In the first of a four-part series on global healthcare, we look at why the sector is likely to take centre stage in the 2020 US elections and what this means for investors.
7 minute read
In some ways, Dana Rohrabacher, the former Republican representative of California, fitted into the Trump administration perfectly. He was early to publicly declare his support for Trump during the 2016 campaign, became known for adopting a pro-Russia stance and voted to repeal the Affordable Care Act (ACA).
It was the latter that proved fateful – unhinging his 27-year career in Congress. In the 2018 election battle for California’s 48th district, he struggled to defend his record on healthcare as ACA gained voter support, catching many Republicans off guard. In a last-ditch political ad aired on YouTube,1 Rohrabacher was filmed walking along the beach with his family, referring to his daughter’s leukaemia as a reason he was “taking on both parties and fighting for those with pre-existing conditions”, one of ACA’s central tenets. The appeal did not work, and he lost against Democrat Harley Rouda in an upset. Nationwide, healthcare helped Democrats take back the House of Representatives in 2018.
More than immigration or the economy, healthcare is poised to be a central political fault line in next year’s presidential election. And, with the sector representing about 13 per cent of the S&P 500 benchmark stock index, as of 31 July, the political situation will be keenly watched by investors.
“There is a lot of campaign rhetoric out there,” says Stephanie Niven, global equity portfolio manager at Aviva Investors. “People are posturing to get votes, and financial markets are being hit as a result.”
Checking the healthcare pulse: Overpriced and underserved
Healthcare – and health insurance in particular – is such a hot-button issue in American politics because it impacts all voters regardless of race, gender, socioeconomic status or political affiliation. For those who have health insurance, their out-of-pocket costs are rising to sometimes unaffordable levels, says Matthew Raque, senior global healthcare and pharmaceuticals research analyst at Aviva Investors.
One way of gauging out-of-pocket expenses is through employer health insurance deductibles, which have skyrocketed by 150 per cent to an average of US$1,350 in 2018 compared to 2009, according to an analysis by the Kaiser Family Foundation.2 “The cost of healthcare is impacting consumers’ wallets in a fairly meaningful way,” says Raque. “Furthermore, the quality of healthcare is inconsistent: it depends on where you live, where you work and what kind of insurance you have.”
Despite Obamacare, about 8.8 per cent of the population – or nearly 30 million people – do not have health insurance, according to the latest data from the US Census Bureau.3 (See chart below.) For those without health insurance, a serious accident or an unexpected long-term illness could result in bankruptcy.
In total, Americans spent US$3.65 trillion, or about 18 per cent of US gross domestic product (GDP), on healthcare – more than any other developed nation and the entire GDP of many countries including the UK, according to data from the US Census Bureau as of 2017, the latest available.4
Robert M. Kaplan, professor of medicine at the Stanford School of Medicine Clinical Excellence Research Center, argues in his new book ‘More than Medicine: The Broken Promise of American Health’ that despite having the most expensive healthcare system in the world, the US lags many other developed nations in life expectancy (see chart below), child mortality and other health metrics.
Kaplan believes misplaced confidence and funding in ever-more expensive high-tech diagnostics and treatments may accelerate the pace of healthcare inflation without necessarily yielding the expected improvements in the health of the population. He points out that earlier this year Novartis introduced Zolgensma, the most expensive gene therapy treatment to date for a rare childhood disorder, costing US$2.1 million per patient.5 The drug was approved on the basis of a single study involving 15 children, did not include a control group and subsequently was embroiled in a data manipulation scandal.6
“Many of the new therapeutic biological products that have been approved recently are outrageously expensive but have a relatively small impact on human health,” says Kaplan.
The number of novel drugs and biologics approved by US Food and Drug Administration (FDA) is increasing, culminating in an all-time high of 59 new drug approvals in 2018.7 Some recent products, such as PCSK9 inhibitors to lower cholesterol, started as high as about US$14,000 per person per year. While there is some evidence that they lower cholesterol and, in some incidences, reduce the number of cardiovascular events, their ability to substantially outperform other cheaper alternatives and extend the life of patients is less clear. For example, randomised trials of PCSK9 inhibitors have not shown reductions in mortality.
The big concern is the opportunity cost
“The big concern is the opportunity cost,” says Kaplan. “For example, if most people currently taking drugs to lower cholesterol switch to PCSK9 inhibitors, the higher cost would be reflected in health insurance premiums and deductibles for families. In the US, that is already becoming out of reach for many.”
For companies, higher insurance costs prevent them from investing to grow their businesses, reducing existing debt or paying higher wages. Pharmaceutical companies, for a long time among the most profitable within healthcare, are feeling the pressure.
“It has reached a bubbling point,” Niven says. “Drug pricing in the US – which has driven growth – can no longer be relied upon to drive sales to the extent it once did.”
In search of remedies
Unlike many other sectors, the American healthcare system has yet to solve the fundamental value problem of how to improve results at a lower cost. Various healthcare proposals from ‘Medicare for All’ to President Trump’s promise to negotiate lower drug prices may amplify the issue, but are unlikely to solve it.
“What’s more likely are incremental changes that consolidate care while focusing on outcomes-based healthcare,” says Raque. “Companies that can integrate healthcare and deliver high-quality solutions with better outcomes and lower costs are more likely to succeed in an ever-changing healthcare landscape.”
Kaplan, a former associate director of the National Institutes of Health (NIH), divides the evolution of the American health system into three stages: stage one was oriented towards fighting infectious diseases such as measles, malaria and smallpox; stage two involved the evolution of chronic diseases, many of which depend on behavioural risk factors such as the link between cigarette smoking and lung cancer (see the chart below); the next and third stage will need to combine medicine with other disciplines, such as social and behavioural sciences.
If chronic diseases have behavioural root causes, then social service solutions aiming to change those behaviours may help bring about healthier outcomes. Switzerland, for example, has one of the highest annual expenditures on social services as well as having one of the longest life expectancies. The US, however, remains underfunded in social services, and life expectancy has been falling for a sustained period not seen since World War I.8 The opioid epidemic, which calls for both medical and social service solutions, is a leading cause of lower life expectancy (see charts below).
Opioids are also increasingly a liability for providers of the drug. In August, Johnson & Johnson was ordered by an Oklahoma judge to pay US$572 million in relation to the state’s opioid crisis, potentially encouraging dozens of other drugmakers to settle. Separately, Purdue Pharma and its owners, the Sackler family, are negotiating a settlement on more than 2,000 lawsuits against the company.9
“Given the figure of 130 people a day dying from opioid abuse issues, this is clearly a significant issue the US Food and Drug Administration wants to be on top of due to the economic cost,” said James Balfour, equity portfolio manager at Aviva Investors with sector coverage responsibilities in pharmaceuticals. “Johnson & Johnson has stated it will appeal this decision. However, a decision by Purdue to settle might limit the options for Johnson & Johnson to overturn the decision.”
Opioid usage is also a growing problem among some European countries, according to the 2019 European Drug Report.10 Synthetic opioids, which are opioids other than heroin, accounted for the most common form of opioid use among those seeking specialised drug treatments. Despite this threat, however, the availability, use and consequences of synthetic opioids remains more limited compared to the US, according to the report.
In the UK, for example, the number of deaths linked to synthetic opioids was 75 in 2017, up from 58 in 2016 but far below that of the US, according to the nation’s Office for National Statistics.11 The European Drug Report attributes lower deaths in Europe to a combination of tighter prescription guidelines limiting the availability of synthetic opioids and a more pragmatic approach to the availability of replacement therapy and other types of treatment measures. Furthermore, in several countries where the threats posed by opioids are accelerating, “the provision of effective harm reduction and treatment remains inadequate”, suggesting a need for an integrated medical, regulatory and social services solution.
Applying behavioural and social science techniques increases costs in the short term, but it may help to improve wellbeing and reduce aggregate costs of healthcare in the long term. This is relevant for both governments and companies delivering healthcare.
Earlier this year, insurance company Aetna launched Aetna 360 Behavioral Health, expanding upon two previous programmes focusing on mental health but also encompassing other aspects such as transportation, support group and day care services. According to a statement from the company, the initiative led to lower re-admission rates, higher ambulatory follow-up rates and higher satisfaction rates among members, caregivers and providers.12
Integrating behavioural and social insights into healthcare policies can reduce costs
“Integrating behavioural and social insights into healthcare policies can reduce costs,” says Raque. “And if insurance companies can reduce costs, they can make more money.”
Employers are also looking for opportunities to cut medical costs by encouraging lifestyle changes. While health-related workplace benefits such as gym memberships are not new, technology has enabled companies to increasingly personalise the level of services to help their employees stay healthier. Some may focus on mobile technology to gauge nutrition requirements based on an individual’s biometrics, preferences and dietary needs. Others offer customised coaching and monitoring services to those suffering from the often-related conditions of type 2 diabetes and hypertension.
Experts often point to the anti-smoking efforts in the US as one of the clearest examples of how changing behaviours can have a lasting impact and cut costs in the long term. In 1964, 42.7 per cent of Americans smoked cigarettes. By 2017, that proportion had dropped to 14 per cent and falling, according to the US Centers for Disease Control and Prevention.13 Considering that smoking-related diseases cost an estimated US$170 billion in healthcare and US$150 billion in lost productivity, this is a significant saving.14
Technology: Fusing data, behavioural insight and connected health
A more cost-effective healthcare system would require a similar multidisciplinary, outcomes-based approach but applied across the entire healthcare sector, using technology as an enabler. Data science, for example, is reshaping the sector, helping to improve diagnostics, healthcare maintenance and cost efficiency. One example of a company looking to optimise big data to deliver better healthcare at a lower cost is United Health, through its subsidiary Optum Insights. It provides software to general practice surgeries, not just for doing expenses and other administrative tasks, but also to help in diagnostics and find lower-cost solutions in the shift towards outcomes-based healthcare.
“It is ahead of competitors in this respect,” Niven says. “It’s a first mover advantage, similar to Google in search engines. This gives the company a tremendous competitive advantage because of the vast data sets it has built.”
Niven believes the data advantage presents investors with a long-term opportunity, despite some short-term volatility in United Health’s share price this year due to the political backdrop.
“Effectively, investors have been selling United Health on the basis that politics is such an existential threat to the managed care business,” she says. Yet about half its profits do not come from managed care but from Optum, which besides data services also includes the healthcare and pharmaceutical businesses.
While ‘Medicare for all’ has captured the market’s attention, it is unlikely to materialise. What is more likely to happen is ‘Medicare for more'.
“I can see the rationale of a very rich country providing universal healthcare, but politically, it’s incredibly difficult to get any major reforms through a divided Congress,” Niven says. “While ‘Medicare for all’ has captured the market’s attention, it is unlikely to materialise. What is more likely to happen is ‘Medicare for more’.”
‘Investing for all’
‘Medicare for All’ is a proposal that would essentially abolish private health insurance in favour of a universal healthcare system more in line with other industrialised nations. In the week after Bernie Sanders unveiled it on April 10, the S&P 500 Health Care Index dropped by about 6.5 per cent to its lowest level this year compared to a slight increase for the broader index during the same period; managed-care companies were among the hardest hit.
Weeks later when Joe Biden began edging ahead of the crowd as one of the leading Democratic candidates, the S&P 500 Health Care Index rebounded; Biden had endorsed Obamacare, and investor fears were allayed of drastic upheaval in the healthcare industry. President Donald Trump is expected to offer his party’s alternative healthcare proposal later this year. While continuing to oppose Obamacare, the Republican plan may shift more decision-making power to states, require higher price transparency and expand health savings account options.15
Traditionally a sector where investors go for protection during periods of market turmoil, healthcare may not provide as much short-term cover in the next downturn. In the first seven months of the year, the S&P 500 Health Care Index trailed its broader S&P 500 Index, returning just 5.28 per cent versus 18.89 per cent. In comparison, during the market sell-off in the fourth quarter of 2018, the S&P 500 Health Care Index fell by about 9.5 per cent versus a drop of 14.3 per cent for the broader index.
The 2020 elections likely will bring more volatility to healthcare as both parties vie for votes. But for investors capable of filtering out the short-term noise, there may be opportunities to tap into global trends such as technological advances in medicine and a shift to a more interdisciplinary approach to delivering patient outcomes.
That three of the most powerful corporate titans – Jeff Bezos of Amazon, Warren Buffett of Berkshire Hathaway and Jamie Dimon of J.P. Morgan – have joined forces is particularly instructive of where things may be headed. They have jointly formed a new consortium called Haven in 2018 aimed at lowering the cost of employer-based healthcare. Investors should watch this joint venture with interest.
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