
Shifting patient reliance away from higher-acuity sites of care has created openings for providers that can capture some of the patient flow to alternative sites or services, especially in the realms of post-acute and home healthcare. We expect to see better coordination and care management in these alternate sites.
Home healthcare had become a more important channel even before the pandemic. This trend stemmed not only from patients becoming less reliant on visiting higher-acuity sites, but also on favorable reimbursement changes, especially in the US. Now there is an opportunity for enhanced levels of care at home, as well as systems that support patient movement between care settings. Healthcare providers will need to blend home care offerings with other settings, so we expect more investment opportunities in home care practices that can be integrated with traditional providers, and in supporting technologies that enable coordination across traditional and nontraditional care settings, such as acute care in the home.
Telemedicine increasingly substitutes for in-person care
As consumers deferred visits to healthcare centers during the pandemic, basic diagnostics became quite difficult, complicating efforts to promote good patient outcomes. Suddenly, many consumers began to take telemedicine seriously as a suitable replacement. Telehealth has the potential for growth, but the pandemic has also provided some lessons on what is required to successfully drive adoption. For example, we’ve learned that existing models that offer patients the opportunity to visit any physician were much less popular with patients than those firms that enable virtual visits with a doctor they already know. Compelling telehealth platforms clearly have a role in an omnichannel strategy for healthcare providers.
Regulatory groups and healthcare payers have further supported this shift, by adding virtual services to reimbursement lists, and by increasing the rate at which these services are reimbursed. Looking ahead, it is not clear how patients and physicians will balance telehealth with in-person care, though telehealth demand will likely come down from the pandemic peak.
Modernization of traditional clinical trials
Covid-19 exposed some of the weaknesses in the traditional clinical trial approach, which historically relies on in-person visits to collect patient data. This dependence slowed or halted development of many pipeline assets early in the pandemic. Clinical trial efficiency solutions (such as e-consent in clinical operations), decentralization of trials (remote patient diagnostics and monitoring), and use of real-world data (synthetic control arms) all represent angles of development toward a trial model less reliant on physical interactions.
In addition, to accelerate vaccine development, researchers collaborated in unprecedented ways, such as the use of Certara’s evidence generation, simulation modeling, and regulatory consulting services for vaccine candidates. Development success may portend more consortium-oriented research and trial models for sharing data as part of innovative life-saving medications.
Digital solutions that support virtual trial execution also accelerated due to the pandemic. Those that can transfer and add value to other pipeline assets will likely endure. While core in-person aspects of clinical trials should remain relevant, private equity funds should prepare for their diligence to evaluate which digital assets could grow in the future.
Healthcare provider consolidation heats up
In recent years, larger provider platforms have been busy consolidating small providers, to gain the efficiency benefits of scale. Independent physicians, as well as smaller physician groups, were particularly vulnerable to the business effects of the pandemic. More of these individuals and smaller groups thus may choose to mitigate their risks by joining a broader platform. Larger platforms are inherently better-positioned to survive, due to their scale, better economics, and reduced exposure to any individual payer or geography.
That said, in order to continue to reap value from their positions, large-scale groups will need to go beyond pulling managed care and revenue cycle management levers, by harnessing the power of technology, ancillary services, and more outpatient-focused models.
A few other areas of healthcare seem ripe for change, though it is not yet clear how they will play out in the market.
In particular, many governments are beginning to view healthcare as a new national infrastructure and component of national defense, leading to rising public investment, increased reimbursement in new technologies, and potential incentives for domestic supply chains. This raises further questions around the traditional hospital model, given the potential costs and benefits of added capacity for future pandemics.
Consider recent developments in the US. As part of Operation Warp Speed, the federal government spent almost $18 billion in a public-to-private partnership to promote the mass production of vaccine technologies by a number of firms in an effort to spur an otherwise burdensome development process. Also during the pandemic, the Centers for Medicare & Medicaid Services cemented reimbursement increases for 144 telehealth services by Medicare for patients in rural communities.
Given past administrative changes to healthcare, there is reason to believe that many of these updates to healthcare norms may persist after the pandemic recedes, or remain indefinitely in the event of an extended pandemic. The degree to which governments expand spending and regulation will merit keen investor interest in the coming months and year. Overall, though, despite the devastation of the pandemic, the healthcare sector remains highly attractive for private equity investors that have capital to deploy.