When designing an investment portfolio, some sectors rely on the potential for future growth to appear. It is hard to find a sector with more predictable demand growth than healthcare.
This used to be largely from the ageing of developed countries, but now emerging markets such as China are experiencing the same issues.
The costs of healthcare are handled in different ways in different countries: a single-payer healthcare system in the NHS, multi-payer insurance systems elsewhere and the state standing behind basic healthcare generally.
The continuing growth in demand is therefore confronted by governments’ need to control costs, even as demand rises, something which creates challenges and opportunities for investors.
The recent review of public health conducted by Lord Ara Darzi illustrates the pressures. Some of his conclusions need to be seen in a UK, NHS settling, but most show pressures relevant in all health systems and conclusions following the 2020 pandemic.
This is a vast area, so we will only try to cover his conclusions that suggest ideas for equity investors.
Budget pressures
The NHS budget has risen from 2 per cent of GDP when it was founded in 1947 to 7 per cent today. This has been offset by a similar fall in defence spending, but the latter is now at its 2 per cent limit (our NATO commitment).
Further cost pressures in the NHS will therefore need to be budgeted against tax rises or compete with social security (including social care), education or the rising environmental investments.
It is likely that the NHS will have to seek efficiency in core areas and reduce the scope of their offer outside the core areas of public health in order to be sustainable in future.
Health economics
Total NHS expenditure has trebled in real terms since 1979, adjusted for population growth and demographics.
So, this rise in costs is not all about the ageing population. The major part is increased in scope of services, ie conditions now treated that were not treated previously, and improved treatments that are more expensive.
Seventy-five per cent of the NHS budget is spent on hospitals, 15 per cent on drugs and 10 per cent on mental health.
Drug costs are the easiest target for a healthcare system and these pressures have been negative for pharmaceutical companies in recent years. Fewer new drugs have received patents and more generic drugs welcomed. Also, the system may be reluctant to approve funding for novel treatments for rare diseases.
Reducing the more material costs of hospitals and their staff relies on reducing the time patients spend in hospital. To keep the public from ill-health there will be more innoculations, diagnostics, scans and blood tests. When patients are unwell there will be more home monitoring and less time on wards.
The world leader in medical scanners is Siemens Healthineers, patient monitoring is Philips and testing equipment is Thermo Fisher. I have personal investments in the last two of these stocks.
