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Healthcare reform that could lower costs

Rich Carney, CFA

Rich Carney, CFA

Research Analyst


Andy Acker, CFA

Andy Acker, CFA

Portfolio Manager


20 Nov 2019

Amid a raft of costly proposals to overhaul the US healthcare system, companies are hustling to find efficiencies and improve patient outcomes. Global Life Sciences team members, Rich Carney and Andy Acker, discuss the innovations that may lead to lower costs and new sources of growth.

In recent months, several ideas for reforming the US healthcare system have been proposed, including the sweeping plan known as ‘Medicare for All’, which would replace private health insurance with a government-run programme. These reforms have captured significant attention because of their potential disruption and cost: 2020 presidential candidate Senator Elizabeth Warren’s version of ‘Medicare for All’ is estimated to cost around US$20‑30 trillion over the next decade.

But the proposals have also spurred a number of companies to accelerate solutions aimed at improving efficiencies in healthcare delivery — innovations that are effecting real change and that we think could be meaningful to the long‑term performance of the sector.

So far, we have observed three key trends that we believe are likely to play a bigger role in healthcare delivery over the coming years:

1. The growth of telemedicine

We are seeing telemedicine, the remote diagnosis and treatment of patients by means of telecommunications, used in multiple segments of healthcare delivery including primary care, acute care and mental health. Doctors, patients and employers like telemedicine for its efficiency and convenience, resulting in a growing number of commercial plans offering the service.

2. The shakeup of primary care models

With the rise of technology-based solutions, some insurers are taking a ‘virtual first’ approach to care. As an example, some commercial plans now allow patients to access physicians via text and/or video to help manage chronic conditions. For government-sponsored programmes, solutions include telemedicine, an increasing focus on diagnostics and data, as well as more frequent intervention in the home or in retail clinics (such as those found at pharmacy stores).

3. The rise of sophisticated disease management

Helped by the proliferation of connected devices such as continuous glucose monitors for diabetics and electronic health records, we think improvements in disease management could result in significant returns on investment for the healthcare system, as less than 10% of the sickest patients in the US drive around 70% of healthcare spending (source: Kaiser Family Foundation analysis of medical expenditure panel survey). And as employers look for ways to control medical expenses, demand for these solutions could expand rapidly.

None of these trends will transform the healthcare system. But they have the potential to drive down costs and improve patient outcomes, both of which should fuel adoption. Consequently, we think the healthcare service firms leading today’s innovation stand to benefit. At the same time, we believe firms in the healthcare sector that implement these solutions could position themselves for more sustainable long‑term growth.

Health insurers are a prime example, with a few market leaders already taking action. During a company earnings call in early 2019, UnitedHealth Group’s warning that ‘Medicare for All’ could destabilise the nation’s health system caused healthcare stocks to sell off. Fast forward to today and the tone has changed dramatically. In remarks during third quarter results, UnitedHealth highlighted key areas where the company is beginning to show progress in controlling costs without government intervention.

For example, the firm noted opportunities to shift “medical spend” to more cost effective sites, including performing hip and knee replacements in outpatient centres, which often have around a 50% cost advantage over traditional settings with equal, if not better, results for patients.

UnitedHealth is also optimising the delivery of imaging procedures and enabling specialty drugs to be administered through alternate sites, which, combined with changes for other high cost services, are expected to deliver US$1.5 billion in savings to customers in 2020. Further, over the past year the company has deployed new technology that can analyse millions of data points to help physicians determine the optimal care setting for patients. In doing so, UnitedHealth is realising a 10% reduction in patient readmissions.

In our opinion, the efforts of insurance providers suggest that government-based solutions are not the only option for reforming the healthcare system. The industry is beginning to rethink operations and to innovate products, often with meaningful impact. We expect more companies to pursue such initiatives, and believe these moves could not only help improve efficiencies and patient outcomes but also set up the sector for more sustainable long‑term growth.

 

Rich Carney, CFA

Rich Carney, CFA

Research Analyst


Andy Acker, CFA

Andy Acker, CFA

Portfolio Manager


20 Nov 2019

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