Why Covid's Economic Impact On Healthcare Won't End With A Vaccine

The decline in profitable non-Covid procedures will severely depress hospital profits, while the expenditures necessary for the pandemic and for preparation for future healthcare crises may drive health spending higher as a percentage of the economy, which may not be the most efficient use of capital. JL

Charley Grant reports in the Wall Street Journal:

Regulatory approval is distinct from the vaccine reaching patients. Scaling up manufacturing to meet demand is a huge challenge. Then there is priority: the military, health-care personnel and other essential workers are likely to receive doses before the general public. 40% of respondents expect the vaccine to be available to all by late 2021, and 36% aren’t expecting that until 2022 or later. U.S. health spending, already 18% of gross domestic product, could become an even larger part of the economy in years to come. (But) as a result of lower patient volumes for non-Covid treatments, hospitals (will) lose $300 billion (by) the end of the year.

The effects of the coronavirus crisis are likely to be felt on the economy for years to come. For the health-care industry that isn’t entirely bad news.

Economic data has improved across the U.S. in recent months, which has led to a sharp stock rally. But rising case counts of Covid-19, the illness caused by the novel coronavirus, and the widespread rollback of state reopening plans present obvious concerns. Barring a sudden deceleration in the spread of the virus, investors’ high hopes as reflected in stock prices might depend on when a Covid-19 vaccine reaches the market.

The drug industry has pushed ahead with research at a breakneck pace. In ordinary times, the vaccine-development process can take five years or longer, but some companies hope to have late-stage vaccine data by the fall.

Success in the clinic is no guarantee, of course: Guidance issued by the Food and Drug Administration says that any vaccine should be at least 50% more effective than a placebo in preventing the disease, a high bar.

Industry insiders are confident. According to a survey of 50 health-care executives and investors conducted by Stifel, nearly all expected a vaccine would eventually be approved in the U.S. More than half of those surveyed expected approval to occur late this year or in the first quarter of 2021.

But regulatory approval is distinct from the vaccine actually reaching patients. After all, scaling up manufacturing to meet unprecedented demand is a huge challenge. Then there is the issue of priority: Members of the military, health-care personnel and other essential workers are likely to receive doses well before the general public. In the survey, 40% of respondents expect the vaccine to be available to all by late 2021, and 36% aren’t expecting that until 2022 or later.

In the short term, that is bad news for the U.S. hospital system. As a result of lower patient volumes for non-Covid treatments, hospitals are projected to lose more than $300 billion from March until the end of the year, according to the industry lobbying group American Hospital Association. Government aid will offset just part of that loss. While most hospitals aren’t publicly traded, that bodes poorly for many suppliers of devices and surgical equipment.

And once Covid-19 is behind us, its psychological impact will cause lingering economic effects. Most of the Stifel respondents expect another pandemic within a decade, and 90% expect significant investments by governments to prepare for that possibility.

That fear could meaningfully boost sales for things such as hospital beds, antiviral therapeutics, testing supplies and telemedicine services. “For the past several decades, the prevailing mentality in business has been to eliminate redundancy,” says Declan Quirke, a health-care banker at Stifel. Recent events could turn that mentality on its head in this industry, he argues. As a result, U.S. health spending, which already totals about 18% of gross domestic product, could become an even larger part of the economy in the years to come.

At least for this industry, the dark cloud of coronavirus should have a silver lining.