It is readily accepted that social determinants and education levels directly influence life expectancy gradients; that is, the central issue to well-being is not simply poverty but more fundamentally an issue of inequality. The profound promise of technology in healthcare is its role as the great democratizing force across all strata of society by improving access, engagement, care coordination and outcomes at lower costs. The journal Health Affairs published an important study this summer which showed that more healthcare dollars are spent in affluent neighborhoods even though the medical needs tend to be greatest in poorer communities. Evidence suggests that members of these communities forgo healthcare at higher rates due to issues of access and economic consequences associated with the “consumerization” of healthcare (i.e., high deductible plans, cost shifting, etc.).
Worldwide life expectancy improved from 26 years in 1820 to 31 years in 1900 to 49 years in 1950 to 79 years by 2010. Obviously, the accelerated rate of change over the last fifty years was largely due to advances in our understanding of biological pathways and innovative new medical technologies. Arguably, we are now on the threshold of another step function of improvements with innovative new care delivery models coupled with precision, more tailored medicines, which are supported by “value-based” payment models. Healthcare technology’s promise today is to both extend the curve below to the right as well as meaningfully increase the “area under the curve” with dramatically improved health status.
A worrying societal development is the “senior boom” which can only be addressed by advances in healthcare technology. When Medicare was established in 1965, there were 5.4 Americans between the ages of 20 – 64 years for every American over 65. This year that ratio has decreased to 4-to-1, and now the Congressional Budget Office is warning that in 30 years that relationship will be 2.6-to-1. Compounding this situation is the burden of U.S. Treasury debt on society. In 1999, it was 38% of U.S. GDP and analysts estimate that level today to be 76% of GDP and an unimaginable 141% in 30 years from now. As a result, investments in healthcare technology have become an absolute imperative.
Just over the last five years, healthcare technology spend on a per physician basis increased nearly 50% from approximately $23k in 2010 to $33k in 2015, according to the Medical Group Management Association, underscoring data’s role in optimizing outcomes. The promise of better matching patient to provider, or patient to therapy, is real and Artificial Intelligence (AI) will play a powerful role as computer neural networks develop to optimize the human-to-data interface. This last observation is fundamental to many of our portfolio companies as entrepreneurs seek to utilize rigid clinical data captured in patient-based systems made actionable with more informed, appropriate and predictive decisions.
As the complexity of the “business of healthcare” accelerated over the past 30 years, new technologies were developed to manage the escalating administrative burdens. In 1980 over $27 billion was incurred in administrative and insurance-related costs; that number in 2012 was $413 billion. An explosion of innovative tools and services have been developed to manage those expenses. Compounding this situation is regulatory reform which has introduced new financial and operating risks into the delivery system that must be assessed, underwritten and then managed.
According to StartUp Health, in 3Q16 global digital health investment activity (including partnership and joint venture activity) totaled $2.4 billion and year-to-date nearly $6.5 billion has been invested in 394 companies. This level of activity continues the pace set during 2014 and 2015. The three most significant sub-categories in the healthcare technology sector this year are Patient/Consumer Experience ($2.5 billion invested year-to-date), Wellness ($918 million) and Personalized Health/Quantified Self ($634 million).
Public investor enthusiasm was equally robust this past quarter. The Leerink Healthcare Technology and Services index of 33 publicly traded stocks increased 7.9% in 3Q16 and 11% year-to-date. Leerink estimates that aggregate revenue growth for these companies will be 19.6% in 2016 and 14.7% in 2017, which accounts for average valuation multiples of 13.7x and 13.0x for 2016 and 2017 EBITDA estimates, respectively. In a period where broader publicly stock indices have advanced modestly (S&P 500 is up 4.8% year-to-date), the healthcare technology sector has been embraced. Having said that, it is worth noting that this is the final year for Meaningful Use payments which likely introduces some uncertainty for some healthcare technology vendors.
While still in excess of $200 billion, global healthcare M&A activity is off more than 50% year-to-date when compared to 2015 volumes, much of this due to Department of Justice delayed reviews of the large pending insurance mergers. Overall M&A activity across all sectors is down more than 20% to put that in some perspective. Specific healthcare technology M&A consolidation themes that emerged this past quarter generally centered on consumerism/patient engagement, telemedicine/remote monitoring, data-driven devices and strengthened infrastructure offerings.