Roger Widdowson: on the role of the private sector in healthcare 

The impact of funding constraints in the public sector health arena is almost certainly going to send ripples through the private sector. With a huge number of private sector providers of care and product manufacturers and producers in the UK and in every other country. And everybody at the moment is suffering cost pressure from their customers, so effectively customers want more for less. In the care provision subsector for example, fee rates have been frozen effectively for probably two years now….

Now costs go up, despite the fact that fees are frozen, so the natural consequence of that is reduced investment in care homes for example, which can have a knock-on effect on occupancy, which means less profit, and a lot of these businesses actually now are in private equity ownership. They were quite highly leveraged at the peak of the M&A market in 2007 or 6, so that’s naturally lead to some stressed situations and actually some business failures, and obviously in the UK we’ve got the very high profile case of Southern Cross at the moment.

I think in the product arena, many product providers have got some opportunity to improve efficiency. It’s a natural course of business for most groups, particularly in manufacturing, when you suffer a bit of financial stress and you look for the cheaper solutions, you off-shore, maybe make some acquisitions to try to access cheaper production capacity overseas. So nowhere is immune from this, this is a phenomenon that’s affecting the whole supply chain into the sector…

I think increased M&A activity is a fairly natural consequence of the pressure being felt in the NHS at the moment. In reality a lot of care provision for elderly people and the most critically ill is delivered in a fairly expensive manner, and one way of them mitigating the margin compression at the moment that they’re suffering from flat fees but increase in costs is actually to scale the businesses and take some cost synergies out.

I think in the provider space we’re likely to see probably some similar results from the price pressures and cost pressures that their customers are feeling. I think the model’s slightly different though, we’re talking about global businesses typically here, and I think they’ve got the opportunity to make acquisitions to access cheaper manufacturing capability, improve their product portfolios, and just, sort of round off strategically what they are doing to make their operations as efficient as possible. That in many cases will result in most acquisitions around the globe actually. It’s a slightly different model to the providers’ side, but I think we will see more activity.