Private companies had been expecting a £700m boost in annual spending from the government in the second wave of big central contracts. Instead, it appears the schemes going ahead will be worth less than half that, and may be as little as £200m.
But the pain for these companies doesn’t stop there.
With the first wave of treatment centres, private sector companies were guaranteed the value of their contracts, irrespective of the costs or volumes involved. But the second wave has involved a decoupling of that guarantee and the contract terms indicate that the Department of Health is increasingly aware of the costs of providing these services. Its new contracts are based not only on the level but also the volume of service provided by private operators.
Although first wave contracts are still in place, private healthcare providers who have contracts with the government are painfully aware that costs will go up, despite the politically charged environment.
But it is not all doom and gloom. Numis Securities estimates that spending in the sector over the long term will continue to rise. It forecasts that healthcare spending around the world will triple by 2020 as growth rates exceed those of the past.
Cost effective analysis is the basis upon which the National Health Service assesses contract valuations according to the report by Lord Darzi into healthcare. Companies that can increase hospital efficiency and improve service should benefit from ongoing healthcare reform.
Diagnostics companies definitely fit this bill and will benefit from the drive for efficiency, and the push to get patients through the healthcare system quicker. Two companies we like are Axis Shield and Trinity Biotech. Another company that produces innovative products that enable patients to achieve a quick recovery time is orthopaedics specialist Smith & Nephew.
