Healthcare margins at risk from labor and supply chain challenges

Margin pressures among U.S. healthcare and pharmaceutical companies are at risk with renewed labor challenges and supply chain issues.

Healthcare companies are facing higher costs and potentially lost revenue as a result of these disruptions, according to a recent report from Fitch Ratings. However, healthcare companies are unlikely to suffer in the markets due to a temporary decline in profitability at the end of 2021.

Healthcare providers have been facing a shortage of workers for several months, which is causing many to raise wages and leverage more temporary health, which can also cost more. At the same time, retaining workers is also more challenging due to the effects of burnout and high rates of turnover. In particular, senior housing, skilled nursing and some in-patient behavioral health operators have reported a shortage of workers. Without sufficient staff, providers can’t admit as many patients and operate at full capacity.

Providers have seen improvements in margins since the early days of the pandemic when routine care and elective procedures were temporarily halted. The staffing challenges will likely impact this recovery.

“Labor challenges are a margin headwind for hospitals but they may pose a more material risk to the recovery in certain subsectors, such as skilled nursing and senior housing,” Fitch noted

Supply chain challenges are also top of mind for the healthcare sector, with higher transportation costs incurred by distributors and customers being most prevalent. Healthcare companies are leveraging all resources to fight the supply chain battle, including working with the medical device sector to overcome sourcing challenges and lobbying for government support to acquire semiconductor and other necessary inputs to their production process.

“The risk that supply chain challenges become a greater headwind to revenue is rising but many issuers expect these issues to begin to subside in mid-2022,” Fitch wrote.

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