Health care vendors that provide equipment and services could be a key avenue for reducing the health care sector's greenhouse gas emissions and cutting costs amid increasing pressure from governments.

Why it matters:  In the U.S., health care organizations have been asked to commit to reducing their emissions at least 50% by 2030, and reach net zero by 2050, as part of a voluntary pledge. In Europe, large contracts and tenders for equipment and services already incorporate carbon-emission reduction targets. Spending on health care in developed markets is also on the rise, reaching 9.6% of GDP in 2021 versus 8.8% in 2019, according to Organization for Economic Cooperation and Development (OECD) estimates.

What we think and why:  Pressure on health care budgets and requirements to reduce the sector's greenhouse gas emissions will only increase in the long term. Therefore, the ability to innovate and invest in research and development to deliver on these decarbonization targets will increasingly become a differentiating factor in the business performance of rated health-care sector vendors.

Why Decarbonization Matters In Health Care

A large amount of time, money, and materials spent on health care can be classified as system waste, or expenditure without a useful outcome. This is according to the Journal of the American Medical Association (JAMA), which estimates that close to 30% of health care spending in the U.S. is wasted each year. The U.N. Environment Program defines health care waste as all waste generated by health care facilities, medical laboratories, biomedical research, and various other sources. Moreover, a 2017 report from the OECD suggests that up to 20% of health care spending could be put to "better use" in its 38 member countries.

Health care spending is rising throughout developed economies.   In our view, the objectives of managing costs and greenhouse gas emissions in health care are often aligned with improving operating efficiency. Across OECD members, average health spending increased to 9.7% of GDP in 2020 from about 8.7% in 2015 (see chart 1). The U.S. spends more on health care as a share of the economy than any other country. In 2020, health spending accounted for about 19% of U.S. GDP, nearly twice as much as the average OECD country, despite mixed evidence of better outcomes. By contrast, health expenditure in Germany amounted to 12.8% of GDP, the highest share of all 27 EU member states. The EU average for health expenditure was 9.9% of GDP and OECD estimates point to average health expenditure growth of 5% in 2020.

With such sector growth prospects, under a business-as-usual scenario, greenhouse gas emissions related to sector activity would likely continue to increase.   We therefore believe finding solutions to decrease emissions in absolute terms, while responding to increasing demand for health care services, is becoming more essential for players in the sector, in particular if governments aim to reach a path to a low-carbon economy.

Chart 1

On average, health care accounts for about 4% of global greenhouse gas emissions.   This is according to a 2019 study (Pichler et al); emissions include carbon dioxide, methane, and ozone. Together, the U.S., EU, and China contribute more than 50% of the health care industry's global greenhouse gas emissions (source: ARUP, 2019). The observed, widespread, and substantial damage attributed to climate change include to human health, such as infectious diseases, malnutrition, or mental health. Effective adaptation options exist to help protect human health, including strengthening public health programs related to climate-sensitive diseases, or increasing health systems resilience (International Panel for Climate Change [IPCC], Summary for Policymakers, 2023). We believe the health care industry will be required to strengthen its ability to cut its share of greenhouse gases contributing to climate change.

Chart 2

The Health Care Industry's Main Vendors

The 15 companies featured in this report are leaders in their specific categories, with dominant market shares, and cater to an international market. We have selected certain multinational companies that operate in the pharmaceutical space (Johnson & Johnson, GlaxoSmithKline PLC, Novartis AG, and Merck & Co. Inc., among others) and medical equipment (Coloplast A/S, Boston Scientific Corp., Zimmer Biomet Holdings Inc., and WS Audiology), as well as a few representative health care service companies (DaVita Inc. and Colisee Group SAS). Furthermore, we have included three case studies of companies we rate (Alcon Inc., Fresenius Medical Care AG & Co. KGaA, and Mehiläinen Yhtyma Oy) with specific examples of how they reduce time and material spent while improving patient outcomes.

We note that private health care service providers tend to operate nationally to cater for a specific reimbursement regime. Their size is often limited by their overhead costs, which represent a nonreimbursable burden.

In our definition of the global pharmaceutical sector, we include companies that develop, manufacture, or market branded pharmaceuticals or generic drugs as well as contract drug manufacturers.

Health care services entities, rated under our corporate criteria, derive most of their revenue from for-profit services to patients.  Such entities provide these services to hospitals; ambulatory surgery centers; facilities such as skilled nursing, outpatient, substance abuse rehabilitation, and other behavioral health care; home health care services; urgent care clinics; and hospice services. They also operate dialysis, dental, laboratory, and diagnostic services including imaging, radiation oncology, ambulance, and other medical transport services, among other human health care and veterinarian services.

Health care equipment providers derive most of their revenue from developing, manufacturing, and marketing medical, surgical, and dental devices and instruments.  These include consumable items, implantable devices, conventional supplies (such as, gowns, gloves, bandages, and syringes), and capital equipment used by health care providers. Such companies may also be contract manufacturers of health care equipment; and could be life science players that develop, manufacture, and market laboratory equipment, instruments, reagents, and diagnostic tests.

Vendors Are Progressing With Carbon Emission Reduction Targets

In Europe, for example, with its centralized health care systems, large contracts and tenders for equipment and services already incorporate carbon emission reduction targets. This is to align health care provision throughout the supply chain with political and regulatory objectives linked to climate change.

We observe that large pharmaceutical and medical equipment companies have ambitious greenhouse gas emission reduction goals for themselves, and their supply chains, in response to policies and pressures from different stakeholders. This implies that contract development and manufacturing organizations, which provide services such as drug development; and equipment or consumables suppliers also need to meet scope 1 and 2 emission reduction targets. We anticipate that requirements for the global health care sector to reduce its environmental footprint, notably related to waste and carbon emissions, will continue to increase.

More stringent sustainability requirements would benefit companies at the forefront of developing technology and new operating models or applying them in their operations. For example, these companies' strategies already include measures to reduce system waste, along with the associated monetary costs and emissions (see charts 3 and 4).

Chart 3

Chart 4

Authorities Are Responding To Climate Change's Impact On Health

Adverse effects on health from human-caused climate change are on the rise (IPCC, 2023). It's therefore no surprise that policymakers are pushing all stakeholders, including the health care industry, to cut their contribution to climate change. For instance, according to the Lancet Countdown on health and climate change report published in 2021, children younger than one were affected by 626 million more person-days of heatwave exposure in 2020 than the average in 1986–2005; for adults older than 65 years, the exposure increase was 3.1 billion person-days. The report also cites warmer climate conditions as a reason for higher transmissibility of air-, food-, and vector-borne pathogens. Climate change has the potential to influence primary medical care outcomes, as well as society's ability to care for an aging population; and the authorities are therefore increasingly taking action.

For example, the U.S. Department of Health and Human Services (HHS) created a new Office of Climate Change and Health Equity by executive order in January 2021.   The office's mission is to protect the U.S. population, especially vulnerable groups, from the health threats posed by climate change. This includes working with organizations that contribute to health care's carbon footprint--health care providers, payers, pharmaceutical suppliers, device makers, group-purchasing organizations, and others--to "publicly and energetically" reduce it.

In April 2022, the HHS partnered with the White House to issue a call to action on climate change through a new initiative aimed at reducing emissions across the health care sector.  This came in the form of a voluntary pledge, where health care organizations were asked to commit to reducing their emissions by at least 50% by 2030 and to net zero by 2050, and publicly report on their progress. This includes completing an inventory of scope 3 emissions and developing climate resilience plans for their facilities and communities. The pledge also asks organizations to designate an executive lead for this work. Historically, self-regulation initiatives in most countries have been precursors to more formal regulation, which lends weight to this requirement.

In Europe, the EU4Health program established in 2021 emphasizes the importance of tackling climate change for the sector.  This is in line with the EU's commitments to implement the Paris Agreement. The program should help mainstream climate action in the EU's policies and contribute to the achievement of an overall target that at least 30% of the total EU budget goes to the fight against climate change. The program aims to support activities that would respect the EU's climate and environmental standards and priorities and the "do no significant harm" principle of the European Green Deal.

How Vendors Can Help Cut System Waste And Emissions

Although health care systems differ between countries, health care's rising costs and environmental footprint seem to be common characteristics. We believe many vendors in the system can offer value-added solutions to reduce both.

In our view, suppliers of advanced medical technology have the capabilities to help reduce waste and greenhouse gas emissions in the health care industry. These primarily relate to research and development and access to renewable energy:

• Innovative technologies pave the way for decarbonization in many ways, from helping to reduce courses of treatment and hospital stays, to improving the productivity of health care facilities.
• High-value-adding processes tend to reside in locations with well-developed infrastructure and access to renewable energy for primary usage. It could take time for agricultural inputs and some bulk pharmaceuticals (in bulk form for further processing or dispensing) to meet renewable energy targets, but these inputs do not affect all companies in the sector equally.

Vendor Innovation Can Address Three Key Areas Of Health Care

We think failure of care coordination, failure of care delivery, and overtreatment (or low value care) are the three most addressable items via innovation in health care. This is according to a 2019 review published by JAMA that showed up to 30% of time and materials used in delivering health care in the U.S. can be considered wasted because they do not result in a clinical outcome.

The JAMA study expressed its findings only as the monetary value of system waste, putting these three items as responsible for 27%-37% of the overall value, with the rest attributable to administrative complexity, pricing failure, and fraud (see chart 5).

Chart 5

Based on our analysis, we have identified health care areas offering long-term growth prospects.   We conclude that a combination of factors can reduce the time and materials spent on these health care functions, while improving patient outcomes. We consider the most relevant health care areas to be:

• Pre-treatment: Such as through digitalized records, organization of patient flows, home care, and remote diagnosis.
• In-facility care: On-site precision diagnostics and monitoring; more accurate, shorter courses of treatment; a decrease in the number and length of hospital stays, and a modular and increased life span of equipment.
• Offsite care: Home care, self-administered treatment options.

Using case studies from Mehiläinen Yhtyma Oy, Alcon Inc., and Fresenius Medical Care Ag & Co. KGaA, we illustrate how medical technology companies are already making an impact in these areas.

Pre-treatment: Improving wait times and access to health care

In the U.K., for instance, 41% of the population sometimes, rarely, or never get an answer from a health care specialist over a four-week period, according to the 2023 World Population Review. If we look at specific procedures in Europe, the U.K., Germany, and Norway are among the countries where patients face long wait times (for some, the average can exceed 100 days) for cataract surgery or hip and knee replacement. Yet these countries also spend among the highest in the region on health care as a proportion of GDP, at about 12.0%, 11.3%, and 12.8% respectively.

In-facility care: More efficient procedures

Inefficiencies in the health care system relate to numerous failures that result in longer or recurring hospital stays or treatments. Increasing health care spending does not always translate into more efficient systems. Our case study of Alcon provides an example of how health care equipment providers can help reduce the amount of wasted time and resources in this area. The company aims to be carbon neutral by 2030. By 2021, it had also reduced scope 1 and 2 emissions by about 5% and 12%, respectively, compared with the amounts generated in 2019, despite overall revenue growth of 10% over the same period. This was notably thanks to an absolute reduction of energy usage despite higher production and use of renewable energy sources.

Offsite care: Reducing clinic visits

In 2018, the U.S. government's national Renal Data System estimated that nearly 15% of the adult population was suffering from chronic kidney disease, fueled by increasing rates of diabetes and hypertension. According to the government's data, more than 800,000 people were estimated to have progressed to kidney failure (end-stage renal disease), and this number is forecast to climb to about 1.3 million by 2030. Without a transplant, such patients require dialysis to clear their blood of waste and excess fluid, which involves spending three-to-five hours hooked up to a machine, three times a week.

Efforts To Reduce Waste And Carbon Emissions Also Stem From Vendors' Procurement Policies

Similar to many other industries selling to the general public, scope 3 accounts for more than 80% of greenhouse gas emissions for companies operating in the health care products and services sectors. We therefore see efforts to reduce such indirect emissions emerging as a competitive differentiator.

We note health care vendors' efforts to show that their products facilitate carbon reduction at the point of medical care delivery and in patients' homes.  In turn, they can ensure their growth strategies continue to fall in line with the environmental targets of governments and society. Large, top-tier vendors, for example, are already imposing carbon-reduction requirements on their suppliers. We believe this practice will rise in prominence and can give some companies a competitive edge.

Cutting down consumable volumes and idle time for equipment represents an opportunity to reduce emissions associated with the manufacturing and application of such products.  Moreover, through innovation, increasing equipment life spans and capacity for upgrades can help reduce the carbon costs of raw materials, as well as the cost of hospital refurbishment. These developments signal improved economics and carbon profiles for diagnostic services, favoring vendors that can help deliver the benefits. Vendors' profitability profiles benefit more from services, technological solutions, and consumables than from hardware sales.

Looking Ahead

S&P Global Ratings believes the ability to create innovative technology, processes, and business models that help lower emissions, while increasing productivity and the quality of patient care, will continue to drive the growth prospects and quality of earnings of health care equipment and services providers. Reducing the number of delayed, canceled, or failed medical procedures (wasted time) associated with diagnostic or therapeutic equipment provides an opportunity to decrease the associated greenhouse gas emissions throughout the health care value chain.

We expect increasing scrutiny of greenhouse gas emission reductions and wider cost pressures to speed up the transformation, which could favor technology leaders in the pharma and medical equipment sectors. Advanced companies that have already formulated a strategy to achieve sector sustainability targets and reduce health care costs, for patients and health care providers alike, are likely to benefit from such a development. In contrast, companies without the capacity or willingness to quickly respond to the shifting health care equipment and supply landscape may face the risk of weakening competitiveness and pricing power.

Although we do not see broad and imminent consequences from a credit perspective at this stage, we see leading sector players focusing their development efforts toward more stringent environmental and health care system cost-efficiency targets. In doing so, they would be aiming to stay competitive and protect their profitability in an increasingly demanding environment.

Related Research

• Carbon Capture, Removal, And Credits Pose Challenges For Companies, June 8, 2023
• Why Climate Risks Are Changing So Few Corporate Ratings, April 12, 2023
• Industry Top Trends 2023: Healthcare, Jan. 23, 2023
• Is Climate Change Another Obstacle To Economic Development?, Jan. 16, 2023
• Climate Change Will Heighten Output Volatility, Jan. 5, 2023
• Carbon Pricing, In Various Forms, Is Likely To Spread In The Move To Net Zero, Aug. 9, 2022

Editors

Robert Anderson

Bernadette Stroeder

Digital Designer

Joe Carrick-varty