Not that safe
Back in June, Hedley Goldberg, who heads up health care services at Rothschild, told HBI 2022 attendees that healthcare investors shouldn’t be too worried about the macroeconomic outlook. Yes, inflation was higher than it had been in decades. Yes, a recession was undoubtedly on the horizon. But health care services would be resilient and able to pass on cost increases to payors. But now multiple listed groups are reporting net losses for Q3 and many investors are getting cold feet. Is this just a temporary blip or a sign of worst to come?
Both pan-emerging markets outpatient operator Medicover and Nordic outpatient group Terveystalo have posted net losses for Q3, with both companies seeing double digit falls in their share prices in response.
Perhaps it came as more of a surprise to the markets than the net loss which embattled pan-European care group Orpea announced at the end of September. Medicover and Terveystalo are asset-light groups focused on high-margin outpatient sectors, with the majority of their revenue coming from the private-pay occupational sector. Neither group has been the subject of a major scandal.
Cost inflation across all inputs, but especially wages and energy costs, is the clear culprit. Revenue continued to grow in nominal terms at both groups. There is clearly a limit to how quickly even agile private-pay focused operators can pass on cost increases to their customers, especially at a time when the general macroeconomic outlook is so gloomy.
But Medicover CFO Joe Ryan tells us he is not particularly worried, saying that rising inflation is more of a problem than high inflation, in and of itself. Even if we are now entering a world of consistently higher inflation, companies such as Medicover are used to operating in emerging markets where inflation is often higher and gaining indexation from private payors where this is the case.
But for publicly or statutory insurance funded activity in developed countries it will be harder to pass on the cost increases, as governments frantically try to fill fiscal holes in the face of rising interest rates. Medicover is concerned about tariffs for the labs sector in Germany in particular, which have been consistently lowered over the past three decades. He says smaller labs operators will not be able to keep operating without some kind of tariff increase to compensate for the increase in costs they are now seeing.
And in France, the entire labs sector is set to go on strike in protest of a proposed €250m annual cut to the sector, which operators are saying will mean lab closures if they go through.
Meanwhile, the more long term issue of labour shortages is not helping matters. Terveystalo says tight labour markets meant it couldn’t service higher margin cash paying clients as it had to concentrate on its core publicly-funded and employer-funded activity. So labour shortages are adding to cost inflation and also limiting their ability to compensate for it with top-line growth.
Eventually even government payors will have to bite the bullet and accept price and tariffs increases – healthcare services are not expendable. The key question is how long it will take.
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
