Public Strain, Private Gain in Improving Canadian Health Care

Overview:

• The Canadian health care system is under significant pressure, highlighted by major family doctor shortages and long, growing wait times for key medical procedures.
• Governments face fiscal challenges trying to improve the health care system amidst many pressing needs. We think the private sector will play an increased role in health care delivery.
• Increased technology adoption should help drive major improvements in system efficiency, productivity and better patient outcomes.
• "Buy Canadian" initiatives should boost Canadian vendors.

The TD Cowen Insight

The performance of the Canadian health care system has been on a decline, raising the public's frustration level with it. With federal and provincial governments facing fiscal challenges, and health care being a top priority of governments and the public, we think there will be increased opportunities for the private sector to help drive significant improvements in health care delivery.

Increased Opportunities for the Private Sector

The Canadian health care system is under significant pressure, as the pandemic exposed key deficiencies that has seen Canada fall toward the bottom end of the rankings among its peers. Many Canadians remain frustrated, particularly given the significant family doctor shortage (approximately 6.5 million people do not have a family doctor) and large increases in wait times, with Canada ranked last in timeliness.

Governments are facing greater fiscal challenges, with increasing budget deficits and capital spending driving debt levels to new highs. The trade war could make things worse.

Why should investors care?

We think the private sector will play a significantly increased role in health care delivery as governments balance fiscal challenges with the need to improve the health care system. For example, Ontario's Your Health Act that passed in 2023 will allow more private clinics to offer certain publicly funded procedures to help reduce wait lists. Other provinces, including Quebec, B.C. and Alberta have much longer wait times and may follow Ontario's lead. Recent surveys suggest greater public support for increased private sector involvement in health care.

Governments have significantly increased health care spending in recent years, leading to favourable reimbursement trends in primary care, which we expect to continue as family doctors' pay is still well below doctors in other specializations, and increased funding in many areas including long-term care, dental (CDCP) and pharmacare.

Tech should play a major role in driving increased system efficiency, productivity, and better patient outcomes, with Canadian vendors set to benefit from increasing "Buy Canada" initiatives and mandates.

Although there is currently a limited number of publicly-traded health care companies of meaningful size in Canada, as the sector only accounts for ~0.25% of S&P/TSX (vs. ~5%-10% for most major indices), we think there are many compelling and fast-growing small caps trading at attractive valuations that are benefiting or poised to benefit from these trends. There are also many sizable private companies that have been growing rapidly.

Insights From the U.S.

The Canadian health care sector is not one that is widely covered, and we believe that we bring a unique perspective by bringing together the knowledge of the broader TD Cowen team. In particular, our report leverages the extensive knowledge and expertise of our Canadian and U.S. research teams, with 10 of our senior analysts detailing the current state of the Canadian health care landscape, doing a deep dive into major challenges and opportunities facing governments across the country, and discussing key industry trends in both Canada and the U.S.

As we see the private sector playing a more outsized role in the future of Canada's health care system, we highlight some of the relevant trends and experiences observed in the U.S. where private payors and other stakeholders have long played a role in the health care system.

We have also included key insights from our network of industry experts and professionals to help identify key themes and trends that are likely to play out in the Canadian health care system over the coming years.

Financial and Industry Model Implications

Total health care spending in Canada is projected to have hit CA$372 billion in 2024, or about CA$9,054 per Canadian, according to the Canadian Institute for Health Information (CIHI), and grow at an average annual rate of ~5.2% over the next decade, at a faster pace than projected revenue, according to the Canadian Medical Association (CMA; 2022).

We believe spending on top government health care priorities, including expanding primary care coverage to all Canadians, reducing wait times, and increasing technology adoption across the health care sector, could help these markets grow at a faster pace, benefiting several of our top stock picks through increased total addressable market and potential upside to our revenue and margin forecasts.

What to Watch

• Provincial and Territorial government announcements and request for proposals (RFPs) related to the expanded role of the private sector in delivering health care services (e.g., MRI and CT scans, cataract surgeries, hip and knee replacement surgeries, broader responsibilities for pharmacists and nurse practitioners). Given the fiscal challenges facing provinces and territories and the significant increases in wait times for key medical procedures, we think there will be more of these announcements in the years ahead.
• Provincial and Territorial government announcements and RFPs mandating the selection of Canadian vendors or having selection criteria that favours Canadian vendors.
• Announcements on increased health care funding from the federal and provincial and territorial governments to address major health care issues (e.g., family doctor shortages).
• Government mandates requiring the adoption of certain technologies to help improve the efficiency and quality of health care delivery.