The Australian healthcare sector looks set for a major shakeup as higher costs could force hospitals to merge. It’s a trend that has already crippled a struggling US healthcare system.
But despite this, the healthcare sector, which represents companies involved in developing pharmaceuticals, manufacturing medical devices or providing medical care and health insurance, continues to perform well.
In the US, by the end of 2019, health spending comprised nearly 18% of the US gross domestic product (GDP) and is projected to exceed US$6 trillion annually by 2028.
The numbers are certainly attractive, but does (or will) a shake-up of hospital systems eventually have a negative impact?
Hospital mergers – a growing trend
More than 20 regional Victorian health services are expected to face budget cuts of up to 30% in the coming financial year.
A member of a regional Victorian hospital board disclosed that 25 health services would receive reduced grants and would need to use reserves until 2025.
The cuts were revealed during a meeting between hospital CFOs and the health department and are anticipated to significantly impact small regional hospitals and cast doubt on the health minister's assurance that no hospitals will close under the new health services plan.
Victorian Health Minister Mary-Anne Thomas told ABC Central Victoria recently that the government would not close any hospitals as part of a shake-up of healthcare in Victoria.
"There will be no hospital closures under my watch," Thomas said.
However, mergers are not out of the question.
The Victorian Healthcare Association expressed concerns about the severe financial implications for small rural hospitals.
"Health services have already been asked to contain costs and find savings across non-clinical staff and services," Victorian Healthcare Association CEO Leigh Clarke said.
"Given we are seeing funds pulled out of services, the question now becomes how do you do health service reform well and how do you do it without compromising on the delivery of high-quality care."
Clarke highlighted that health services were struggling with rising costs that outstripped government funding and emphasised the challenge of implementing health service reform without compromising care quality.
Shadow Health Minister Georgie Crozier criticised the lack of community consultation, predicting service and job losses.
"It is incredibly disappointing that the government has not been up-front with the community, hasn't communicated their plans, and as a result, loss of services will occur and job losses will happen and importantly a local voice will be lost," Crozier said.
This isn’t just a Victoria, or Australia-wide issue. The US is already seeing the impact that hospital closures and mergers can have on the healthcare system.
Community impact of mergers
A new study from the National Bureau of Economic Research on hospital mergers between 2002 and 2020 examined the impact of more than 1,000 mergers in the US on care quality and prices.
Researchers investigated the ancillary effects on communities, analysing data from around 300 mergers between 2010 and 2015. They compared hospital prices post-merger to employment and tax data from local non-healthcare companies.
The study found that hospital mergers led to increased inpatient and outpatient prices within two years, with 40% of hospitals raising prices by more than 5%.
These price increases were linked to job cuts in healthcare and non-healthcare sectors, with more than 200 jobs lost per community, likely due to higher healthcare premium costs for employers. Additionally, federal income tax revenue decreased, and unemployment insurance payments rose by 2.5% in affected communities.
The research also identified a correlation between price increases and higher rates of suicides and overdoses. A 1% price increase was associated with a 2.7% rise in deaths from suicide and drug overdose. Specifically, approximately 1 in 140 individuals who lost their jobs due to higher healthcare costs died from suicide or overdose.
The American Hospital Association (AHA) disagreed with the findings.
The AHA criticised the study in a June 24 statement, arguing it was flawed for excluding healthcare employers from the analysis and for attempting to link mergers to suicide rates.
“The authors’ approach to their economic arguments is, in a word, odd,” wrote Molly Smith, AHA’s group vice president for public policy. “[...] During the study period, employment increased – both overall and even more so in the health sector... Worst of all, however, is their effort to link suicide rates with hospital pricing. Quite frankly, it is unconscionable given the lengths hospitals go to every day to save people who have attempted or are at risk of taking their own life.”
Healthcare outperforms
Despite the negative impact of mergers in the US, other factors are pushing the sector higher on the stock market. Over the past year, the S&P 500 Health Care Sector Index is 11.97% higher.
In Australia, the one-year return of the S&P/ASX 200 Health Care index is 4.86%.
Notably, Australia’s healthcare sector has outperformed all others over the past five years, driven by strong demand from investors seeking companies with reliable earnings growth.
This has led to historically high valuations, with some healthcare companies trading at a 50% premium to their global peers and a 100% premium to the broader Australian market.
Determining the best long-term investments in such a specialist industry with rich valuations requires careful analysis.
Impacting the sector are factors such as demographic trends, technological advancements and government policies.
Australia has small and large companies doing great work in several fields including diabetes, cancer treatment, bacterial skin infections, gene assessments and more.
Let’s hope the good work done by these companies isn’t affected by a potentially smaller hospital system, noting that many of these companies are aligned with hospitals for clinical trials.