Blog: Paul and Brett’s Alpha July 2021

Paul Major, Brett Darke – Portfolio Manager

The monthly BBH factsheet and commentary is always thought provoking and elicits a wide range of responses and views, here at the Trust we thought it would be a good idea to make the portfolio management teams commentary available in form of  rolling 12 month blog, as always any comments and observations are welcome.

July 2021

State of the Nation

This month we turn away from the longer-term consequences of the pandemic to consider the immediate repercussions of the UK Government’s decision to remove restrictions. Make no mistake, this is a bold experiment that will either go down in history as an enormous mistake or show the world how to live with the virus at an acceptable cost to wider society despite more transmissible variants emerging, as opposed to those counties whose return to normal has been predicated (unsuccessfully and unrealistically in our view) on a ‘zero COVID’ policy (e.g. Australia, New Zealand).

Even for someone unlucky enough not to reside on this Sceptred Isle, this is no academic exercise. As night follows day, the winter will come and with it the respiratory disease season. The best part of two years of social distancing has reduced exposure and natural immunity to RSV, Influenza and those bacterial infections that bedevil emphysema sufferers. The lack of influenza makes this season’s strain selection trickier than usual and it is perfectly reasonable to assume the vaccine will be less effective than in a typical year. All of this to come and COVID will not go away.

For the dispassionate observer (which is the role that your managers must take in order to fulfil our obligation to our investors), the UK’s attempt to escape the grip of this pervasive pathogen will inform us all as to where we need to be positioned in terms of the acuity curve and in terms of what are reasonable expectations for capacity utilisation over the coming 6-12 months.

First though, we need to understand where the baseline lies, so that we can monitor what happens next. This is not about case numbers, it’s about hospitalisations and about people’s behaviour. Few of us are willing participants in the healthcare system but, at the same time, lower acuity procedures can be delayed for protracted periods and the growing backlog of these will only be cleared if capacity is there to facilitate this. When might we be able to get back to 100% of historical capacity and then re-start the longstanding trend of increasing this capacity to meet ever-growing demand?

Letter from America

Before we consider matters at home, it is worth reflecting on the state of play in healthcare’s most important market – America. The picture there varies from state to state, reflecting disparate vaccine take-up and adherence to social distancing measures and mask mandates. These will impact the RE as the delta variant sweeps through the country and it also gives us some sort of benchmark against which to compare the UK

We have various data sources available to us. Federal databases and quarterly reporting from healthcare providers (both the facility operators undertaking the procedures and the managed care providers footing the bill). In addition to this, we have a number of regular surveys of hospital managers, physicians and so on from Wall Street to give a qualitative read on the current situation. Each of these will have its strengths and weaknesses and one needs to try to stitch all of this together to make a blanket view of what is likely going on currently, and what this might mean for the outlook in both the short and medium term.

Our current conclusions on the state of play from these disparate data sources is broadly as follows:

  • The US system is now operating at close to 100% of pre-pandemic (i.e. end 2019) capacity and there is growing confidence that a return to prepandemic capacity will be achieved in the second half of the year, assuming that the pandemic can continue to be kept under control (COVID cases account for 3-5% of current admissions).
  • Whilst Wall Street seems fixated on the above metric, demographic factors deliver a positive case growth trend of around 3% per annum and thus normality as defined by the pre-pandemic baseline would be around 105% of pre-pandemic levels by mid-2021. As such, we are still ‘missing’ quite a few patients and procedures versus this trend line.
  • Elective procedures are patchy to the extent that we have yet to see employment return to pre-pandemic levels and there is an explicit linkage between employment and healthcare utilisation through the provision of employer-funded health insurance.
  • There is also some residual reluctance to go to hospital (either electively or via the ER) due to COVID wariness. This is more prevalent amongst the elderly than the younger age groups, despite vaccinations being higher amongst the older cohort. This is reflected in commercial channels (employer sponsored insurance) having returned to pre-pandemic utilisation levels, whereas Medicare (over 65s) remains below pre-pandemic levels.
  • Where providers offer capacity via ambulatory surgical centres (ASCs; akin to a private day case hospital here in the UK), take-up is much stronger there than in the traditional hospital setting and we expect this part of the market to continue to expand as a proportion of total capacity. There is a (correct) perception that patients are safer from accidental COVID exposure in these facilities and they generally have lower operating costs so providers are happy for patients to opt for routine procedures in this setting.
  • The hospital capex trend has normalised and seems very much centred on a post-COVID dynamic (i.e. equipment lifecycle management, capacity expansion and productivity enhancement).
  • The reluctance for some older ‘double jabbed’ patients to undertake planned elective procedures seems to be a contributory factor to the higher than expected acuity of overall admissions hospital operators are reporting, since their care is often for lower margin care like orthopaedics and Medicare reimbursement rates tend to be lower than for commercially funded cases. Simply put, the ‘missing’ patients are the less unwell and less profitable. This is positive for Facilities’ operating margins.
  • In line with the comment above, emergency room visits have not returned to pre-pandemic levels and, where there are emergency admissions via the ER, they tend to be higher acuity (i.e. more serious and thus more profitable for the hospital treating the patient). This likely reflects the lower incidence of accidents as activities that might result in injury (sports, road traffic etc.) have yet to return to pre-pandemic levels. Whilst people may want to avoid hospitals due to COVID, there comes a point where you know you need care and such patients are more likely to be admitted following that ER visit.
  • It is possible that some of the ‘missing’ patients and ER visits are occurring in so-called Urgent Care Centres (akin to Minor Injuries hospitals here in the UK). This is a relatively nascent industry segment in the US and data on utilisation is more difficult to come by. However, the number of UCs has almost doubled in the past eight years and is expected to continue to grow at a double digit rate for several years to come.


Inpatient hospital care

In contrast to the US, with its patchwork of private and public operators and different insurance schemes, the UK is a monolithic single provider system and our health service makes a significant amount of data available through the NHS Digital ‘dashboards’ platform (1) . This allows us to look at the system-wide activity levels from a single source.

Let us begin with in-patient hospital care. The available data goes back to 2007 and shows a gradual positive year-on-year volume trend, as one would expect for a country with both a growing and an ageing population. Chart 1 below illustrates an unsurprising pattern; this gradual positive trend was upended by the pandemic in March 2020 and, as yet, procedure volumes have yet to recover to pre-pandemic levels, never mind re-establish the link with the underlying historical trend (and there is no reason to believe this trend should have changed at all).

Until the case completion rates returns to trend, the UK will continue to grow its backlog of low acuity procedures (aka ‘waiting lists’). The reason for the current situation is two-fold. Firstly, care capacity has been diverted to dealing with COVID-19. Secondly, and arguably more importantly, the total number of beds in use has been reduced to allow for greater spatial distancing within hospitals and thus reduce the risk of nosocomial COVID-19 cases (Chart 2 illustrates this abrupt reduction in overnight bed capacity). Until this capacity is re-introduced (either directly or via the co-option of the c8,000 beds of private hospital capacity here in the UK), we have no hope of getting on top of the backlog.

The other interesting element of this dataset is the proportion of admissions that result in a procedure has declined. We are not sure if this is an artefact of the pandemic or belies a more conservative management of patients as a realworld consequence of the pandemic itself; anecdotally, we have been told of more conservative strategies being used to manage some patients, thus delaying elective procedures to keep capacity available for COVID surges.

In conclusion then, the situation in the UK is far worse than the situation in the US vis-à-vis both available capacity and also its utilisation and, as such, we are likely to see a continued worsening in health outcomes quality as waiting lists grow.

Outpatient hospital activity

We see a similar pattern in outpatient hospital activity; volumes are below prepandemic levels and well below trend (Chart 3). If there is one positive in all of this, it is that people are more likely now to actually turn up to their appointments, perhaps because they struggled to get the appointment in the first place.

A&E Visits

Whatever side of the political spectrum you find a home, and whether you like a broadsheet, tabloid or local paper, you don’t have to look very far to find an “NHS in crisis” story about over-run A&E departments. We are not going to argue with the broad premise. As we noted last month, staffing levels are far from optimal, stress-related absences are a material issue and, as much as we hate the phrase, the “pingdemic” is currently a real problem in all areas of the UK’s employment sphere.

Continuing the theme of last month, there are two potential drivers of capacity being overwhelmed in the NHS. The first is that too many people are coming in the front door. The second is that the capacity is not as high as it was or as it should be. As ever, the truth will be a complex interplay of the two, but we can interrogate the data to try to understand which is the more likely driver at a national level.

Chart 4 below illustrates the monthly volume of A&E attendances by patient age group and it echoes the theme of the previous sections. We can see the dip in activity in March 2020 as the lockdown jolted everyone into COVID awareness and the hard-hitting message to “protect the NHS” was rammed home through blanket advertising. Leaving aside the very elderly, who often enter the system at end of life, much of the A&E activity in younger groups is accident-driven. Road-traffic accidents, sports injuries, intoxication-related injuries or violence.

The restrictions that we have all lived with these past fifteen months would logically lead to reduced demand on the accident side of the ledger and, since we are not yet back to normal cf.2019, one would not expect activity levels to be as high as they were at that time. Broadly speaking, the data supports this elementary conclusion. Why then are some A&E departments struggling if, in aggregate, the NHS is are not seeing massively higher levels of footfall?

Local COVID pressures may play a role but Occam’s razor brings us back to last month’s theme of staffing levels. It is probably true that exhausted staff working in conditions of high absenteeism are not surprisingly struggling to work at the same levels of productivity as they did historically and are thus lower to process people through the system. If this is really the root cause of the issue, then things are going to get a lot worse before they get better, for all of the reasons articulated in last month’s missive.

And what of the suggestion that an absence of GP access or delayed diagnosis of serious conditions is leading to A&E being overwhelmed by minor cases? We cannot really find any data to allow us to draw a robust conclusion on this point.

GP appointments

As noted previously, the media narrative is broadly that A&E is overwhelmed, in part because people cannot get in to see their GP so instead they are turning up at the hospital with the most minor of complaints, leading to hours of staff time being wasted triaging these cases. The other side of this debate of course is the prejudicial counterpoint widely made on talk radio and some sections of the media as to “what on earth GPs are doing, since you cannot get an appointment”.

The data has a number of caveats; not least the methodology for stripping out COVID vaccination appointments from the data is a little crude by the NHS’ own admission. Also, not every practice has the IT systems that allow full granularity in reporting appointment data, so there is a small proportion of activity that is unclassified. However, the data is nonetheless revealing (Chart 5 below)

Firstly, let’s tackle the pejorative premise that GPs are ‘swinging the lead’ or otherwise workshy in these COVID times. Leaving aside the inevitable collapse in activity in March 2020 as the first lockdown kicked in and systems needed to adjust to a new reality, it is not really obvious that there are fewer appointments being offered today than before, especially when one accounts for the 27m appointments used up administering COVID-19 vaccinations since December 2020 to April 2021. Indeed, from February to April, these tasks took up 23% of total appointments.

It may well be true that the March 2020 to September 2020 period where people did not make appointments, perhaps taking the “stay home and protect the NHS” mantra a little too literally amidst so many headlines that the system was overwhelmed (when in reality it was hospitals that were struggling) has subsequently led to delayed diagnoses that are now, or will soon, bring pressure to A&E departments and hospital admissions (cf. all the various data points regarding reduced referral rates to oncologists, for example. It is inconceivable that the background incidence of cancer has changed for the better over such a short period of time).

How has this additional appointment capacity been facilitated? By shifting a significant proportion of non-vaccine appointment capacity into the virtual setting via Telephone or Telemedicine (which is any form of audio-visual interaction done online, be it on a mobile app or via the patient’s PC). The transition to a greater proportion of telephone appointments has, unsurprisingly, resulted in fewer appointments being missed. The majority of us have been spending far more time at home, making it less likely you will miss the call when it comes. Missed appointments have fallen by around a third over the past year (to around 3-4%).

Longer-term investors in the Trust will be tediously familiar with our longstanding views on the importance of shifting to electronic/remote triage in the primary care setting as one of the most important efficiency gains that the healthcare complex could make (and not just here in the UK).

Those same investors may well recall that, as a consequence of this view, industry leader Teladoc was a top five position for the Trust as recently as December 2019 and yet today we hold none. We outlined our reasoning for not wanting to own this company anymore in the April 2021 Factsheet, describing Teladoc as “indisputably the Rolls Royce of telemedicine tech”.

Chart 5 illustrates this point all too well. Compared to March 2019, face-to-face appointments have declined from >80% of capacity to >55%. However, of that 25% swing, telemedicine accounts for only around 2%, with the trusty telephone taking up the bulk of the work

The truth is that you don’t need any fancy technology most of the time, because much of the business of being a primary care doctor is very simple and routine: a phone call will suffice. This comment is not intended to demean the importance of GP’s work, but rather to note it is overwhelmingly driven by the ongoing management of already diagnosed chronic conditions in older patients. This probably explains why telemedicine has not taken up as much of the workload as one might intuitively expect given that Zoom et. al. have literally taken over everyone else’s working lives.

Even when you do need a visual connection, there are countless secure and very inexpensive apps that can facilitate this (Skype, Zoom, MS Teams, Facetime etc. etc.), although here in the UK, NHS GPs are not allowed to use these apps and can only use those approved by NHS Digital (there are several that meet this standard, but they are unlikely to be familiar to the public equity investor).

In conclusion then, the front door of the NHS is operating as it should have been all along. The door is no longer wedged open; first you must ring the bell to determine if entry is justified. Getting an appointment is indeed tougher than it was, in part because it was too easy beforehand but also because a huge amount of time is being used up on the vaccination drive. At some point, this activity will abate and there should be a lot more appointments (both electronic and face-to-face) available for the wider public. We will be watching for this and there will certainly be questions to be asked if it does not play out this way.

The sick man of Europe?

The veneration of our National Health Service to the cult-like worship otherwise reserved for a religious institution is one of the stranger aspects of the British psyche and it is a brave person indeed who dares to criticise it on social media. Nonetheless, it behoves us all to cast a critical eye over the services that we pay for and to speak truth to power (i.e. central government), wherever that takes us. It does not matter how dedicated the staff are; if there is more work than people or systems to do the work, then the work will not all get done.

Our national healthcare system has many, many problems and the service that it provides is not what we all want it to be. It is not good enough to note how fair it is, when in fact what we are saying is that it is equally unfair to everyone (and even that isn’t true because many companies offer private healthcare that allows the fortunate to bypass the waiting lists and even see private GPs).

Things need to change. That criticism having been made, the operational response to the pandemic at the GP level objectively looks to have been good and hospitals have adapted as best they can to the crisis foisted upon them with little or no warning (and scarcely any PPE).

However, our system was straining to cope with volume-based demand even before the pandemic and the necessary response has inevitably accelerated the growth of the elective procedure backlog. Whatever you might want to believe, the only logical conclusion here is that things are going to get much worse irrespective of how severe the next wave of COVID is (or is not), although the tools to begin to make things better are being deployed.

One could again surmise (and Keir Starmer would argue) that a massive injection of cash could address this problem and to some extent it would help. However, patient safety comes first and if the NHS is to increase its volume of work, it must first increase the volume of staff available to do the work. Even technological solutions take time to bed in, whilst people get trained on new systems and workflows etc. As discussed last month, this will not be a quick fix. Where more money might usefully be deployed quickly is in paying the private sector to help clear the backlog.

And this ironically is where the differences in the US and the UK systems become apparent. The former is mired in horrendous inequities of access and care quality that would shame other developed nations. That said, the profit motive on the provider side has encouraged additional investment in capacity and productivity to meet the demand that is now returning and, as such, the backlog of cases that we see in the UK is not arising there to the same extent. What can we learn from this?

The message seems to be a simple one: if you invest more, you have more. The NHS needs cash, but it needs to be spent on raising capacity and productivity. This is happening, but slowly. Since we are already in a massive COVID-driven deficit hole, what difference would another few tens of billions make?

Investment guidelines

The development of these datasets over the coming months (both here and in the US) will be instructive. For now, our wariness regarding any move down the acuity curve in terms of the Trust’s holding persists since we are still rather far away from returning to the historical volume trend that we intuitively know is still there and that underpins out-year forecasts for many device/procedure related companies. Even before we talk about ‘wave four’ and ‘Delta+’, we are not yet out of the woods.

Stepping away from the UK and focusing on the US market (where the majority of the portfolio revenue exposures lie), the participants seem well attuned to the reality on the ground and to the risks in the outlook. As such, our confidence that the US healthcare system will be able to navigate its way through the continuing crisis whilst maintaining high levels of available capacity continues to grow, even if we think the focus remains at the higher acuity end of that curve.

We always appreciate the opportunity to interact with our investors directly and you can submit questions regarding the Trust at any time via:

As ever, we will endeavour to respond in a timely fashion. We thank you for your support of BB Healthcare Trust.

Paul Major and Brett Darke