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The Keckley Report

Investors and Healthcare: A Look at 2015 Expectations

By January 5, 2015March 1st, 2023No Comments

The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week’s article.

The U.S. healthcare system is labor intense and highly regulated at the state and federal levels. It is also capital intense: It requires funding from investors, lenders, and the government to innovate, operate and compete.

The U.S. healthcare system is the single largest contributor to the U.S. gross domestic product (GDP) with total spending in 2014 at $3.06 trillion, or almost 18% of our economy. In 1980, total spending was $.25 trillion, or 9.2% of our GDP; by 2022, spending will top $5 trillion, or 19.9% of the GDP.

It can be argued that our healthcare system is recession proof. For four decades, total health spending has exceeded the overall growth of the economy (GDP) by an average 1.1%-3.0% every year. From 2000-2013,  the annual performance of the industry, as measured by Standard and Poor’s Healthcare Index, outperformed the Standard and Poor’s 500 by almost 3 to 1 on a Compound Annual Growth Rate (CAGR) basis. It’s a system that does well financially when the rest of the economy isn’t, and it does better than other industries when our economy is doing well.

It consumes capital for facilities, technologies, and expanding workforce, so its dependence on capital is constant. Historically, the relationship between healthcare investors and the industry has been mutually beneficial. There are three basic reasons to believe it will continue:

  1. Demand is strong and growing. 11,000 Baby Boomers are aging into Medicare daily. Insurance coverage via Medicaid and subsidized coverage through health marketplaces are increasing access for millions previously uninsured. The U.S. represents half of the global market for prescription drugs and there’s no sign of it slowing: Spending on generics and specialty drugs is increasing at double digit pace going into 2015. Utilization—volume, visits, tests, procedures, admissions, residents, etc.—is increasing. In 2015, there’s no evidence it will subside. Investors and lenders know that healthcare is a growing market: While overall utilization is certain to increase, investors and lenders understand per capita spending must be constrained. They are keen to invest in solutions that accommodate high utilization at a lower cost and with demonstrably better value.
  2. The U.S. healthcare system is profitable. State-of-the-art technologies, modern facilities, new drugs and treatments and a well-paid workforce mean our fixed and direct healthcare costs are high. These costs are marked up and passed through in premiums, charges and out-of-pocket costs ultimately hitting households. From 2008 to 2013, while average household income fell 5.7% and the consumer price index increased 7%, out-of-pocket costs for hospital services increased 34%, prescription drug costs increased 17% and dental services increased 15%. During this same period, in most sectors of healthcare, profits improved even in sectors where revenues slowed. And in sectors where the outlook for investors is negative, like not-for-profit hospitals, investors reward operators and solutions that improve efficiency. In 2015, investors will continue to bet on managers and solutions that improve operating margins and accelerate growth. Investors are interested in companies that find new paths to profitability—new business models, new ways of managing core processes, new methods of managing risk, new ways to manage demand, and new ways to improve outcomes cost effectively.
  3. U.S. consumers resist major changes to our healthcare system. The recent Ebola virus in West Africa struck fear in the U.S., but public health officials quelled the public’s concern of an outbreak at home by reinforcing our global preeminence in detecting and fighting pandemics. Americans believe our system is the world’s best. Polling about the Affordable Care Act is telling: Americans don’t want dramatic changes to our healthcare system. While they acknowledge its notable flaws—lack of transparency, fragmentation, cost, access, etc.—they think our system is state-of-the-art. The result is that changes to the system are incremental. Investors in healthcare know changes will come slowly because our regulatory climate is complicated and aversion to change by many incumbents (like physicians and others) is palpable. For investors and lenders, resistance to change is both good and bad: It lends to predictability but it tempers short-term expectations.

So as we start 2015, healthcare will continue to be an important focus for institutional and individual investors and lenders. They’ll fund organizations and entrepreneurs that have a keen sense of opportunities in financing, operating and delivering healthcare services better. They’ll invest in managers that know how to navigate the regulatory dynamics in their sectors while building enterprise value. And they will seek out the winners in each sector as many falter.

Next week, more than 30,000 will attend JPMorgan’s annual health investor meeting in San Francisco. It’s arguably the Bonnaroo (or Woodstock in my generation) for healthcare investors. They’ll hear presentations from start-ups to established players across the entire spectrum – payer, provider, life sciences, HIT, retail health and others. They’ll exchange cards and arrange follow-up discussions. It’s the mating game of dollars and healthcare that’s fundamental in our industry.

I have started two companies backed by outside investors and have served on boards of publicly-traded healthcare companies. Investors in our system serve an important purpose: They fuel innovation, fund consolidation and streamlining, and reward effective management. They can be demanding and their laser focus on financial performance frustrating at times. But, that’s necessary and appropriate. They play a key role in our system if we wish to continue as a privately-run marketplace for products and services.

Investors in healthcare bet on investments that reward doing well by doing good. That’s why they will play a vital role in 2015 as the transformation of the U.S. system from volume to value unfolds.


Sources: National Health Expenditures 2013-2023,” Centers for Medicare and Medicaid Services; “National Health Expenditures, Historical,” Centers for Medicare and Medicaid Services; National Institute of Healthcare Management; Kaiser Family Foundation Policy Research; Standard and Poor’s S&P 500 HC Index and S&P 500 Index; Express Scripts; Jeff Kluger, “A Preemie Revolution,” Time, June 2, 2014; Kaiser Family Foundation and Health and Educational Trust, 2013; “2015 Outlook U.S. Not-for-Profit Healthcare,” Moody’s Investor Services, December 2, 2014; “2014 Outlook U.S. Not-for-Profit Healthcare,” Moody’s Investor Services, November 25, 2013; “2015 Sector Outlook Negative for Nonprofit Hospitals; Ratings Outlook Remains Stable,” FitchRatings, December 9, 2014; “2014 Outlook Nonprofit Hospitals and Healthcare Negative; Profitability Challenged,” FitchRatings, December 11, 2013; “Not-For-Profit Healthcare Outlook 2015,” S&P Ratings Services, December 18, 2014; “Outlook Negative for Not-for-Profit Hospitals,” HFMA, January 2, 2014

The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.

© 2014 Navigant Consulting, Inc.