Healthcare underperformed S&P 500 in 2021 for third year straight

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Healthcare underperformed the S&P 500 Index in 2021 for the third year in a row, and the industry’s share of the S&P 500 was at its lowest level since 2013, according to an analysis from SVB Leerink.

Poor performances in the biotech and digital health sectors dragged down the rest of the industry, the report found. Those losses were partially offset by strong gains across healthcare providers, insurers and life science tools and diagnostics. Overall, SVB Leerink found healthcare companies gained 22% in 2021 through Dec. 17, compared with 24% across the S&P 500.

Within healthcare, life sciences tools and services saw the highest gains in 2021, at 35.5%, which was on par with the sector’s 2020 performance. Second was healthcare providers and services, which gained 30.7%, more than double its 2020 performance.

Biotech and technology both underperformed the market in 2021, the report said.

“Health tech had its Icarus moment and came back down to earth in 2021, with a 30% pullback since February,” SVB noted in the report. An SVB analyst was not available to comment further on the report Monday.

SVB predicts 2022 will bring renewed challenges. Significant headwinds in the coming year include rate increases, high inflation and slow earnings growth, especially across large-cap biopharma companies. COVID-19 will continue to drive up the cost of labor for healthcare providers, although SVB noted the preliminary injunction in November that halted President Joe Biden’s federal vaccine mandate has calmed anxiety in the sector. For-profit hospital chains HCA Healthcare and Tenet Healthcare followed that ruling with their own pauses on company-wide requirements in states without mandates.

Still, SVB said its analysts believe healthcare providers are pricing in 4% to 6% clinical wage increases for their 2022 budgets, higher than the usual 2% to 3% increases. COVID-19 could also contribute to even more delayed care next year, although SVB noted surgical activity is picking back up.

An emerging theme will be bifurcation within the tech-enabled provider sector. SVB thinks “major tectonic shifts” will drive risk to insurers and create opportunity for so-called payviders. The report noted that every 1% in Medicare Advantage spending represents between $2 billion and $3 billion in potential revenue for full-risk medical groups.

“We see opportunities to invest into the dislocation and see winners emerging after significant underperformance,” the report said.

From a stock picking perspective, SVB said it thinks the “enablers” of healthcare will perform better than the “disruptors.” It singled out physician enablement companies Agilon Health and Privia Health as examples of companies it predicts will perform well in 2022. These tech-driven models don’t involve employing physicians, but rather partnering with practices to save money, drive more revenue and share in the profits.

SVB also wrote that it thinks HCA Healthcare, a Nashville, Tennessee-based hospital chain, will outperform its peers in 2022. That’s not surprising, as HCA has remained extremely profitable throughout the pandemic.