COVID-19 Impact on the Knee Replacement Industry

Rajit Kamal (These are my personal views and does not necessarily reflect the views of my employer)

First of all, our thoughts and prayers should be with people directly impacted by this pandemic and all the healthcare workers who are putting their lives at risk every day to treat the sick. We all need to do whatever we can to help them, support them and thank them. For those who want to make a monetary donation, United Way COVID-19 fund (www.unitedway.org) or WHO’s COVID-19 Solidarity Response Fund (https://www.who.int/emergencies/diseases/novel-coronavirus-2019/donate) are good places to donate.  

The business environment in the last couple of weeks has seen unprecedented uncertainty and disruption. The business literature identifies three types of risks that any business should manage:

1.      Preventable Risk: These are undesirable risks that should be avoided or reduced. These are risks around compliance, breach of data privacy etc., risks for which companies have policies, procedures and resources to manage.

2.      Operational Risk: These are the risks the business takes from a strategic standpoint. These could be risk of entering a new market, investing in a new product or buying a company etc. Companies plan to manage these risks and understand the puts and takes before taking the risk.

3.      External Risk: Companies have no control over their occurrence. They can be risk of hurricane, terrorist attack etc. Companies usually do contingency planning for risks like these.

COVID – 19 is clearly an external risk, that many organizations did not see coming. While possibility of a Pandemic was always real, most organizations did not plan for this scenario and were caught off guard. To make the matter worse, things moved very quickly and there was no time to plan. And to add to that, there is still uncertainty around how long will it last, how deep would the impact be? There is no playbook and organizations must go along and plan as the situations evolves.

While there is uncertainty around impact and implications, there are guidelines for any business to follow. 1) Safety of employees first 2) Sustain the business till the lock down lasts (this includes measures to reduce the cash burn while revenues dry up) 3) Proactively plan for recovery.

The positive side is that the business fundamentals for most industries is sound and the demand will come back (the key questions is how long will it last & how fast would the ramp be?), the financial sector (e.g. banks) are in good shape and the government is moving boldly and quickly to provide liquidity (e.g. $2T CARES act) in the market and soften the blow.

I have had the opportunity to speak with over ~30 of my customers in the last couple of weeks. Below are the six questions that answer the implications on the Total Knee Replacement Market.

1.      Will this change long term demand for TKR?: The long-term outlook for the TKR market remains sound. The demographic shift and active populations around the world are driving a healthy volume growth for knee replacement and there is nothing that changes those fundamentals. We might see some shift in site of care (e.g. faster shift to ASCs) or increase use of certain technologies to treat patients (more on that later) but fundamentals remain healthy and strong.  

2.      How long will this last and would the overall volume go down for 2020: Most countries around the world have stopped doing elective surgeries. The general timeline is for 6-8 weeks but this is an evolving situation and would depend on how quickly we can “flatten the curve”.  

Most surgeons expect to ramp up quickly and try to make up for lost volume once things open. However, it is reasonable to expect that we will lose some volume in 2020 and will fully make up the volume by 2021. Obviously, the biggest uncertainty here is the time it takes for things to start opening.

Just to do some numbers, if we lose 8 weeks and a surgeon has 3 surgery days in a week, they would lose ~24 surgery days. If surgeries start in June, we will have around 30 Saturdays from June 6th to end of the year. Let’s take 2 Saturdays out for Thanksgiving and Christmas, there will be ~28 Saturdays to make up the lost volume. That would mean Saturday surgeries have to be at ~85% utilization of a typical surgery day. As an aggregate, every center will have to operate on Saturdays at >85% utilization to make up the lost volume. Possible, but unlikely.

3.      How will the recovery look like? There are three possible scenarios for the recovery. 

V      U       L

The recovery could be “V” shaped where we ramp up quickly to the original state, or “U” shaped where it slowly ramps up or “L” shaped where the slowdown drags for long and the industry settles at a lower volume/growth rate.

Given the sound fundamentals of the business, “L” shaped recovery can be ruled out. The recovery will either be “V” shaped or “U” shaped. The general feedback from surgeons is that it will be a “V” shaped recovery as they are ready to go, and patients are eager to get their surgery done. Most surgeons I spoke with expect to add Saturdays to their surgery schedule and look at adding one more surgery during their surgery days.

My bet is still on a “V” shaped recovery, but it is contingent on the following:

a.                  How long will it last? If this drags for longer than 6-8 weeks, you can expect the recovery to have slower ramp up. Longer duration means higher number of infections, higher fatalities and it will create a general anxiety and patients will wait longer before they start going back to hospitals. We will start to see patients delaying their surgery. Eventually, volumes will come back, but the ramp up will be slower.

b.                  Availability of PPE: We are seeing shortage of PPEs. Most hospitals are now running on 1 week of inventory and expected to run out soon. If this shortage continues, it will slow down the ramp up till we get the stock back. I see very high level of activity in terms of producing more PPEs but it all depends on how long this will last and potential demand vs. available supply.

c.                  Surgery Backlog and prioritization: All non-essential surgeries have been postponed. When the lockdown is lifted, in full-service hospitals, they might be forced to start prioritizing “non-essential surgeries”. Primary Knee replacement is one of the most elective surgeries, and might not be at the top of the priority list. In joints focused centers, this will not be an issue.

d.                  Testing equipment: Lot of states are calling every medical staff (e.g. New York) to help fight the COVID-19 pandemic. We will likely have orthopedic healthcare professionals help during this period. Since they will exposure to COVID-19 patients, all of them would have to be tested for COVID-19 to ensure they are not positive. We would need enough testing equipment to test everyone. If that is not the case, they will have to quarantine for ~14 days before coming back to work and that might slow the recovery ramp up.

4.      Will the procedure mix or site of care look different during recovery? One can expect the procedure mix and site of care to change during recovery from what it looks like in the steady state.

a.      Higher Revision Mix: We know that revision procedures are less elective than primary procedures. Surgeons I spoke with are triaging their Revision patients to identify who can wait and who needs to be operated now. Some Revision patients who have an urgent need are still getting operated. However, when the lock down is lifted, one can expect the surgeons to front load their Revision surgeries to get through the backlog of “lesser elective Revision surgeries”.  So, if a typical mix for a surgeon is say ~20% revision mix, that might increase in the recovery period as surgeons will try to do 1-2 more Revisions in a week than they do normally. I expect this to get back to steady state eventually.

b.      Efficiency Solutions: Efficiency and OR turnover will be key focus once surgeries resume. Customers will look for products and services that will improve their OR efficiency. Size specific trays, disposable instruments and technologies that improve OR efficiency will see higher demand. We will also see surgeons who use Cementless increase their Cementless mix as these surgeries are up to 15 minutes faster.

c.      New Products: The willingness to try new products will be limited as surgeons will have limited time for training or trying new products. They would like to focus on their current product usage till they get through the recovery period. The recovery period won’t be the right time to do any new product launches.

d.      ASC: The knee replacement market is already seeing a persistent shift to the ASCs. One can expect this shift to accelerate during the recovery period. ASCs don’t tie up hospital beds, patients get back home in 24 hrs. and they are more efficient. This shift is going to continue after the recovery period.

5.      What are financial implications to the hospital and what are its impact? The hospitals, ASCs, joint centers are under financial strain. Most of them have ~6-8 weeks of cash left.  

There are three drivers of cash flow:

a.      Operational Cash Flow: With electives surgeries stopped, the incoming cash has gone down to zero. We have heard them furloughing their employees, extending their accounts payables etc to reduce their burn rate. When the recovery happens, it will take some time before the cash reserves get back to healthy state. 

Hospitals will try to extend their accounts payable days in initial phase of recovery to preserve cash.

b.     Investing cash flow: One can expect any capital expenditures to come to a halt in the recovery phase. Hospitals are likely not going to buy big capital equipment or make any significant investment till they build up their reserve. I don’t expect the normal capital buying cycle to come back before 1H 2021.

c.      Financing cash flows: These are the cash flows tied to paying interest and taxes. Hospitals will re-negotiate their debt terms to reduce interest payments. There could be some relief on the tax front to help preserve cash.  

6.      Will there be any structural changes due to COVID-19? Any crisis like these, always drives structural changes. We can expect to see some in knee replacement market as well.

a.      Shift to ASC: This was already happening, and this crisis will accelerate the transition.

b.     Virtual Consultation: Surgeons I spoke with are doing virtual consultations. Some of them were doing for the first time and initial feedback was good. Patients will also use it and like virtual consultations. It is easier and convenient. This will shift some consultations, especially post-op ones to virtual after recovery. We will also see payers paying and creating incentives for virtual consultations.

c.      Technology Halo: As surgeons start to rely more on technology during this period, I think the general willingness to adopt technology will increase. We will start to see adoption of digital care navigation tools, templating/planning and other technologies across the care continuum. 

What do you think? Please share your thoughts.