Yale School of Management

Healthcare is Hot

Is healthcare in the doldrums, or is it HOT? I’d like to discuss some of the current issues facing the healthcare sector in the US, and tie them back into SOM’s EMBA in healthcare management. Pharmaceutical companies are playing a balancing act right now, yet healthcare reform has created a market for innovation, perhaps unlike anything we’ve seen before. Result: investment dollars have been gushing into healthcare transformation. I’ll look at some of the drivers for this.

In the pharmaceutical sector, with everyone falling off the patent cliff, from Pfizer and Novartis to GSK to Sanofi and BMS, prospects were looking pretty bad the past couple of years. All of these companies and many more facing expirations and possibly extinction have been scrambling to improve their prospects through acquisitions and partnerships. A big wave of blockbusters similar to what we saw at the end of the nineties and the beginning of the 2000s just isn’t on the docket, so business development into targeted therapies is the order of the day.

At the same time, the advent of healthcare reform has been a cause for (ahem) much debate. Just a little. As physicians and hospitals have gunned up for the transformation of healthcare, implementation of processes and technology to rationalize management of practices and institutions has exploded. Maybe the government’s IT services aren’t topnotch, but much of the medical industry is working to achieve a high level of proficiency in data and process management.

Honestly, the American healthcare sector is bloated. In the U.S. we spend nearly 18% of our gross domestic product on health. This outpaces the level in all other industrialized countries, with the nearest competitors for this dubious distinction at just over 11% of GDP. Per capita, we spend $8,500 (around $2.5 trillion total) and the next in line are the Swiss at $5,600. (Data in this paragraph from the OECD, 2013). For all that excess spend, we get limited comparative benefits (feel free to disagree; I can hear the groaning now). In terms of life expectancy, we’re behind at least 30 other developed and developing countries, at just under 78 years. The longest-lived country in the world is our buddy Switzerland, at almost 83 years. So, for much less per capita spend, the Swiss get almost 5 extra years of life. We’re behind Slovenia, Greece, Portugal, and Israel for crying out loud.

HC spend as share of GDP

Obviously, (for many of us at least), the US can’t continue to spend on healthcare like this. That’s where the opportunity lies. In terms of productivity growth, healthcare has lagged behind many other industries for years. Martin Baily, of the Brookings Institution and McKinsey, has blamed the slow improvement in healthcare productivity on three factors: “poor regulation, institutional inertia, and perverse incentives”. With healthcare reform, these factors are being rearranged in many ways.

Many of those who are putting their intellectual energy and capital into finding ways to reduce the excess spend on healthcare are themselves going to make huge fortunes in the next few years. The money and the effort has been pouring in at unprecedented levels.

From Bloomberg News just this morning, I pulled an article by Peter Orszag, Sheldon Whitehouse and Ezekiel Emanuel (who spoke at Yale on November 1, meeting with the Healthcare MBAe group and others). The piece is focused on cost savings in healthcare. They summarize some estimates of what we might save with the transformations under way:

“Without a doubt, there is plenty of room to improve the value Americans receive from their health-care dollars. The president's own Council of Economic Advisers estimated that the U.S. could save more than $700 billion every year without compromising health outcomes; the Institute of Medicine has put the number at $765 billion; the New England Healthcare Institute has set it at $850 billion annually; Rand Corp.'s savings range averages $910 billion a year; and the Lewin Group and former George W. Bush Treasury Secretary Paul O'Neill have estimated the annual savings at $1 trillion. Whatever the precise number, the potential savings are big.”

So what’s this mean to people studying the business of healthcare? If you can figure out a way to generate just one penny of savings for every hundred dollars of the lowest savings estimate above, that’s a $70 million dollar value. It’s pretty “easy” to build a business by justifying that kind of value add. People in the venture sector are paying close attention to this.

“Venture capital (VC) funding in the [health IT] sector continued to rise in yet another record quarter with $737 million raised in 151 deals. The dollar amount of disclosed deals surpassed the second quarter total of $623 million. Year to date, the Healthcare IT sector has raised a disclosed $1.85 billion.” (Mercom Capital Group)

 Mercom Group

The market for health IT is big, and getting bigger: “In total, the EMR market topped out at $20.7 billion in 2012, up 15 percent from $17.9 billion in 2011, and ‘includes revenues for EMR/EHR systems, CPOE systems, and directly related services such as installation, training, servicing, and consulting which are key profit areas for companies but does not include hardware or other IT systems unrelated to EMR such as billing systems.’” [Kalorama Information]

In the EMBA class graduating in 2015, almost one-quarter of the cohort is a health IT professional of some sort. Two members of the class run their own companies focused on helping hospitals transition to full-scale, comprehensive EMR. Two others work for major EMR service firms, and one works on health IT issues for a major consulting company.

In addition to IT, a number of members of the class, including several practicing physicians, have started or are starting ventures focused on the development of innovative medical device and diagnostic technology.

As for me, I feel a bit like a dinosaur. I’ve spent the last ten years working on the development of new pharmaceutical brands. In the end, these brands were essentially excuses for spending more on healthcare than is really necessary. I got into healthcare research because it seemed more meaningful than a lot of other areas. The time is ripe for businesses to bring more meaning to the healthcare industry. 

About the author

John Mitchell

MBA for Executives, 2015