In a paper released today – The Social Care Evolution: A Private Sector Investment Opportunity – Julie-Anne Mizzi, Global Head of Social Care at AMP Capital, discusses the changing global landscape for healthcare provision, and how investors have an important role in supporting the development of new healthcare infrastructure.
As the world’s population continues to age, the scale of the changing demographics around it means healthcare models are being forced to adapt. Health expenditure has outpaced GDP growth by 2% in OECD countries for almost 50 years. People are living longer, thanks to improved health technology and successful medical intervention, but in many instances their quality of life has declined. In addition to an increased need for elderly care, there’s a prevalence of diseases associated with ageing and fuelled by affluent lifestyles: cardiovascular disease, diabetes and many cancers; currently, approximately 84% of health resources are spent in OECD countries where only 18% of the global population reside. As developing markets ‘catch up’ with the OECD, their spend on healthcare is expected to jump similarly.
The step-down care solution
The increase in cost and demand is leading the healthcare model to change – and we believe change creates investment opportunities in a rapidly evolving sector. For example, hospitals tend to be the most expensive component of the health care system. It’s therefore prudent for governments and other payors to aim to keep people from entering hospital where possible, and help them to leave quicker when they are admitted. This has led to a trend for non-emergency healthcare services such as primary care, step-down care and rehab, which reduce dependence on hospitals and therefore reduce cost of care. The patient benefits from tailored care, usually delivered closer to their community.
The investment opportunities presented by the step-down care model are varied in different markets. Nordic countries have pioneered the shift towards the integrated care model, which is a holistic path to long-term health centred around the individual. In the UK the predominant primary care model of self-employed GPs has limited opportunities for deployment of private capital, but Ireland’s HSE facilitates investment in the primary care space, recognising the benefits of the multi-disciplinary primary care model and the reduction of strain on acute care hospitals. AMP Capital’s Irish Infrastructure Fund established Valley Healthcare in February 2017, which now owns six primary care centres across Ireland. These centres are located in community hubs across rural Ireland and provide a comprehensive range of non-critical healthcare and related services.
Demographics drive demand for long-term care
The other area of healthcare where we see significant need for private investment is the long-term care space. This sector is subdivided into mental health and social care, and elderly care. The ageing population in developed markets translates very clearly into a high demand for elderly care, while customer demand is driving improved services and high-quality care. Demand has also increased for specialist care as medical intervention has allowed many people with severe disabilities to live longer and fuller lives. Meanwhile there are a significant number of parents who have provided long-term care to adult children who are unable to maintain this role, given their age. There is growing demand for both residential and supported living facilities.
With long-term care, there is a fine balance between affordability for stretched payors and sufficient quality of care: economies of scale and experienced management teams help to achieve both, meaning consolidation in the fragmented market via a high-quality business is a sensible approach. One of themost supportive factors for a long-term care business is owning real estate, which rules out the suitability of many businesses for infrastructure investors. ‘Sale and leaseback’ has been a trend in the sector, leading to many ‘asset-light’ care businesses which are beholden to lease agreements and dependent on their landlords for continuing capital investment. There have been some high-profile collapses of long-term care businesses whose failures in part are due to their significant rental burden in difficult market environments. Not only does owning assets insulate a business’s financial position to a degree, it also offers strategic flexibility. This plays a part in improving the physical standards of care-homes – for example, people have moved from being housed in wards to private rooms with en-suites, which requires adaptation of facilities. As the care offering develops, it’s important that long-term care businesses have the flexibility to adapt their premises to consumer demands.
One of the most important elements of any healthcare business is quality of care, and our UK specialist care portfolio company Regard’s excellent performance was a key factor in our bid for the group. Quality of care forms a natural barrier to entry in this industry. Businesses operating within a community will be judged by their reputation, and a poor reputation takes many years to turn around. Care is a vocation, and staff need to feel valued and know that care, not just profits, are a priority of their employers. Maintaining and motivating the workforce is one of the biggest challenges of a long-term care business.
In the UK we have leveraged our extensive experience of investing in the elderly care space in Australia with our investment in The Regard Group. In this market, the funding model for specialist care, which is local authority funded, has been more consistent than the elderly care space and remained attractive to investors. The elderly care space, which is funded by a mixture of private and public expenditure has, in many cases been very constrained. However, we would consider high quality businesses in the UK elderly care space. The sector in Germany is interesting, as there is strong government funding provided by the mandatory national long-term care insurance scheme which was put in place in 1996. However, many of the larger businesses have followed the ‘sale and leaseback’ model, making them less attractive for infrastructure investors. Like the UK, in Canada elderly care is under-funded by the state system. It has been significantly underinvested by both the government and private sector, leading to acute bed shortages and obsolete facilities, but offers potential for transformational investments from an experienced investor.
‘Infrastructure health’ means investors can provide solutions and cooperate with the public sector to support a stretched system, while capitalising on growth opportunities for high-quality sustainable businesses. With rigorous management and a focus on ESG and quality of care, infrastructure funds have an important role to play in resolving what may be one of the greatest demographic challenges for the developed world in the coming years.
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