COVID-19: Potential Impact on CHNG

Credit Suisse’s https://www.credit-suisse.com analysts while doing their COVID-19 Impact Analysis for Change Healthcare (CHNG) https://changehealthcare.com, found that one of the biggest factors affecting CHNG is that elective surgeries are getting delayed or postponed throughout the country. This delay is affecting physician practices resulting in the financial strain having an impact on CHNG’s business.

According to the data tracked by the Credit Suisse Medical Supplies & Devices team, 45 states in the U.S including D.C, have issued mandates or recommendations and guidelines for suspending elective procedures.

However, related to elective surgeries there are factors that need to be factored in such as a significant portion of CHNG’s business is license-based and unlikely to be impacted by a decline in transactions. The company stands to benefit from pent-up demand hopefully as the majority of lost volume comes back.

The delay or postponement of elective surgeries will impact the company’s Network Solutions segment, which is primarily volume-based except for a small piece that is associated with data solutions. Network Solutions makes up around 18% of the company’s revenue and is indexed to the volume of activity in the healthcare industry.

The company reports that Network Solutions essentially covers the broad healthcare landscape and any impact would basically align with the shift in utilization witnessed across the various medical services and practice settings. The company has already indicated they are witnessing a temporary decline in network transactions ranging from 25-35% with the greatest impact being in dental which makes up around 4% of the total healthcare volume.

It is assumed that the Network Solutions business will take the largest hit based on overall healthcare volumes which are expected to be down 30% Y/Y in FY1Q21, down 35% in April as well as the 1H of May, and be down 25% in the 2H of May and all of June. However, in moving to FY2Q21, it is expected that pent-up demand for healthcare services will accelerate network activity and therefore the forecast is 8% Y/Y growth. It is expected that growth in 2HFY21 will return to pre-COVID-19 FY21 levels of 3%.

The cancelling of elective services in hospitals has also impacted the Revenue Cycle Management (RCM) services business which is part of the company’s Technology Enabled Services (TES) segment. The case mix is important for the company’s RCM services business at 70% is skewed towards diversified physician practices/ambulatory and 30% for acute care which is impacted by the dollar amount of claims not just the number of claims.

Regarding estimates for RCM services, analysts forecast that for FY1Q21, the hospital component of 30% will be down to 20% as hospital clients have partially offset discontinuation of non-emergency/non-critical, elective-type surgeries, admissions with COVID-19 related volume, plus some other critical procedures.

Analysts expect that for FY21, pent-up demand for RCM services will drive Y/Y growth of 7%. As for the 2H of FY21, it is assumed that there will be a 5% decline Y/Y as CHNG faces a $60 million annual contract loss spread across the 3rd and 4th quarters.

Software and Analytics (S&A) represents 51% of the company’s total revenue and 56% of the company’s adjusted EBITDA and generates around 80% of the revenues based on a subscription-based SaaS model. As a result, this segment is largely shielded from the current situation.

Around 75% of the company’s S&A segment revenue is license-based with the remaining 25% related to the PI business. However, CHNG’s Payment Integrity (PI) business may experience a slowdown in Q1F21while the software business component is expected to remain at the pre-COVID-19 estimated growth rate of 10% as providers deal with the peak of the crisis and payers are acutely focused on minimizing provider abrasion.

However once things begin to normalize, the PI business will ultimately regain momentum potentially with benefits from some pent-up demand in Q2FY21 with a 15% growth in the contingency based component while leaving the software component at the 10% baseline level.  It is expected that the business will revert back to pre COVID-19 growth of 10% for the remainder of FY21.

Importantly, CHNG also views the expansion of the use of telemedicine as a positive development for their business. Also, the administration’s efforts to support small businesses will bode well for CHNG’s physician clients, especially those that run small physician practices and are facing challenges in keeping their practices up and running.

For more information and to provide feedback, email Jailendra Singh at jailendra.singh@credit-suisse.com or call 212-325-8121.

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