The JPMorgan Storylines: A Preview

Chances are, many of the 9000 attendees at this week’s 36th Annual JP Morgan Healthcare Conference in San Francisco will watch tonight’s NCAA National Football Championship between the University of Georgia Bulldogs and the Crimson Tide of the University of Alabama. I know I will.

I follow college football more closely than the National Football League. According to data from Nielsen, the average audience for NFL viewership was 14.9 million this season, down 9.7% last year and 8% in 2015. But viewership for college football was also down this year so go figure. Does this portend a trend away from football at every level? I don’t know.

In the world of college sports, I’m just a fan. I pull for the teams that play by the rules, educate their athletes and prefer the underdogs in most contests. I sometimes pull for the team with the best-looking uniform or hedge if they have a Vanderbilt or Ohio State connection, but otherwise, it’s absolutely absent scientific method. When it comes to college sports, I’m just a fan.

When it comes to healthcare, I am a student. I try to decipher between trends that are game-changing and those that signal something bigger to come. I study lag and lead indicators and factors outside healthcare that impede or accelerate a trend’s impact as a platform for innovation and change.

At this week’s JPM conference, more than 450 healthcare organizations will offer their views about the trends they think most impactful and the role they hope to play. There will be presentations by organizations across every sector in healthcare including investor-owned and not-for-profits. They’ll offer their viewpoints on the trends most relevant to their businesses and how lenders and investors in their audience should assess their ability to execute their strategies. And the lobbies, bars and nearby restaurants will be slammed as investors and lenders conduct their one-on-ones with those they’ve funded or those they might.

JPM has been dubbed healthcare’s Woodstock. That’s an apt description. The prominent themes in this year’s version will be these…

  • Healthcare remains a growth industry in the U.S. Medicare is adding 10,000 enrollees daily. Total spending in 2016 was up 4.3% over 2015. Spending in every major sector was up led by health insurance (+5.8%), physicians & professionals (+5.4%), hospitals (+4.8%), nursing home/continuing care centers (+2.9%), prescription drugs (1.3%). And the Congressional Budget Office estimates spending will increase 5.6% annually through 2027.
  • The individual insurance market will stabilize in 2018 and beyond. Last year, insurers turned the corner in the individual market.
  • Reducing cost in healthcare without compromising quality and safety is achievable. It’s not sustainable: at 18% of GDP today and 21% in 5 years. Information technologies, advanced analytics, artificial intelligence, machine learning and innovation in medical management are essential to cost reduction.
  • Organizations are finding better ways to manage chronic condition which constitute 87% of total U.S. spending and a growing portion of global spending.
  • Consolidation in the insurance, acute, post-acute, biopharma and device sectors will continue and deals will be bigger. Diversification (vertical consolidation) will become more prominent and the scale and scope of deals will increase from local combinations to regional/national initiatives.
  • Drug costs will continue to be an issue. After discounts and rebates, drug costs are expected to increase 5% thru 2021 as 45 new drugs obtain approval, and 2300 novel therapies (including 600 in cancer treatment) are introduced (Quintiles/IMS). Public pressure for federal price controls will play a key role. Blockbuster biologics and gene therapies remain opportunities.
  • Managed Medicaid & Managed Medicare (Medicare Advantage) will benefit from public policies that delegate oversight to states and reduce regulatory burdens on private insurers.
  • Lower-cost alternatives in care delivery i.e. urgent care clinics, micro-hospitals, telemedicine, et al are coming of age as operators achieve scale and investor confidence increases. Local health systems will compete against investor owned independent operators in many markets.
  • Cyber-security remains an issue. Investments in technologies and processes to defend against hacking & cyber-blackmail trail other industries and pose a serious threat to the industry.
  • The reduction of corporate tax rates via the Tax Cuts and Jobs Act will benefit global operators whose off-shore profits will be taxed at a lower rate (15.5%). Technology and drug companies may expand their footprints in healthcare as a result.
  • Digital health investments have gained momentum and are being integrated in care delivery efficiently and effectively. The shakeout of early-stage players will continue this year.
  • The wellness and healthy living sector is maturing. 75% of cost of chronic correlates to exercise, nutrition and stress. (CDC). Wearables are gaining acceptance and play a key role. Organizations offering scalable business models to employers and payers, and direct-to-consumer providers who demonstrate member behavior change, are showing sustainable earnings.

And there will be precautionary reminders from industry analysts and economists:

  • Debt: The nation’s debt ($20.2 trillion) to GDP ratio (1.08) is as high as it been since World War II. Household debt, at $12.96 trillion, is at an all-time high. 33% of American households have outstanding debt with collectors, and up to 50% in some southern counties (Urban Institute). And corporate debt is up 39% in the past 5 years; the average debt-to-capital ratio has risen from 35% to 54% today—the highest level in 20 years. In fact, corporate debt has risen at an annual rate of 8.5% in the last decade vs. 4.6% growth in sales. Managing debt will be a central theme in 2018 and beyond.
  • Concentration of economic power: Per the S&P Global, $1.92 trillion in cash is held by the largest 2000 U.S. companies, but 20 of these control more than half. In every sector of the economy, the biggest organizations have gained market share over others. Anti-trust concerns will be prominent in most industries including healthcare.
  • Political uncertainty: The GOP holds a 24-seat advantage in the House and 2-seat advantage in the Senate. Each is considered at risk in the election cycle. GOP-led policies to cut Medicare spending and block grants Medicaid to states, plus uncertainty around funding for CHIP, community health centers, Veterans Choice and other programs remain unknowns.

But less attention will be paid to noticeably less lucrative opportunities in healthcare where capital can be deployed productively. At the top of that list: public health. Total U.S. spending for public health activity increased from $81.7 billion in 2015 to $82.2 billion in 2016. Average life expectancy dropped to 78.6 years in 2016 from 78.9 in 2014. Drug overdose deaths increased more than 20% to 63,632 in 2016 and on most measures of the public’s health (mortality, morbidity, obesity et al) the public’s health is eroding, especially in low income and at-risk communities. The majority of funding for public health initiatives comes from state and federal funding. As a result, investors seeking handsome returns shy from these opportunities though acknowledged to be a high priority in the industry. Notably, Bill Gates will keynote JPM today: no doubt he’ll urge the audience to balance profit with purpose in healthcare.

So, those are the themes and trends we’ll hear about at JPM. They’re easy to follow: healthcare’s a goldmine for data and JPM is great venue for observing how companies are divining their paths in response.

But tonight, I will be watching the Dawgs-Tide tussle. It pits two states better known for these storied football programs than the improvements made in their healthcare: Alabama ranks 47th in the country per America’s Health Rankings and Georgia I 41st. Both are improving the health status in their states. Both have higher rates of heart disease, obesity, drug abuse and smoking than the U.S., and funding increases for public health programs has been negligible. And they’re both passionate about their teams.

Paul

P.S. Just Capital’s survey of 72,000 Americans found 80% believe companies are not sharing their financial success with their employees (Fortune December 26, 2017). It estimates the “quit” rate for 2017 is likely to be the highest on record (26%) which Glassdoor CEO Andrew Chamberlain attributes to transparency about opportunities for employee betterment and a tight labor market. London Business School Prof Alex Edmans analyzed the relationship between employee satisfaction and financial performance for publicly traded companies in the U.S. over a three-decade period finding those rated among the best places to work outperformed others by 2.3%-3.8% annually.

While navigating the treacherous waters in healthcare this year, organizations in almost every sector face growing workforce issues. At JPM, some organizations will draw attention to the uniqueness of their workforce strategies and healthiness of their cultures. Ditto their advisors--lawyers, lenders,  consultants—who’ll be there to tout their strengths while soliciting new business. Given the public’s attention to misdeeds at Wells Fargo, Weinstein, Uber and many others, it will be interesting to see how much the “people side of enterprise” plays into their presentations. As is said, culture eats strategy for lunch!