This article appears in our Q4 2018 Quarterly Report.1
In the developed world, the critical issue is keeping old bodies healthy cheaply. Life expectancy is already long. Instead, as those bodies age, they pick up chronic ailments that make lives a misery but aren’t fatal.
Maintaining quality of life, cheaply
These chronic conditions include things like arthritis, obesity, diabetes, asthma and depression. They can remain in a stable but debilitating condition for years. The treatments are often well established but can’t free someone of the disease. Instead they help to manage it. This can make them very expensive. So the challenge switches from “how can we extend lives?” to “how can we maintain the quality of lives, and cheaply?”
This is a huge challenge. But it is also a huge opportunity for human ingenuity, and that is where equity investing thrives. Our strategy has invested in the theme of cutting costs in healthcare for over a decade. It has typically been one of our larger themes, and a steady contributor.
Many of our investee companies in this area provide global solutions. Cerner’s core business is electronic health records. These support the digital solutions which help to cut costs in any healthcare system. Fresenius has global businesses in diabetes care, and generic drugs. Generic drugs are a success in managing healthcare costs everywhere in the world. Steris provides outsourcing functions for hospitals and health centres around the world. Their expertise saves those institutions significant amounts of money.
Other portfolio holdings are more specific to individual markets. While the challenges are common, the regulatory and political responses can be quite different. Some companies provide functions that couldn’t, or wouldn’t need to, exist in other markets.
US healthcare, overpriced and underwhelming
Nowhere is this more apparent than in the US healthcare market. It is by far the largest healthcare market in revenue terms in any country. It is probably the largest single market for any good or service anywhere in the world. By most measures, it is also notably not good at providing healthcare. In 2015 the USA spent more than twice the OECD average on healthcare. At the same time it had life expectancy two years below the OECD average.2
At its heart, the problem is ideological. The USA is the proud champion of free markets globally. It instinctively rejects market regulation. This is a tricky stance in healthcare. The transactions are by their nature asymmetric: if you’re ill, and the doctor says he has a cure, how likely are you to shop around?
There is no other large market where the providers of healthcare are as unregulated in what they charge. They have entrenched their position through decades of lobbying. And they have created byzantine structures to allow them to set the prices they want.
Some of our investments are in companies which help to unpick those defences. Premier and CVShave different ways of combining buyer power to drive better deals. CVS is currently going even further, seeking a merger with an insurance company called Aetna. This would control so much of the value chain that the cost savings could be significant.
Another long-term WHEB investment, HMS Holdings, sells software that prevents fraud and billing errors in the US system. It reckons that the total amount lost each year could be up to a trillion dollars.
Although these business models are a product of the US healthcare ecosystem, it is not certain that they will never have global applications. Some other markets do look a bit like the USA. And health networks do watch what works in other places and try to replicate the best bits.
‘Socialist’ healthcare
It is politically more challenging to do this in the USA than elsewhere. For parts of the US Republican party, the “socialist” healthcare systems of Europe are held in contempt. They trumpet the power of free markets, and the individual’s right to choose their own healthcare. Even if this means entering a market that is rigged against them.
The irony is that there are parts of the US healthcare system which now look more “socialist” than anywhere else in the world.
We had a striking example of this in the fourth quarter. Our investee company, Tivity Health, bought another company called Nutrisystems. Tivity Health encourages elderly people to go to the gym, on behalf of the companies that insure them. Nutrisystems provides specifically-designed ready meals to aid weight-loss.
The logic of the combination is that the health networks will now do more than just monitor what exercise you do. They will also literally deliver the food you eat in your home. Not a nanny state exactly – more of a nanny market.
Putting aside the irony, this will almost certainly work to reduce obesity and improve lives. It is another example of great ingenuity and opportunity. And that’s what makes investing to improve the efficiency of healthcare so rewarding.