Supply Chain, Labor Inflation Poses Risk to Healthcare Profit Margins

According to a Fitch Ratings report, supply chain challenges and rises in labor are leading to higher costs and potential revenue loss, threatening profit margins for healthcare and pharmaceutical companies.

Healthcare providers across the board are challenged by a nationwide healthcare labor shortage, resulting in raises of labor wages and increased use of costly temporary help. 

Healthcare and pharmaceutical companies in the US have managed to maintain “solid credit metrics” throughout the COVID-19 pandemic despite these ongoing challenges, Fitch Ratings said. In fact, third quarter results were “in line to slightly better than expected” for most healthcare sub-sectors, the ratings orgnazations found.

However, healthcare facilities such as senior housing, skilled nursing, and some inpatient behavioral health operators reported that they could not meet demands due to scarcity of workers, causing lower new admission rates.

The report states a temporary drop in profitability is unlikely to be a downgrade trigger as healthcare's consistent demand will always defend profitability.

Healthcare providers can bring back some of the lost profit margins due to rate increases, but those efforts will likely lag, given the cadence of contract renewals. 

Healthcare facilities' cost mitigation endeavors will aim to save cost in other ways. For example, the report suggests that healthcare providers use their staff more efficiently and improve recruitment efforts. 

Labor challenges present more risk to the recovery of specific subsectors such as skilled nursing and senior housing than hospitals. 

"Lower operating cashflows for these non-hospital settings, where staffing is insufficient to meet demand, is slowing the rate at which they recover from significant pandemic-induced declines. Their landlords, healthcare REITs, need operating fundamentals to continue to improve to ensure continuity in rental payments," Fitch Ratings states. 

Some healthcare providers can expect labor issues to persist as a challenge, but as unemployment benefits expire, there is evidence of more extensive recruitment in late third and fourth quarters of 2021.

Supply chain challenges are another threat to healthcare revenue and profit. The most significant issues are higher transportation costs incurred by distributors and customers. 

"Some issuers are increasingly discussing materials and inputs sourcing challenges with the medical device sub-sector, for example, lobbying for government support to acquire semiconductor and other necessary inputs to their production process," explains the Fitch Rating report.

The supply chain challenges may pose a greater risk to revenue, but issuers expect these problems to subside by mid-2022.