The healthcare industry is expected to continue to benefit from a rising need in services as Americans live — and look to live — longer. Companies providing pharmaceuticals, industry-related technology and healthcare services are all expected to show growth along with the industry as a whole. But are there still opportunities in this space?
To find out, BE spoke with Ruben J. King-Shaw Jr., Managing Partner and Chief Investment Officer of Mansa Capital, a Boston-based private equity firm. He is responsible for finding investment opportunities within the US healthcare economy.
BE: Finance gurus have been touting the healthcare industry for years. Are there still real opportunities at this point or could there be some overvaluation here?
King-Shaw: There are many excellent opportunities in the US healthcare economy. Overall, the US healthcare industry is projected to double in just seven years from $2.5 trillion in 2013 to $4.6 trillion by the year 2020. To put that into perspective, by the year 2020, the healthcare economy will account for nearly 20% of the total US economy. In such a rapidly growing sector, the appropriate business models are led by capable management teams and offer innovative products, services and technologies–in other words, ones that meet the evolving demands of the healthcare consumer– and will flourish over the next decade.
It is important to add that “healthcare” is a very broad description of a collection of industries that includes hospitals, physician practices, software applications, medical devices, pharmaceuticals and managed care organizations. Some areas–such as electronic medical records–may indeed be overvalued. Others such as community-based long term care and hand-held/mobile apps have very attractive valuations right now.
What kind of growth are you expecting for 2014?
King-Shaw: Overall, we look for the healthcare economy to grow by a compounded average growth rate (CAGR) of about 6% in 2014, consistent with government (Dept. of Health and Human Services) projections. Some sectors, such as home and community-based care, will grow by more (we estimate closer to 8%). We expect healthcare information technology, which includes Internet and cloud-based strategies, to grow at even higher rates. It is important to note that the overall US economic growth in 2014 is projected at about 2.9%. Thus, the US healthcare economy is projected to grow at twice the rate of the national economy. Moreover, some healthcare sub sectors such as information technology are expected to grow three times faster than the national economy.
Where are some of the drivers fueling that growth?
King-Shaw: Demographics are a powerful driver of growth in healthcare expenditures. The obvious example is age. As
we age, we consume more healthcare services in general such as physician care, pharmaceuticals, durable medical equipment and medical devices. Yet ethnic demographics are also a powerful force. African Americans, traditionally value-based shoppers, have become a major driver towards greater transparency in the healthcare Internet (e-commerce) sector. We see growing demand among African Americans for information to compare costs, risks and outcomes when choosing a provider, nursing home, treatment or medication.Hispanics have traditionally been the most under-insured population in America. As Hispanics increasingly gain insurance coverage, they will have greater access to care than ever before. Greater access translates into greater demand for nearly everything in the healthcare sector. In many markets such as Texas and Michigan, providers, insurers and product suppliers will have to expand their operations with more culturally competent strategies. This could mean a Spanish-language web experience or additional distribution outlets in Hispanic communities.
Finally, every year sees new discoveries in medical science and technology. Combined, these forces enable new approaches to treating chronic conditions that are often more prevalent in minority communities such as obesity and diabetes as well as diseases such as cancer, heart failure and kidney disease. Targeted, culturally-sensitive healthcare communication, education and preventative care will be critical to successfully serving minority populations. For the new treatments that demonstrate superior value, there will be strong demand among patients, providers and investors alike.
What impact did the Affordable Care Act have on the healthcare industry and what does it mean for investors?
King-Shaw: There is no simple, easy or short answer to this question. The Act has not been fully implemented at this point. Yet, in general, the ACA is expected to eventually bring nearly all Americans under some kind of insurance coverage. That would remove the single greatest barrier to healthcare services: affordability. With that barrier removed, demand for healthcare services will grow rapidly and the healthcare economy will need additional capital to supply the products, services, technology and personnel to meet the growing demand. Investors, who are the providers of capital, could benefit greatly.
Another positive effect of the Act has been to encourage the use of health information technology to contain costs and promote wellness. Investors can find good returns in those two sectors. There are, however, more concerning scenarios. Businesses may curtail hiring or cease offering group coverage if the cost of insurance rises too high and/or the penalty for NOT offering coverage is too low. A “jobless” recovery is not good for investors.
A much less talked about aspect of the Act is to usher in changes to the
way hospitals and physicians are compensated. The shift to performance-based compensation (based in part on clinical outcomes and patient satisfaction) and away from fee-for-service compensation has just begun. Provider organizations that embrace this change will offer good returns for their investors. Those who do not, face a bleak future for themselves and their capital partners.How can an individual investor best position their portfolio to benefit from the expected growth in this area?
King-Shaw: For those comfortable with public securities, a conversation with their stock broker or financial advisor can result in the selection of a specific healthcare company’s stock or select a number of healthcare stocks, which can benefit from the aforementioned trends. Also, there are healthcare specific mutual funds, which one might consider. Investment in a private equity fund is the leading alternative to the investing in publicly traded stocks. These private equity funds can be healthcare specific–such as ours at Mansa Capital–or the funds may include healthcare along with other industries.
Private equity funds generally require longer “hold” periods but they have historically produced significantly higher returns for their investors than the stock market. Both publicly traded stocks and private equity funds have their unique risks, so everyone should consider all investments carefully and get good advice before investing.