The healthcare sector in the United States is a large driver of economic output. The World Health Organization notes that the United States spends more on healthcare as part of its GDP (17%) than any country in the world. Most facilities are owned by private sector businesses while other community hospitals are either non-profit, for-profit, or government owned. Government funded programs include Medicare, Medicaid, Children’s Health Insurance Program, and the Veterans Health Administration. Physicians for National Health Program note that 64% of health spending is paid by the government and most public sector employees are able to get health insurance from the government.
According to The National Institutes of Health, the United States had near-highest levels of obesity, heart and lung disease, and cancer screenings. In 2012, 25% of senior citizens had to declare bankruptcy due to medical expenses or were forced to mortgage their residences. The U.S. healthcare system was crumbling and the Patient Protection and Affordable Care Act (ACA) became the pioneer for major changes in health insurance. Under it, hospitals and primary physicians had to change procedures financially, technologically, and clinically to produce better health outcomes, lower costs, and improve accessibility.
The healthcare industry has a direct effect on the quality of life of people. Healthcare is defined as the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans (Technofunc). Doctors, dentists, nurses, pharmacists, and other care providers provide services to treat patients through methods such as preventive or rehabilitative care. The healthcare industry is formed of numerous subsectors including pharmaceutical services, diagnostics, medical technologies, and managed healthcare. Given that baby boomers are approaching the age for more healthcare services and social security, this demographic has propelled the industry. Payor services and pharmaceutical services have generated the most return throughout 2016 and in 1Q 2017. Though payers often question the growth of the industry, payor services have emphasized the need to accommodate for technological capabilities and to diversify into new groups and populations. The pharmaceutical industry is valued highly given the performance of buyouts. Private owners have acquired numerous big pharma companies because of novel, innovative products that are being created rapidly. The Wall Street Journal notes some examples, including GlaxoSmithKline acquiring Stifle Laboratories and Grifols acquiring Talecris Biotherapeutics.
The medical devices subsector has faced numerous challenges because of inconsistency with FDA regulations and varying payor systems (Liang). As a result, venture investors have lowered their investment and deployment within this sector. The key issue is that most businesses in this subsector started off as one-product companies and raised large amounts of capital without considering clinical utility and economic benefits. Today, there is a movement towards utilizing molecular diagnostics and personalized medicine making a diverse portfolio of products critical. To accommodate for this development, the medical devices market will take time to grow so that business models can progress.
The biotechnology subsector garners its value by developing, manufacturing, and marketing patented medicines that generate billions of dollars in revenue. Biotechnology firms are far more young, innovative, and rapidly grow compared to pharmaceutical companies (WHO). Biotech companies’ biological processes that utilize microbes and cell lines to produce treatments. The biopharmaceutical company, Amgen, researches insulin injections and complex treatments such as gene therapy to replace defective genes. Over the last year, the biotech industry has seen considerable growth compared to the S&P 500. Over the past five years, the performance of the NASDAQ Biotechnology Industry has been impressive as it has outperformed the S&P 500 by 60.20% (Yahoo Finance).
Though President Trump’s campaign centered around repealing the ACA, he has taken a far softer tone in office. Democrats stand firm on their united decision to not repeal the healthcare plan, and Republicans in Congress are divided on the issue given the drastic implications a repeal could have. A potential change the Trump administration could make to the ACA is to limit cost-sharing subsidies under the ACA (Kurtzleben). Republicans identify this as one of the main flaws under the Obama administration in regards to the ACA. The administration was spending money that Congress had not fully allocated to reimburse health insurers, providing insurance to working-poor individuals. The new bill proposed by Republicans to replace ACA was vetoed as some Republicans felt that new bill still had too much governmental control. The Trump administration is looking into the possibility of allowing states to experiment by applying for waivers. An example of such a waiver is that some states can expand Medicaid given specific work requirements.
Unlike the ACA, MACRA, otherwise known as the Medicare and Access and CHIP Reauthorization Act of 2015, has received bipartisan support among Democrats and Republicans. MACRA is a set of laws that cap Medicaid and Medicare reimbursement at zero unless specific criteria of quality are met (Nephrology). This act is intended to emphasize value-based care and transparency, especially when consolidating with those in private practice who have difficulty with contracting, implementing IT infrastructure, and measuring quality. Though Obama’s administration had a large role in driving the country to undertake MACRA, a repeal of ACA would not be a repeal of MACRA. Under MACRA, alternative payment models can be developed and accountable care organizations can join large organizations and health plans to create more transparency.
Healthcare providers are aware of the difficulties pertaining growth and are lowering unit costs and maintaining margins to keep their business stable. Organic growth is not nearly as common as growth through consolidation and acquisition. Due to tightening reimbursements and an aging baby boomer population, organic growth will be more difficult to attain (George). The report notes that many people are under the impression that we will have lower healthcare costs when people live longer and utilize novel treatments far more. However, 2017 is an indication of how health systems are struggling financially. With aging populations, healthcare providers utilize the acute care model which depends on preventive and rehabilitative actions that are time-sensitive and require frequent intervention. These providers have utilized this model far too much and there needs to be a greater emphasis on having low cost models and a reinvented model (Henry). As a result, many of these organizations will be undergoing acquisitions to better approach their communities appropriately. 2017 will be a year where many health systems will be restructuring and be acquired due to financial challenges. One of the main factors affecting healthcare is government regulation. This has affected the pharmaceutical and biotechnology companies the most given the higher quota of trials and tests required for a drug to be considered for approval for the FDA. The average drug takes approximately 12 years to develop and has an average of a $5 billion investment cost (FDA). Unemployment is also impacting this sector as many Americans, over 50%, get their health insurance from their employer and are unable to have insurance if they are unemployed. As a result, they spend less money on health-related services and products.
Within the healthcare pipeline, disruptors are emerging. Contrary to popular opinion, they are not hospital companies, insurance companies, or pharmaceutical companies that are continually undergoing rapid changes. Disruptors are technology companies that are merging health services companies that do not fit into a traditional category in the healthcare industry, such as urgent care centers (Harrison). Disruptors have begun to develop a critical role in the healthcare ecosystem as they are transforming the way existing healthcare providers conduct business. Many technology and retail companies have expressed an interest in health and have begun to enter this space, which is threatening other traditional health insurance companies.
The subsectors within the healthcare industry are valued by consumers differently. The equipment industry consists of manufacturers of healthcare equipment and medical devices. The Medical Device and Diagnostic Industry creates products including medical instruments, drug delivery systems, diagnostic equipment, and cardiovascular devices. Hospitals and doctors utilize this equipment when treating patients given their wide myriad of conditions. Medtronic, one of the world’s largest medical device companies, specializes in producing devices that are implanted into patients during surgical procedures. However, Medtronic’s valuation is significantly lower than the sector average (Collins). This results in a cheap, affordable stock for investors despite the ratios being in line with the equipment industry average. Given that this is a large subsector, a distribution industry can also be highly valued as it would increase efficiency.
Healthcare facilities are the healthcare providers in the healthcare sector. These are the locations where doctors practice medicine and diagnose and deliver medicines to patients. Companies can provide healthcare and social services through hospitals, doctors’ offices, nursing homes, and outpatient surgery sectors. Harvard Business This industry’s growth is lower that the healthcare sector’s growth, and it can be attributed to the increasing amount of pressure to generate revenue. The top 50 organizations in the industry generated less than 30% of the total revenue. This includes the hospital industry which had a combined revenue of $700 billion a year (Harvard Business Review). With emerging treatment methods and the latest equipment, costs are extremely high to maintain equipment such as CT and MRI machines. The labor cost of doctors, surgeons, nurses, and radiologists are an immense portion of the revenue, up to 40%. Thus, it becomes a large expense for these organizations to undertake. To reduce costs, many competing facilities and health insurance companies attempt to merge to create more cost-effective care without compromising quality.
The Life Sciences Research and Development area is decreasing in valuation in the US, Canada, and Europe. Countries in Asia are outpacing these countries due to the costs of running clinical trials to be far less than in developed countries. In addition, there is a wide availability of naïve patients that are more willing to enroll in clinical trials which allows for a faster rate of approval. Inflation-adjusted biomedical expenditures for research and development have fallen over the past few years while continuously growing in Asia (Chakma).
President Joe Biden seems to have clinched his position as the 46th president of the United States of America. The Democratic party maintained a majority in the House of Representatives, but it seems that they will not win the Senate. A Republican controlled Senate would make it more difficult for Biden to push forward his agenda. Regarding health care policies, we can expect the Biden administration to expand coverage for Americans (Young). The Trump Administration has spent the past 4 years trying to get rid of the ACA (Keith). It is expected that the Biden presidency will push to undo those efforts, expanding the reach and scope of the health care reform (Young).
When the ACA was first enacted under the Obama administration M&A activity in the healthcare space saw a significant increase. Health care practices merged together in an effort to increase leverage in health care contracting as well as control increased costs of having regulated overhead percentages (Singer). “Government spending necessary to set up and operate the exchanges vastly exceeded the amount saved by private-sector insurers, leading to an increase in total administrative costs” (Book).
It is possible we see similar activity if the Biden administration is able to push their agenda through congress. That being said, there have been indications from the Biden camp that more pressure could be put on hospitals and pharmaceutical companies looking to merge (Gooch).
The Covid-19 pandemic has been a turbulent time for virtually every industry in the global economy. Hospitals and the healthcare industry as a whole have been in the center of all the action, landing in the top five sectors impacted by the pandemic (Caldwell).
Health care businesses are hurting in many ways, and one of the major areas is sharply declining revenue from elective or non-essential care. Due to the massive volume of Covid-19 patients most, if not all, of these elective procedures and treatments have been postponed (Caldwell). Health care providers in the U.S make a significant amount of their revenue from these expensive procedures, and conservative estimates show that hospitals in the U.S are losing over a billion dollars per day (Farr).
Executives of these health care companies seem to have recognized these problems early in the pandemic, already having strategies in place by early March (Caldwell). According to an Ernst & Young report earlier this year, 75% of health executives were already undertaking some form of a digital transformation program, and half were allocating at least 25% of their capital to digital capabilities (Caldwell). The current Covid-19 landscape has accelerated the use of telehealth. Teladoc Health, the largest telemedicine software provider in the United States, reported 2.8 million virtual visits in Q2 2020. That more than triples the visits in Q2 of 2019 (Commins). It is evident that telehealth is being implemented at an unprecedented scale, and this is reflected in M&A activity in the digital health sector. According to Business Wire, Global VC funding for companies in the Digital Health sector brought in $10.3 billion this year. This is 43% higher than 2019.
Telemedicine is a bright spot within healthcare that is helping to offset the sharp declines in elective procedure revenue. The question looking forward is once a successful Corona vaccine is made available to the public, will Telemedicine implementation and use subside or will it be the new norm.
Abbreviated New Drug Application (ANDA): Generics, U.S. Food and Drug Administration Home Page (2017), https://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/ApprovalApplications/AbbreviatedNewDrugApplicationANDAGenerics/ (last visited May 6, 2017).
Anthony Ledesma et al., Health Care Financing Worldwide: An Overview, Health Affairs (2007), http://content.healthaffairs.org/content/26/4/920.full (last visited May 7, 2017).
Danielle Kurtzleben, 6 Changes The Trump Administration Can Still Make To Obamacare, NPR (2017), http://www.npr.org/sections/health-shots/2017/03/29/521713002/6-changes-the-trump-administration-can-still-make-to-obamacare (last visited May 7, 2017).
David U. Himmelstein & Steffie Woolhandler, Government funds nearly two-thirds of U.S. healthcare costs, American Journal of Public Health (2015), http://www.pnhp.org/news/2016/january/government-funds-nearly-two-thirds-of-us-health-care-costs-american-journal-of-pub (last visited May 7, 2017).
Healthcare Industry Domain, TechnoFunc (2013), http://www.technofunc.com/index.php/domain-knowledge/healthcare-industry (last visited May 7, 2017).
James VonOsdol & Mitch Morris, 2017 Outlook on U.S. Healthcare Providers, Deloitte (2016), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/life-sciences-health-care/us-health-care-providers-podcast.pdf (last visited May 7, 2017).
John Torinus, Why U.S. spends 17% of GDP on health care, Disqus (2011), http://johntorinus.com/general-blog/health-care-economics/why-u-s-spends-17-of-gdp-on-health-care/ (last visited May 7, 2017).
Julie Henry, 4 major challenges facing acute care hospitals-and what to expect next, Healthcare Dive (2015), http://www.healthcaredive.com/news/4-major-challenges-facing-acute-care-hospitalsand-what-to-expect-next/376705/ (last visited May 7, 2017).
Justin Chakma et al., Asia’s Ascent — Global Trends in Biomedical R&D Expenditures, The New England Journal of Medicine (2014), http://rwjcsp.unc.edu/downloads/news/2014/20140102_NEJM.pdf (last visited May 6, 2017).
Kate Harrison, 10 Healthcare Technology Disruptors To Watch, Forbes (2015), https://www.forbes.com/sites/kateharrison/2015/08/13/10-healthcare-technology-disruptors-to-watch-all-led-by-women/ – 22362d7048ef (last visited May 7, 2017).
MDDI Staff, Top 40 Medical Device Companies, Medical Device and Diagnostic Industry (2014), http://www.mddionline.com/article/top-40-medical-device-companies (last visited May 7, 2017).
Michael Liang, Baird Capital’s Michael Liang Examines Opportunities by Subsector, Baird (2017), http://www.rwbaird.com/news/Seeing-Healthcares-Vital-Signs.aspx (last visited May 7, 2017).
Michael E. Porter, Thomas H. Lee & Robert S. Kaplan and Michael E. Porter, The Strategy That Will Fix Health Care, Harvard Business Review (2015), https://hbr.org/2013/10/the-strategy-that-will-fix-health-care (last visited May 7, 2017).
Sarah Collins, What Do Analysts Recommend for Medtronic ahead of 4Q16 Results? Market Realist (2016), http://marketrealist.com/2016/05/analysts-recommend-ahead-medtronics-4q16-results/ (last visited May 6, 2017).
Raymond Gilmartin, The Pharmaceutical Innovation Platform, International Federation of Pharmaceutical Manufacturer Association (IFPMA) (2004), http://www.who.int/intellectualproperty/Pharmaceutical_innovation.pdf (last visited May 6, 2017).
Rebecca George, 2017 Global Health Care Sector Outlook, Deloitte (2017), https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Life-Sciences-Health-Care/gx-lshc-2017-health-care-outlook.pdf (last visited May 6, 2017).
SPDR S&P Biotech ETF (XBI), Yahoo! Finance, https://finance.yahoo.com/quote/XBI/ (last visited May 7, 2017).
Karen Young et al., President-elect Joe Biden: Building on a legacy, PwC Health Research Institute (2020), https://www.pwc.com/us/Biden2020healthagenda (last visited December, 7 2020).
Katie Keith, What Biden’s Election Would Mean For The Affordable Care Act, Health Affairs (2020), https://www.healthaffairs.org/do/10.1377/hblog20201105.33952/full/ (last visited December 7, 2020).
Kelly Gooch, PwC: What healthcare executives can expect under Biden presidency, Becker’s Hospital Review (2020), https://www.beckershospitalreview.com/hospital-management-administration/pwc-what-healthcare-executives-can-expect-under-biden-presidency.html (last visited December 7, 2020).
Rebecca Pifer, Election 2020: Trump and Biden’s starkly diverging views on healthcare, Health Care Dive (2020), https://www.healthcaredive.com/news/presidential-election-2020-trump-biden-different-healthcare-policies-ACA-coronavirus/585184/ (last visited December 7, 2020).
Robert Book, The ACA Exchanges Increase Administration Costs of Health Insurance, American Action Forum (2016), https://www.americanactionforum.org/research/aca-exchanges-increased-administrative-costs-health-insurance/ (last visited December 8, 2020).
Jeffrey Singer, Obamacare’s Catch 22, U.S. News (2016), https://www.usnews.com/opinion/articles/2016-08-11/obamacare-gave-rise-to-the-health-care-mergers-its-advocates-oppose (last visited December 8, 2020).
Christina Farr, U.S hospitals are losing millions of dollars per day in the midst of the Covid-19 pandemic – and recovery may take years, CNBC (2020), https://www.cnbc.com/2020/05/05/hospitals-losing-millions-of-dollars-per-day-in-covid-19-pandemic.html (last visited December 8, 2020).
John Commins, Covid-19: Telehealth Provides ‘Stop Gap’ For Providers, Health Leaders (2020), https://www.healthleadersmedia.com/telehealth/covid-19-telehealth-provides-stop-gap-providers (last visited December 8, 2020).
Larry Gage, What Covid-19 Means for the Future of Health Mergers, Alston and Bird (2020), https://www.alston.com/en/insights/publications/2020/07/what-covid19-means-for-health-mergers/ (last visited December 8, 2020).
Curran Aiyer and Jonas Kurihara contributed to this report.