U.S. health care staffing companies are on their way to a slow recovery, with patients who had delayed elective procedures now returning to their providers of care. However, the pace of recovery will be uneven, depending on the mix of service lines and geography. The collapse in patient volume following the abrupt government directive in mid-March to delay all elective procedures to conserve hospital capacity to treat COVID-19 patients and patient fears of visiting health care providers during the pandemic, has cascaded through the health system, resulting in a dramatic reduction in health care staffing companies' revenues and cash flows. At the trough in April, anesthesiology services were down almost 70%, radiology volume was down about 60%, and emergency department (ED) visits were down consistently over 40%.

Given the sudden and severe decline in business, the resultant strain on cash flow and liquidity, and the uncertain duration and severity of the pandemic, S&P Global Ratings took a number of negative rating actions on staffing companies since late March. However, amid the negative actions, we revised an outlook to stable from negative on one staffing company--for Sound Inpatient Physicians Holdings--because we believe it was not adversely affected by the pandemic and resulting market conditions. For a complete list of staffing companies we rate by concentration, please see "The Health Care Credit Beat: U.S. Health Care Staffing Challenged To Meet Evolving Needs Of Hospitals,"published June 13, 2019.

Although health services saw an increase in employment in May, according to a June 15, 2020, report from the U.S. Bureau of Labor Statistics, the gains were largely in dental health practitioners and physician offices. Meanwhile, hospitals shed another 27,000 jobs. For more information on hospitals' path to recovery, see "A Bumpy Recovery Is Ahead For Hospitals And Other Health Providers As Non-Emergent Procedures Restart," published May 26, 2020.

While the worst may be over for staffing companies with the slow return of patients, the recovery of staffing companies may lag that of hospitals. We expect hospitals will wait to see how strong and sustained the recovery is and initially fill staffing needs internally. Hospitals had sidelined some of their staff with furloughs and/or layoffs to align staffing requirements and control costs given the lower volume. As such, some hospitals and staffing companies have stopped using locum tenens, preferring to keep their own staff employed. We believe they will call back their own staff at the pace their business improves. Furthermore, though patients are returning, we think hospitals will operate below their normal capacity for at least the next several months, if not for the rest of the year, returning to pre-COVID-19 levels sometime in 2021 at best. For the professional outsourced staffing business such as anesthesia and radiology, we expect these staffing companies to recover roughly at the pace that patient volume returns.

Surviving The Eye Of The Storm

Staffing companies' financial results for first quarter of 2020 were negatively affected by the mid-March shutdown of elective procedures. While the first quarter reflects only two weeks of COVID-19-related declines, the end of March and beginning of April saw the most severe revenue declines, as all procedures considered non-emergent (many of which have become emergent over time) were immediately canceled or postponed. We expect second-quarter financial results to be far worse than those of the first quarter, reflecting the trough in inpatient and outpatient volumes and a suppressed recovery.

At the beginning of the pandemic, staffing companies rushed to take preventive measures, given the high uncertainty regarding the timing of a recovery in volumes, the tightness of capital markets, the risk of an extended billing and claims processing cycle, and the questionable ability of hospitals to pay their traditional subsidies given their own staffing and cash flow strains.

Many staffing companies have had to maintain adequate front-line capacity for potential uneven demand, while limiting losses and maintaining liquidity. They have furloughed nonessential clinical and back office personnel, redeployed internal team members to augment positions such as nurse credentialing, extended vendor payment terms, collected older receivables more aggressively, suspended retirement matching programs, and shifted office-based clinicians to telehealth. Anesthesiology clinicians were reassigned to support postoperative care, critical care nursing, vascular access and airway management, providing intensive and critical care rather than covering surgical cases.

Liquidity spotlight

While we believe much of the lost volume will eventually return, we don't expect a return to pre-pandemic levels until potentially sometime in mid-2021. Additionally, as hospitals face their own financial and liquidity woes in the near term, primarily due to very large declines in revenue from patient volume associated with the deferral of elective and non-emergent procedures, we believe staffing companies may experience longer receivables turnover as well as more significant pricing pressure. As such, some staffing companies, particularly those that are highly leveraged, may face very significant liquidity pressures for several months. It is possible not all will be able to withstand the sharp decline and non-linear business recovery. Despite the unprecedented disruption to operations and highly uncertain timing of a full recovery, many companies have had little difficulty obtaining covenant waivers and additional liquidity from lenders and private equity sponsors. Nevertheless, we expect that lenders to highly leveraged companies already troubled before the pandemic may not be as accommodating, adding pressure to those companies.

Staffing companies that have been able to boost liquidity include CHG Healthcare Services Inc., for example, which borrowed incremental senior secured notes as a precautionary measure in response to the COVID-19 pandemic. MEDNAX Inc. entered into an amendment to its revolving credit agreement, establishing a deemed EBITDA for the second and third quarters of 2020, which it will use in the calculation of consolidated EBITDA under the credit agreement. This strategy leads us to believe lenders are tolerant of the company's leverage spike, understanding that while the severity of EBITDA loss could lead leverage much above expectations, they expect it to be a temporary setback. Team Health Holdings Inc. announced that its board of directors approved a senior secured term loan from its private equity sponsor Blackstone, which covers interest payments in April, the first full month of the pandemic, through mid-May and contemplates the flexibility to add additional tranches to the loan to cover future principal and interest payments. Blackstone is also assuming responsibility for funding legislative advocacy costs for surprise billing legislation so that financial resources from the CARES Act are directed exclusively to support clinician compensation.

Health care staffing companies' liquidity was also aided by grants they received from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress on March 27, 2020. The CARES Act is a $2 trillion stimulus bill aimed at providing relief for individuals and businesses that have been hurt by the coronavirus outbreak, with $100 billion specifically to compensate health care providers for lost revenues and incremental expenses incurred in response to the COVID-19 pandemic, though a majority of the funds were directed toward hospitals. Several staffing companies have received grant funding, which they are not required to repay, as well as Medicare fee-for-service accelerated and advanced payments, which will need to be repaid in 2020 and thus provide only temporary liquidity relief, and tax payment deferrals.

Where Do We Go From Here: Rating Recovery

Given the extended period of disruption, a looming recession with high unemployment, and possible lasting changes to health care providers, credit metrics in 2020 will be much weaker than what we had previously expected for nearly all staffing companies. We expect performance to remain somewhat weaker than our previous expectations for 2021 as well. Nevertheless, we expect staffing companies to eventually return to growth as hospitals see volume return, albeit at a slower pace. As such, we continue to view this period as a near-term disruption and not a change in our view of the long-term credit picture.

We expect earnings in the second quarter to decline significantly, reflecting the trough in patient and procedure volumes, which likely bottomed out in April, with tentative modest recovery in May and June. We expect volumes to strengthen over the near term, as many non-emergent procedures that were postponed are now becoming emergent. Additionally, many states have begun to loosen restrictions on elective surgeries, allowing hospitals and outpatient centers to resume performing non-emergent, elective medical procedures, in line with certain guidelines. While volume from medically necessary procedures, and even some voluntary or elective procedures, has pulled staffing companies out of the trough, these increases will not be linear. Consumers are still delaying health care services, feeling uncomfortable going to a hospital, urgent care, or walk-in clinic for any kind of medical treatment and many intend to delay future care, treatment, and procedures.

The ability of the staffing companies to preserve their ratings is questionable. By definition, a negative outlook suggests we believe there is a one in three chance of a rating downgrade within a year, and a negative CreditWatch suggests there is a 50% chance of a downgrade within three months. The negative outlooks on four of these companies (Envision Healthcare Corp., Team Health, The Schumacher Group of Delaware Inc., and ASP NAPA Holdings LLC) take into account significant clinical and operational challenges from COVID-19, often combined with already high leverage, thin liquidity, or a need to access capital markets during potentially tight credit market conditions.

Envision and ASP Napa, both rated 'CCC' with a negative outlook, have the greatest potential for a default. We believe Envision's liquidity over the next 12 months may be insufficient to overcome business disruption from the COVID-19 pandemic, and it may violate its first-lien springing debt covenant over that time, which could trigger a restructuring. The business may also not recover to near pre-pandemic levels in 2021, leading the company to struggle to generate enough cash flow to meet its operating needs and cover its debt obligations. ASP NAPA may face heightened risk of default, and potential debt restructuring within the next six to 12 months due to a potential near-term compliance breach, likelihood of insufficient liquidity to overcome the expected decline in cash flow, and refinancing risk associated with its revolving credit facility that matures April 2021.

While Team Health and Schumacher have sufficient liquidity to fund operations for several more months of suppressed volume, we expect both companies to require access to capital markets and thus see heightened refinancing risk over the coming year as material portions of the companies' capital structures becomes current.

We believe AMN Healthcare Services Inc. has sufficient liquidity despite the economic impact of the COVID-19 pandemic, which we expect will strain 2020 revenue and EBITDA. We believe the surge in nursing demand combined with the company's current liquidity position will be sufficient to withstand the likely decline in its high-margin interim leadership staffing, executive search services, and locum tenens business. The headwinds related to the pandemic did not result in a rating change for CHG Healthcare Services Inc. because we believe the company is well-positioned to withstand a drop in its high-margin locum tenens business, though we continue to monitor the pace of recovery and the company's continued ability to benefit from pricing.

Recovery May Be Under Way, But Longer-Term Challenges Remain

While the worse impact from COVID-19 may be over and the recovery to revenues and earnings, albeit uneven, is under way, staffing companies still face a host of other industry challenges, a number of which may have been exacerbated by the pandemic. We note some longer-term issues the sector is grappling with, especially changes in consumer behavior, staffing challenges, increased pricing pressure from hospitals, and the increasing pressure from UnitedHealth and potentially other payors.

Dealing with UnitedHealth Group's contract termination

Before COVID-19 struck, several staffing companies were facing severe pressure from UnitedHealth Group's terminations of high-reimbursement, in-network agreements. (See "The Health Care Credit Beat: What Will Be The Next Target Of UnitedHealth Group’s Contract Termination Spree?" March 4, 2020.) Amid the pandemic, some companies announced that UnitedHealth was alleviating the pressure while others said the insurer had not provided relief. MEDNAX announced on May 7, 2020, that UnitedHealth agreed to delay the effective dates of their terminations for several months (though we believe a majority of these terminations were related to the anesthesia segment that was recently sold to NAPA). Team Health, meanwhile, announced the suspension to changes to clinician compensation that were resulting from UnitedHealthcare's unilateral termination of the contracts across the country and that the insurer is not easing the pressure.

While some staffing companies may suffer from immediate pressure and others will see some relief, we view the delay of terminations as a temporary respite for the industry. We continue to expect EBITDA losses due to cancelled contracts, albeit perhaps at a later date, and expect companies to continue spending on legal costs for disputes and negotiations.

Staffing should be on the lookout for potential behavioral changes

Emergency visits.  Emergency room volume has decreased in part due to consumers feeling uncomfortable going to a hospital. While we expect patients to gradually return, we believe some of the low-acuity volume may not return altogether, as consumers have been exploring alternatives to the ER such as urgent care, walk-in clinics, or telehealth visits.

Telehealth.  Office-based clinicians have rapidly shifted to telehealth during the pandemic to treat patients remotely. Hospitals have also been using telehealth to triage patients to avoid losing some patient volume. In mid-March, the Centers for Medicare & Medicaid Services (CMS) broadened access to Medicare telehealth services so that beneficiaries can receive a wider range of services from their doctors. CMS expanded this benefit on a temporary and emergency basis under the 1135 waiver authority and Coronavirus Preparedness and Response Supplemental Appropriations Act.

While previously compensation for telehealth visits was lower than for in-person visits, providers are now paid equally for either service venue. Although the government is evaluating whether to permanently pay the same rates for telehealth visits as for in-person visits, we expect telehealth rates are most likely to return to be somewhat lower than in-person visits. However, we expect at least some of its use to continue past the pandemic. If telehealth is available to all beneficiaries on a more permanent basis past COVID-19, we expect the use of telehealth to increase materially. However, at this point the eventual level of reimbursement is unknown, and could be lower.

Nurse licensure.  To fight COVID-19, states have been liberal in expediting the licensing processes and applying for licensure waivers, permitting out-of-state nurses to practice temporarily. While we do not expect a transition to universal licensure, regulations may be eased to allow nurses to cross state borders and provide care without time-consuming barriers.

Higher burnout among the health care staff.  Health care workers have experienced unprecedented anxiety over the past of couple months, being at greater risk for catching COVID-19 and witnessing scenes that have caused symptoms of post-traumatic stress disorder. We expect there could be heavy burnout among doctors and nurses, potentially adding labor cost pressure while increasing demand for temporary staffing. Additionally, staffing companies that rely heavily on older physicians and nurses may be faced with employees that are grappling with the risk of catching a virus on the job.

Related Research

• A Bumpy Recovery Is Ahead For Hospitals And Other Health Providers As Non-Emergent Procedures Restart, May 26, 2020
• The Health Care Credit Beat: What Will Be The Next Target Of UnitedHealth Group's Contract Termination Spree? March 4, 2020
• The Health Care Credit Beat: U.S. Health Care Staffing Challenged To Meet Evolving Needs Of Hospitals, June 13, 2019