Research | Healthcare

Outlook for Healthcare Services, IT and Devices Remains Strong

Despite macroeconomic challenges, healthcare remains a strong sector for investment. Labor headwinds and inflation may temper growth in the short term, but medium- and long-term outlooks and fundamentals remain intact.

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By Shagun Singh and Sean Dodge
Published August 1, 2022 | 4 min read
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Key Points

  • Demand for healthcare services remains high, and hospitals guiding down on margins are doing so due to elevated labor costs.
  • Healthcare IT firms are negotiating a fast-changing market, especially as virtual care increases its potential for delivery of healthcare going forward.
  • In medical devices, there are challenges related to inflation, supply chain and staffing, but the appetite for growth capital remains strong.

The macroeconomic picture is challenging across sectors and healthcare is no exception. For executives at our Global Healthcare Conference this year, staffing shortages in particular are hiking labor costs, while supply chain issues and inflation worries weigh on business decisions. However, most companies remain cautiously optimistic for the remainder of 2022 and into 2023. Despite the wider economic conditions, the fundamentals underpinning the healthcare sector are strong, demand is ramping back up post-COVID, hospitals are innovating towards alternative care sites and virtual care, and there’s a longer term trend towards expanding healthcare delivery, even into the home.

“We believe medical devices that facilitate such a shift to alternate care sites or to the home, while allowing customers to scale, are poised to win. This includes telehealth, telemedicine, remote surgery, remote patient monitoring, sensing technology, and AI, coupled with data analysis that could drive early diagnosis and treatment of patients.”


Labor is the big uncertainty

Acute care hospital companies have been guiding down on earnings due to labor costs remaining high for longer than anticipated, as ramped-up demand post-pandemic met staffing shortages. For much of the first part of the year, frontline healthcare workers were still going into quarantine during the height of the Omicron strain, but that has abated, ushering in a significantly improved operating backdrop, although wage pressure has not abated nearly as quickly.

Management of labor and other cost pressures is a top priority in the sector, which is driving more outsourcing decisions, to the benefit of some healthcare IT firms. Those that provide services that can alleviate staff shortages, such as automation, are clear beneficiaries. Meanwhile, firms in the sector are also facing their own rising wage pressure as competition remains high for top tech talent.

Hospitals are looking to drive efficiency to offset some cost pressures, and our sense is that the capital placement environment is likely to come under more scrutiny, which may adversely impact medical device firms. Hospitals are worried about both lower procedure volumes as they shift to alternative care settings (even as they are trying to capture it by following the patient’s journey outside the hospital); and margin pressure from higher labor costs, which comprise 60% of the total cost.

“The good news is that ‘capturing procedure volumes’ despite the operating environment is the number one priority for hospitals, which bodes well for continued medical device utilization.”


Virtual and digital health solutions are full of potential

Telehealth is the area with the greatest potential for positive impact in the delivery of healthcare. There’s a wide range of use cases, including near-term opportunities in consumer-driven primary care, behavioral health/telepsychiatry and post-acute/home health. Most of the technological barriers have been overcome and it’s really only logistical issues that remain the primary friction.

But this acceleration in the field means that the competitive landscape has grown, and as buyers such as health systems build long-term strategies in virtual care, vendors need to differentiate to stand out. During the pandemic, the rising demand floated all boats, but now that demand is subsiding and healthcare IT firms need to set out their value proposition and play to their competitive advantages.

A mixed appetite for capex

Hospitals are spending both within their walls and gradually expanding to alternative care sites to capture the procedures and care that virtual and digital solutions make possible there. This will require spending on IT, infrastructure and ERP systems, as well as beds, stretchers and instruments. But while hospitals are keen to spend on driving efficiency and transparency, some are hesitant about major projects.

It remains a mixed picture, but generally major projects and high ticket spending capex is under pressure due to longer sales cycles. Small-capex (which tends to be tied to procedures), efficient capex and those early in the adoption cycle are continuing to see strong demand even as there are higher leasing and rentals vs. upfront placements.

“The shift of procedures to alternative care sites is driving hospital capital spending demand. Data suggests that nearly 60% of large joint procedures will be done in ambulatory surgery centers (ASCs) by 2028.”


Medical device companies are passing on prices to hospitals in varying degrees. Some have it built into the contracts, some are exercising their extraordinary circumstances clause, while others are waiting as contracts come up for renewal. Pricing pressure and inflation is driving some of the near-term caution in capital spending, but long-term appetite remains robust and the shift to ASCs and the focus on hospitals to capture patient revenues is a real trend.

Despite the near-term challenges, it’s clear that long-term drivers for the sector remain intact, while new avenues of delivery provide expanded opportunities. Healthcare utilization is poised to grow globally, driven by aging demographics and the continued expansion of the world’s middle class. As medical devices facilitate a shift to ASCs and home care, the healthcare industry will continue to diversify into new innovations such as remote surgery, patient monitoring and AI-enabled data analysis for diagnosis. Cash-generating market leaders that operate with enough scale to manage through any near-term inflationary pressures, and have a clear value proposition, will continue to grow, even against a recessionary backdrop.

This content is based on commentary and analysis from RBC Capital Markets’ Global Healthcare Conference hosted in New York, NY from May 17, 2022 to May 18, 2022. For more information about the conference, please contact your RBC representative.

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