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.
What is the healthcare industry and its major subsectors?
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).
Major Trends in the Healthcare Industry for 2017
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.
How do business valuations differ in Healthcare and across its subsectors?
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).
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Curran Aiyer contributed to this report.