At the start of the year there was a general feeling of optimism, as people increasingly learned to live with the threat of Covid. Travel resumed. Deals were being done. It was business as usual – with some pent-up demand to boot. But with medical costs rising, a new row is brewing that could derail all this good will.
A combination of shortages and rising medical costs are set to pit operators against insurers, and against their REIT landlords.
This issue existed before this year; many of the attendees at HBI 2021 saw inflationary pressures as one of the largest threats facing the sector. But the war in Ukraine has made a bad situation a lot worse.
There is a perception that healthcare is immune to macroeconomic headwinds and that the real risk comes from elsewhere – say regulation. This is certainly often true.
But as overall inflation edges close to 10% in many countries, it is clear that healthcare is not immune to the current inflationary pressure affecting economies across the globe. Along with the threat of recession, it is combing to make a perfect storm.
The supply chain issues and increases in energy costs affect every business. But subsectors heavily dependent on medical devices could be particularly badly impacted.
Higher costs mean lower margins, unless firms can raise prices. Since the current inflationary pressures are coming from constraints on the supply-side rather than booming demand or excessive money printing, there will be very little room for businesses in any sector to raise prices without suffering a fall in demand. Whilst there may be no shortage of demand for healthcare services in general, there certainly is a limit to the willingness and ability of payors to pay!
So earnings will almost certainly fall, and this will mean the likes of care homes will have to have very difficult discussions with their landlords in the coming months.
Some experts we talk to say there is so much capital left to invest and demand is so strong that ultimately the market will continue to provide. But opportunities in the short term – a PE-style 5-year plan for quick returns – may dwindle as healthcare increasingly attracts investors prepared to play a longer game for a lower reward.We would welcome your thoughts on this story. Email your views to David Farbrother or call 0207 183 3779.