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March 2021 investment update

Our March investment update is now available to download.

The cyber security skills gap

The cyber security skills shortage has been making headlines for years, but the Covid-19 pandemic has made it more critical than ever.

Thematic ideas | Healthcare: Covid-19 and investor owned hospitals

Investment outlooks / Q4 2020

How investor owned hospitals are managing through the Covid-19 crisis

The size of the US healthcare industry has grown in consecutive years, in part due to the aging population, growing chronic illnesses and also through wastage and inefficiencies, and with it has also come soaring healthcare costs. That has led to its critics calling the US system Byzantine, where far more is spent on obtaining mediocre results relative to other developed markets. Pharmaceutical companies, medical equipment manufacturers, pharmacy benefit manager middlemen, the oligopoly of drug distributors, physician and nurse staffing groups and the multitude of healthcare insurance providers all have a part to play in making it work. Here we focus on the area at the front line facing Covid patients, hospital and healthcare facilities, its structure, how they managed through the deadliest pandemic of our generation and why we believe capital markets will continue to support them.

According the to the American Hospital Association, 56% of community hospitals in the US are non-government non-profit, 19% are owned by state and local government and the remaining 25% are for-profit hospitals owned by investors. Two thirds of these hospitals are in urban locations, with populations over 500,000, and are often part of a larger streamlined network of facilities offering a full-suite of services, while the remaining third of hospital in rural locations are typically fitted with 100 or fewer beds and may need to transport patients outside of its network if specialized care is required. Unlike many developed nations, US hospitals are reimbursed through an array of channels, as healthcare coverage is not universally available to all its citizens. The government covers payments for the elderly and those on lower income through its Medicare and Medicaid programs while commercial insurance coverage can be obtained privately and mostly through employer linked programs.

Click chart to expand.

At the height of the pandemic, the US Surgeon General advised the nation’s hospitals to 1) free up capacity, 2) conserve personal protective equipment (PPE) and 3) minimise the risk of virus spread within hospitals. Healthcare facilities moved at what appeared breakneck speed to postpone discretionary medical procedures and reallocate hospital resource to Covid patients. Elective procedures (which account for an estimated 55% of total hospital revenue) by definition are non-urgent procedures and it is not uncommon for these to be postponed by patients. They are also generally not cancelled, which gave hospital operators confidence the procedures would still be completed once normality returned. Operationally, the problem for hospitals was managing patient admissions, sourcing supplies and safeguarding other patients. Financially, cost control, management of working capital and timing of cash flows was also crucial for surviving this black swan event.

It was always highly likely that Federal aid would become available for the front line industries working to mitigate the pandemic spread. Until a Covid vaccine is manufactured and distributed, the ability for the economy to stay open greatly depends on hospitals being able to fully function. When the coronavirus aid relief program (CARES Act) was passed in Congress, it didn’t disappoint. The package included grants to reimburse hospitals for Covid patient care, advance Medicare payments to relieve working capital and cash flow pressures and sequestration relief for Medicare reduction.

We believe the financial health of healthcare facilities will remain a point of focus for the general public, the government and investors because of the pandemic. While we are already paying attention to hospital’s practices, we think it makes sense to seek out investment opportunities: we have identified two in this space: HCA and Tenet Healthcare. Best in class hospital operator HCA, recognised for its track record of flexible capital allocation policies, wasted no time in suspending its share repurchases and deferring planned capital expenditure to protect its credit profile. HCA also leaned on its banks for additional capacity in its credit lines while Tenet successfully tapped the capital markets to bolster its liquidity. We are also impressed by HCA and Tenet’s low operating leverage and their management team’s ability to reduce variable costs to protect profitability margins through the downturn.

We are now six months from the start of the pandemic and five months into a bull market run. The protocol for treating Covid patients has shifted its focus from mortality to morbidity, as community spread has been more concentrated in the country’s younger demographic. While we still don’t have a Covid vaccine, cases of infections have been rising again and the US healthcare system will once again become topical in the US election debates. We believe hospital operators should be recognised for their resilience in managing operational and financial challenges and will emerge from this health crisis as one of the strongest healthcare subsegments under the “new normal”.


Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.

If not otherwise indicated, all graphs are sourced from Dolfin research, October 2020.

For more information please read our disclaimer.

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