Addressing the need for sustainability in healthcare

THE principal sustainability challenge facing the healthcare sector today is cost. As medical costs continue to grow, a basic social need becomes increasingly inaccessible to much of the population.

Healthcare budget constraints are forcing treatment access restrictions, denying some patients therapies required to treat their diseases, with high out-of-pocket payments driving large medical debts. UK patients, for instance, do not have access to a third of new treatments as the treatments are deemed not cost-effective by the responsible government body. Patient outcomes are negatively impacted, as is the industry and investors.

As we emerge from the pandemic, there will be immense pressure on governments to rein in their spending, of which healthcare plays a large role - one fifth of government spend in G-7 countries. In the US, which accounts for nearly half of global healthcare expenditure, total spend is projected to increase by over 50 per cent in the next eight years alone. The same plight of healthcare spending outpacing gross domestic product (GDP) growth can be seen across various markets.

In Singapore, we know that the cost of healthcare has increased by more than 50 per cent from 2000 to 2020 and the average healthcare inflation rate was 2.3 per cent, which is higher than the average headline inflation over the same period. Health Minister Gan Kim Yong stated in Parliament earlier this year that the current rate of national healthcare spending could not be sustained.

All these factors point to the conclusion that the current model is not sustainable on a global level.

This collision of ballooning healthcare costs and strained budgets leaves hard choices for policymakers. Governments must decide what therapies they can afford to subsidise, while insurers, as the healthcare payers, are left to determine treatment access restrictions in order to protect their own profitability.

These decisions leave patients unable to benefit from the latest scientific breakthroughs due to barred treatments and high costs.

In developing countries, where governments are less able to subsidise healthcare, even more of the cost burden falls on individuals. Lower incomes mean patients frequently go without treatment as they do not have the means to pay for it. In 2018, average health spending in low-income countries per person was US$40, while in high-income countries, it was US$3,313 - more than 80 times larger.

With change comes opportunity

However, different approaches are emerging through new treatment options, technology and innovative business models. These can ultimately make healthcare more affordable and help consumers, governments and society alike. The innovation and scale required are also an opportunity for companies and investors.

For investors, the scope of change needed to stop the cycle of spiralling costs and deliver sustainable healthcare systems creates both investment risks and opportunities. Those who are attuned to these stand to benefit and can also contribute to the necessary change.

The old pharmaceutical model of simply charging higher prices for therapies based on added clinical benefits must inevitably be rendered obsolete. After all, a product with high profit margins and no supporting sales offers little value.

Companies continually delivering treatments that add costs to the system will be hit hardest by tighter budgets, seeing reimbursements denied or access substantially limited, ultimately hurting sales and profitability. While this is a known risk today, many pharmaceutical companies continue to operate research and development (R&D) models that only incorporate late-stage accessibility considerations. Likewise, industry analysts largely simplify the risk of market access restrictions in their valuation models.

The resulting profitability projections are unlikely to be achieved, due to a much smaller patient pool than originally envisioned. This is not only hurting patients which are denied access but it will also impact long-term company performance and returns for investors. Incorporating these considerations into investment decision-making process provides a more robust understanding of future profitability and the sustainability of business models. Better insights pave the way for superior returns.

Holistic approach

With a clear investment opportunity and need for risk mitigation, investors stand to benefit from a proactive approach. While one might assume standard environmental, social, governance (ESG) scoring would differentiate between healthcare companies contributing more or less to the unsustainable cost strain, this is not the case. Some companies with "good" ESG scores are the worst offenders in raising drug prices unjustifiably.

Industry-specific analysis and understanding are needed to truly ascertain company impacts on healthcare sustainability. These impacts extend beyond the ability of therapies to treat illnesses at a lower price tag. Healthcare costs need to be addressed holistically.

With nearly 75 per cent of total healthcare costs spent on patient care, solutions that can reduce time in care are critically important. Those that can deliver this objective stand to be afforded more pricing autonomy and avoid access restrictions, expanding their market potential. This can be achieved not only through new treatments that better manage or even cure chronic ailments, but also via new technologies in diagnostic tools and medical devices, for instance, that are increasing opportunities to deliver care more effectively and efficiently.

A holistic approach to therapies, supported by new tools and technology, can help transition healthcare systems to a more sustainable footing. Investors have a key role to play. In addition to the opportunity to improve returns, they are in a position to reward companies driving more sustainable business models and behaviour, and challenge those which aren't.

As we have seen with the issue of climate change over recent years, sufficient attention can shift the way of thinking.

• The writers are co-heads of sustainable healthcare equity, HSBC Asset Management.