Fundamental Thinking featured image

Big Health vs. Big Tech: A Fight over the Future of US Health Care

The $4 trillion US health care system represents both the best and worst of health care globally, responsible for the vast majority of leading-edge treatments and providers as well as high rates of uninsured, a staggering $11,000 in annual expenditures per person, and among the worst levels of infant mortality and life expectancy in the developed world. The system’s structure—a hodgepodge of private employer-subsidized, public, and quasi-public insurers, for-profit and not-for-profit networks and unaffiliated providers—famously incentivizes some providers to ring up higher volumes of procedures while inflating fees to cover the huge overhead required to administer the complexity.

Source: Our World In Data

Igor Tishin, PhD, an Information Technology analyst at Harding Loevner, refers to US health care as a “rust heap.” Tishin frequently shares his view that some of the companies under his coverage are in a better position than traditional health care firms to deliver the sort of disruptive change the US health care system so obviously needs. This view puts him at odds with Patrick Todd, CFA, one of our Health Care analysts, who covers a number of high-quality durable-growth insurance, pharma, and diagnostics companies. In responding to Tishin, Todd acknowledges US health care’s need for reform yet is adamant that Tishin’s description of Big Tech’s bonafides is wildly overstated. Tishin paints this as the kind of apologist thinking that has tolerated US$60,000 C-sections.

Hostilities between our brown-bag combatants flared following the January announcement that Haven, a consortium formed to much fanfare several years ago between Amazon, JP Morgan, and Berkshire Hathaway—the most high-profile effort to date by powerful outsiders to develop a better model for delivering higher-quality, more cost-effective care—was disbanding. The following exchange was excerpted from Tishin’s and Todd’s recent internal research postings. We should note that the pair, avid skiers and hikers who regularly compare notes on their families’ outdoor adventures, are perfectly friendly. Often as not on topics not related to US health care, they find their views aligned.

Patrick Todd: Many in the media have concluded that the entrenched powers of private insurers, doctors, and major hospital systems caused Haven’s demise. It makes a good headline, but it’s inaccurate. I think Haven’s demise has more to do with Amazon’s ambition. Amazon has been developing similar offerings to those of Haven. For example, Amazon Care, the primary care and prescription plan for Amazon employees that is now being expanded to the public, is very similar to the former Haven platform for Amazon, JPM, and Berkshire employees. Amazon also just opened its own online pharmacy, building on the acquisition of Pill Pack several years ago. None of these are revolutionary ideas, but I just think Amazon realized they don’t need JPM and Berkshire in the mix.

While Haven has been in the news, I think the more important recent development is the more-or-less unnoticed expansion of the Affordable Care Act (i.e., Obamacare) tucked into the last COVID-19 relief bill. I see this as a sign the Biden administration will continue to expand government’s role in health care, including Medicaid but more importantly Medicare Advantage (MA), which very much benefits UnitedHealth, the market share leader. What’s also interesting is how UnitedHealth is moving more towards an integrated model like hospital network Kaiser Permanente. Through their Optum unit, UnitedHealth is buying up facilities and investing heavily in tech to create a more effective and efficient delivery model that lowers the cost of care. So, you’re seeing best-of-breed providers and insurers becoming more similar.

And so any attempts to fix the system are fruitless because the current setup is a decent compromise and the incumbents are generally doing a fine job. What a pathetic conclusion!

Igor Tishin: And so any attempts to fix the system are fruitless because the current setup is a decent compromise and the incumbents are generally doing a fine job. What a pathetic conclusion! The only thing that Haven’s failure proves to me is that they were not audacious enough and it will take a true outsider to bring simplicity, competition, and accountability to the health care industry’s parasitic relationship with vested interests in Washington and other parts of the economy. It’s going to take an entity with a “call option” mindset (i.e., little to lose, much to gain) and credible capabilities to expose the rot and hopefully fix the problem before the political will is hijacked. Fortunately, there is such a company with the ambition and a good deal of the ingredients in place to offer a data-driven health care system. I gather you’ve heard of Apple?

PT: I think we can both agree that there are inefficiencies in health care delivery, but “parasitic” is a bit extreme even for you, don’t you think? The US does spend more and fares worse on adult and infant mortality metrics. It also has higher rates of poverty and teen pregnancy, much higher levels of obesity, and higher car crash and gun deaths. A lot of the inefficiencies also have to do with how fragmented our payment systems are among Medicare, Medicaid, a fully nationalized program like the Veterans Administration, commercial insurance, insurance purchased on exchanges, etc. How is Apple supposed to fix the payments structure? Unless you’re suggesting we move to a cash system of some kind where the customer pays directly, which not a single other developed country has ever seriously considered doing, and in which case you’ve become even more disconnected from reality than when I last checked.

IT: Sunlight is a great disinfectant! Yes, fragmentation is a huge problem, and of course some policy changes would be required, but let’s look at some of the other parts of the system that are broken: the party receiving the service is not responsible for the payment; the party providing the service decides on the volume of consumption; the party that pays does not really care about the outcome as much as about the cost; and the outcomes and costs are extremely difficult to objectively compare across entities.

Introducing a comprehensive and coherent data platform to streamline treatment administration, track costs and outcomes, and fight balkanization can be a powerful step to expose each of the flaws in the current arrangement, clarify the vision for alternatives, and thus help unite political will for the policy change. Apple with its world-class personal data management platform, credibility with over one billion customers, and data privacy leadership (obviously critical in making such a system work) has a unique set of assets to tackle the issues.

PT: That is a list of blanket statements. Certain areas within health care do encourage volume, that’s true, but others do not. Medicare and some insurance pay hospitals a fixed fee for inpatient care regardless of how much it costs. If a hospital can deliver care more efficiently, they make more money. Conversely, if they do a poor job with the patient and costs are higher than expected, the hospital loses money. I also disagree that insurance companies aren’t incentivized to keep you healthy and keep their own costs low. As for the difficulty in tracking outcomes and costs, this is getting better, in my opinion—without the help of Apple. Doctors’ offices were still using fax machines not too long ago. But with the implementation of the 2009 HITECH Act, we now have electronic health records, and health systems and health care information technology companies are starting to make sense of all this data to improve outcomes and costs. You are starting to see some artificial intelligence applications as well.

IT: Every reform you mention would be enormously enhanced if deployed on a more robust and thorough data platform. The problem is hospitals and insurance companies have neither the expertise nor incentives to scale this up.

Take some of the cultural issues you mentioned contributing to the overall poor health of the US population. The US system is more “sick care” than health care; many more resources are devoted to fixing than preventing. Well, the only way to change that is to introduce personal accountability by rewarding the desired behavior. The Apple Watch can collect some basic but relevant personal data over long periods of time in a very efficient and economical manner. If the insurers really cared about the well-being of their customers, they would all cover putting a basic version of Apple Watch on people’s wrists and use this data to give them a break on their insurance premiums. Once the platform is out there and open to third-party developers, there would be no shortage of creative models for how to foster healthier living through such incentives. A portion of the insurers’ savings could also flow back to Apple and the app developers.

The biometrics on the Apple Watch are still pretty rudimentary, but the company has all sorts of other patents pending for blood pressure sensors, sweat analysis of blood sugar and blood alcohol content, and different types of motion detectors. The other major tech players clearly have a role to play as well. Apple stands out for its expertise in hardware solutions and the strength of its operating system, but Google probably has the strongest AI and data analytics capabilities to process all this data and help patients and their providers make smarter decisions. Amazon is still king of e-commerce and logistics, which will be key in closing the loop between those smart decisions and implementation in the real world through things like low-cost drug refills, mail-in tests and telemedicine, and more transparent pricing between vendors.

Not everyone is a biohacker trying to optimize their output. As a health care IT executive once told me, “Silicon Valley tends to overestimate the health curiosity of the individual.”

PT: It seems obvious that if the people in the US ate less and worked out more our health outcomes would be better. But not everyone is a biohacker trying to optimize their output. As a health care IT executive once told me, “Silicon Valley tends to overestimate the health curiosity of the individual.”

We are already seeing a big move towards value-based reimbursement models that encourage savings, and the health care system is investing heavily in developing the technology and contracts to make it work. In my view, a company like UnitedHealth is just way better positioned to drive these changes. In addition to their traditional insurance operation and growing portfolio of primary and urgent care facilities, they own OptumInsight, which is a leading data and analytics platform used by 9 out of 10 US hospitals. It spends almost US$4 billion a year on tech and innovation and has products designed to tackle waste in the system. In places where OptumHealth, UnitedHealth’s soup-to-nuts data-driven insurance and provider offering, has been in the market for a while, their cost of care is already 30% lower than comparable fee-for-service Medicare.

When you reference the transition away from sick care, what you are really getting at is population health management. Again, this is already happening, and the change is coming from inside the system. Optum, as an example, helps with biometric solutions and on-site services and wellness coaching. Just giving people data on an Apple Watch doesn’t really do anything. Measuring your steps and heart rate only helps at the margin. You need outreach to make it work.

IT: Who is better at outreach than Amazon? Amazon Prime has nearly 150 million US subscribers. Every time they check out of their cart is another opportunity to serve them a reminder about better choices they could be making about their health.

PT: I’m not saying the tech companies aren’t part of the solution, but I see them more as data suppliers and an alternative distribution source than the ones really instigating change. I thought it was interesting that Amazon’s own chief medical officer, TV medical pundit Vin Gupta, recently just about acknowledged as much. Speaking of which, the most direct way to lower costs and improve outcomes is detecting disease early. I’m personally very excited about all the innovation in “liquid biopsies” that scan the body for circulating cancer cells and other very early signs of disease. GRAIL, a company now in the process of being reacquired by Illumina, has shown some impressive data and I expect their Galleri test to become a routine part of the annual bloodwork ordered by physicians. The more and better tests of this kind that are administered, the better the insights will be that come from all your Big Tech big data analysis.

IT: Yes, and I would expect GRAIL to eventually develop a mail-in version of the test and sell it on Amazon.

Patrick, if I didn’t know better, I would say we are approaching a consensus over what needs to be done, and at this point mainly haggling over who does it and in what order. I think change will accelerate when the Big Tech companies can make wearables and other related technologies widely available enough to unlock the data flow in a more powerful way, creating new incentives and behaviors from many of the same actors—hospitals, pharma, and insurers. It’s like the same cast of characters playing a historical drama instead of a horror movie. The result will be savings to patients and their employers, savings to insurers and providers, and a cut of those savings flowing back to the tech companies. As you know, for years “health care TBD” has been part of my long-term valuation model for Apple. I should thank you for helping me understand now how that will play out.

PT: You’re welcome, I guess. Except I’m skeptical that Big Tech really wants to disrupt health care. They want the consumer data, and they want access to that gigantic profit pool. Saying they are “bending the cost curve” is just part of their sales pitch. Let’s be honest, what does real disruption in US health care look like? It’s called single-payer health insurance, aka Medicare For All, but I’m not holding my breath waiting for that to happen.

IT: And if you do (hold your breath) be sure to download Apple Watch’s new Blood Oxygen app first. It’s really cool!

OOOM featured image

Getting Real About Inflation … and Gold

As favorable vaccine news piles up, the winds of reflation are stirring. Early signs of an equity market style rotation in favor of cyclical value stocks, a weakening of the safe-haven US dollar, and a run-up in market-derived measures of inflation expectations all point to a resurgence of animal spirits despite a gloomy outlook for the economy. With our monetary maestros promising easy money into the distant future come what may, it is time to spare a thought for what the possible return of higher inflation might do to your portfolio. Inflation is viewed as the bane of fixed income investments, and rightfully so. But inflation can also wreak havoc on stocks. In theory, inflation should have no impact on equities provided companies are able to pass along higher input costs to their customers. In practice, equity valuations are highly sensitive to changes in the price level, tending to plummet when prices jump. No wonder investors are already casting about for inflation protection.

For a vociferous minority, the only bankable hedge for inflation is gold. For them, every spike in the gold price is reproof of government perfidy and foreshadows an inflationary surge. The evidence linking gold’s price and inflation, however, is curiously threadbare. If gold is an unreliable hedge against rising prices, what role, if any, should it play in a portfolio?

OOOM featured image

When Will Life Return to Normal?

If we are honest with ourselves, it is a question that almost all of us, as investors and people, are probably wondering right about now. In this case, it took the form of the following note from a young colleague based in locked-down London directed to me and my fellow Health Care analyst as part of the daily, ongoing Research Information Group email discussion that has always comprised much of our meeting, brainstorm, and “water-cooler” time here at Harding Loevner.

Considering the challenges of [vaccine] manufacturing and distribution, what would be your best estimate for when developed economies will return to “normality”? I.e., people in developed economies are allowed—and feel safe enough—to live a life more like 2019. E.g., Sept 2021? Jan 2022? Never?

OOOM featured image

Meme Stocks and Market Structure

Unless your investment horizon is measured in milliseconds, it’s usually best to ignore what everyone else is doing. But, occasionally, the market throws up something so peculiar that you have no choice but to sit up and pay attention.

The GameStop debacle, and the meme stock phenomenon more broadly, certainly fit that category. The story bears all the hallmarks of a Hollywood script: how a ragtag group of mostly retail investors, armed with commission-free trading apps and loosely coordinated across online message boards, executed a colossal short squeeze on the hedge funds betting against a down-at-its-heels brick-and-mortar video game retailer while inflicting bloody noses on some of Wall Street’s supposedly most-sophisticated operators. Predictably, several films are already in the works. But beyond the thrill of extravagant market pyrotechnics served up with a generous side of schadenfreude at seeing the odd master of the universe brought low by the great unwashed, why should we care?