Bevan Brittan partners Sarah Skuse, Carlton Sadler and Vincent Buscemi outline the opportunities and challenges that exist when investing in healthcare in the UK.

What makes this sector so attractive to investors?

What’s not to like about healthcare? At the heart of UK healthcare, the ageing population living with multiple co-morbidities and chronic health conditions, underinvestment in the NHS and social care services, and the opportunity to deliver a positive social impact, are driving higher allocations to this sector.

Healthcare is a vibrant, rapidly evolving market at the forefront of technological innovation, offering investment opportunities to those who are seeking asset-backed opportunities and also to those whose investment strategies lean towards technology.

Digital solutions to improve operational efficiency, an appetite to take on development risk (both real estate and technology), the rise of consumerisation in health and social care, and the drive for innovation are major trends in healthcare offering investors a wide range of opportunities for investment.

For those attracted to real estate-backed assets, inflation, economic headwinds and structural changes within traditional property markets have moved investors into alternatives and the sector’s lower cyclicality and defensive characterises are driving higher allocations.

What are the key trends in healthcare?

Technology is being adopted widely and at pace to provide solutions to some of the most intractable challenges in healthcare, whether that be tackling the backlog in elective and non-urgent surgery, integrating the broader health and care ecosystem or improving health outcomes and reducing health inequalities.

Innovative solutions are being applied across the healthcare economy to increase capacity and improve patient flows and experience, via remote care and virtual ward models; streamlining triage and pre-assessment systems by gathering data to better signpost services, profile patient risk and reduce non-attendances; and improve screening and diagnostics with the deployment of artificial intelligence in medical imaging, as well as virtual and augmented reality in fields such as ophthalmology. 

Technology is likely to play an ever more important role in wellness, self-care and preventative medicine, whether that be via wearables and implantables to monitor chronic conditions such as diabetes, cardio health and asthma, or the increased prevalence of IoT devices to support social care, assisted living and integrated retirement communities. Femtech, genomics and stem cell therapies are also likely to drive the revolution in personalised healthcare.

What are the challenges in healthcare now?

Healthcare is a highly regulated environment with high barriers to entry and ongoing compliance and enforcement regimes to meet. There is a range of different regulatory permits required depending upon the type of services provided, including:

Overarching service regulators such as the Care Quality Commission (CQC), for health and adult social care providers, and Ofsted (for children’s services) in England, plus their counterparts in Scotland, Wales and Northern Ireland

Service–specific regulators such as the General Pharmaceutical Council, for community pharmacies and pharmacy professionals, and the Medicines and Healthcare Products Regulatory Agency (MHRA), which licenses the manufacturing and distribution of medicines and medical devices (including AI and software as medical devices).

Furthermore, some of the challenges faced by the healthcare sector include:

The global workforce shortage – particularly in relation to clinical staff and its impact on operators’ ability to provide additional capacity and, at times, to deliver safe and effective care.

Cost Inflation – as with all sectors this brings pressures, particularly for services with exposure to high levels of wage, food and energy costs. There are, however, some advantages here for digital services.

Government funding strategies for social care – with many providers reliant on private payers to cross-subsidise publicly funded service users, the social care funding reforms (although currently delayed until 2025) may present challenges to providers, particularly if the lifetime cost cap and the right to request local authorities to arrange care means more people can access local authority payment rates.

The focus on safety – the trend towards increased regulatory action in response to safety incidents may result not only in increased sanctions in terms of criminal and civil liabilities, but also consequent reputational damage and contractual embargoes imposed by public sector commissioners and insurers.

Different regulatory approaches – taken by the various regulators in the sector, from those that are relatively hands-off (such as the MHRA), to those that are less so.  For instance, the CQC:

Has moved to an increasingly risk-based approach, which means that while the frequency of inspections has reduced, when they do happen they lead to increasingly harsh consequences

Has strengthened its monitoring of services for people with learning disabilities and autism and is increasingly exercising its financial regulatory powers over those social care providers captured by its Market Oversight Regime.

Investors need to ensure they stay ahead of the game and have in place a strategy around corporate structuring generally and more specifically with regards to the regulatory considerations on exits.

What is your outlook for the sector?

Positive and disruptive healthcare technologies are accelerating and bringing with them opportunities; one of the major challenges will be for regulators and legislators to keep pace. AI and machine-learning solutions pose unique challenges because of the potential scale and replicability of harm.

Opportunities abound for investors in the areas of interoperability, data security and integrated care records, as well as in medtech – AI and software as medical devices and tech bio. Funding and investment in solutions that improve patient outcomes and in new devices that employ AI are likely to reap considerable rewards.

We expect the continued and significant reallocation of institutional capital away from core real estate markets into health (and education), with particular opportunity for investing in fixed income assets and for those with appetite for development.