Whistling Past the Graveyard…

As we are now all expert on surge capacity and what it means for the U.S. healthcare system, we have tragically come to learn how woefully unprepared we are for a crisis of this magnitude. Shortcomings in supply chain are now frighteningly evident. Hell, even the lack of adequate labor is alarming as we now start to envision scenarios where some of the essential staff are taken offline. The New York Times recently highlighted that healthcare workers (orange dots) are literally in close proximity to disease daily. At the end of the supply chain is the Death Care industry which is also likely to be overwhelmed given how it is structured.

Risk Exposure

Within weeks (or less), U.S. hospitals will be overwhelmed with COVID-19 cases. The healthcare system is mobilizing, setting up ancillary care units, recognizing the expected inability to house all of those people. With approximately 2.4 beds per 1,000 residents, the U.S. is nearly one-third the per person capacity of countries like South Korea, which appears to have more effectively managed this crisis. If half of the 330 million Americans are infected, and if 5-10% of those cases are critical, it is near-impossible to see how 8 – 16 million people will fit in ~100k ICU beds.

Beds

According to the Centers for Disease Control and Prevention (CDC), more than 2.8 million people die each year in the U.S. (in 2017, 56 million people died globally or 150k per day). On average, 7.7k people die in the U.S. every day which puts the current crisis in such stark relief. About 2.5 million people live in nursing homes and long-term care facilities in the U.S. – 380k already die from infections in those facilities annually.

Dr. Neil Ferguson at the Imperial College in London, a prominent English epidemiologist, recently published models which estimated a range from best to worst case scenarios for deaths due to COVID-19 in the U.S. of 1.1 – 2.2 million people. Think about that. This pandemic has the potential to increase the annual number of deaths in the U.S. by 35 – 80% this year. Thus, the question now is what is the surge capacity of the Death Care industry?

There were an estimated 2.7 million funerals last year. The Death Care industry employs 123k people and is forecasted to be approximately $68 billion in 2023, after a long period of very modest growth according to Research & Markets, Inc. It is principally comprised of three sectors: funeral homes, cemeteries, and memorial products. According to the National Funeral Directors Association (NFDA), there are nearly 19.3k funeral homes (11k of which are members of the NFDA). Funeral home revenues are estimated to be $16.8 billion per IBIS World, with the six largest companies controlling nearly 30% market share. The dominant player is Service Corporation International (NYSE: SCI) with $3.2 billion in revenues, operating margins around 20%, and a market capitalization of $6.8 billion (~2x revenues).

There are over 115k cemeteries in the U.S., which is actually a difficult number to determine given many are not actively managed. SCI estimates that “for profit” cemeteries generate around $4.0 billion in annual revenues with “healthy” operating margins of nearly 30%.

The third significant sector of the Death Care industry is something called memorial products and includes items such as funeral planning, cremation, body preparation, transportation and other assorted merchandise. There are over 300 brands of caskets. While the cost of a funeral may be $8k – $10k, all the additional add-ons likely make these ceremonies meaningfully more expensive. It is estimated that Michael Jackson’s funeral cost well over $1.0 million.

Innovation, believe it or not, is an important recent industry development as issues like brand and environmentally sensitive procedures are becoming much more relevant. And now grieving-at-a-distance. It has also been an industry that has had to gently navigate cultural and religious norms and peculiarities. Now other powerful forces are at work. In 1970, 5% of all funerals involved cremation, but with increasing environmental concerns of placing so much steel and embalming fluid in the ground, cremation is now approximately 56% of all funerals (annually, enough embalming fluid is used to fill eight Olympic-size pools and enough steel is used to build the Golden Gate Bridge). Now that there is a new emerging concern about greenhouse gases as over 600 million pounds of “pollutants” are released, alternative procedures such as alkaline hydrolysis or “green burials” are becoming more prevalent. Cremation is thought to be much less profitable than traditional burials.

Interestingly, until recently, industry analysts had warned that with the dramatic decrease in tobacco usage and increased life expectancy, the Death Care industry was in for relatively difficult times. In 1882 in Rochester, NY, presumably given the needs highlighted by the 620k Civil War fatalities, the first ever National Funeral Directors convention was held. One cannot help but wonder how the industry now will navigate this expected surge, particularly when groups no larger than 10 can congregate. Hopefully, as McKinsey & Co. underscores below, necessary steps can be taken to dramatically reduce the mortality rate and viral reproduction dynamics in the population otherwise this surge will be devastating even to the Death Care industry.

COVID

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One response to “Whistling Past the Graveyard…

  1. Pingback: Digital Health Prospects for 2Q20… | On the Flying Bridge

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