Economic impulses impacting the health care and life sciences sectors

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Marko Jevtic

27 Jun 2023

US macroeconomic backdrop

The US economy has started the year on a soft note. Reassuringly, high-frequency data doesn’t point to a retrenchment in private sector activity but, instead, confirms that a generalized slowdown is underway. Still, with activity approaching stall speed, the economy will grow increasingly susceptible to headwinds, including the banking sector stress and the debt ceiling debacle. The combination of elevated prices, higher interest rates and stringent credit conditions are dampening private sector spending power. And while generally healthy consumer and corporate balance sheets have provided some cushion until now, we should not overlook the risk of nonlinear spending and investment decisions that could precipitate the slowdown.

Considerations for health care providers

Providers continue to face margin pressure as a result of slower consumer spending, increasing labor and supply costs and reimbursements that have not caught up. This is especially acute for labor-intensive provider businesses.

Overall health care employment has surpassed pre-COVID-19 levels. However, structural personnel shortages remain a long-run risk for health systems.

Making productivity-enhancing capital investments will be critical to alleviate cost pressures amid a high-interest rate environment.

Considerations for payers

Payers will face increasing pressure from provider networks to increase reimbursement. However, there will be a lag in timing due to contract lifecycles.

As households deplete excess savings and household finances deteriorate, payers may see an increase in urgent or emergency care needs.

Considerations for private equity (PE) sponsors

PE health care activity is down as a result of higher interest rates, increased labor and input costs impacting attractiveness of some target profiles, and a mismatch in valuation perceptions.

As certain provider assets are hit harder by macroeconomic forces, PE will shift investments to more insulated assets like health care IT and other services (less reliance on patient financing, lower labor costs, etc.).

Considerations in the life sciences sector

Historically, R&D activity in the biopharma and life sciences space has largely been acyclical relative to broader economic currents, suggesting relative resilience in the face of slower private sector activity.

Lingering elevated inflation is driving up labor, raw material and transportation costs for drug and medical device manufacturers. However, strict regulations are preventing biopharma and MedTech from passing on the increased costs to customers, thereby exerting pressure on margins.

Forecasted labor shortages include surgeons and other surgical personnel, highlighting the need for procedure-reliant MedTechs to focus on productivity-enhancing technologies and refine their product and pricing strategies.

Dan Moody, Jean Keleher, Ian Donahue and Shashank Rao of Ernst & Young LLP contributed to this article.

The views expressed by the authors are their own and not necessarily those of Ernst & Young LLP or other members of the global EY organization.

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