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Sydney Williams is Founder and President of Lyceum Associates (http://www.gathersmart.com/), exploring transitions in health care, IT, financials, and the economy.
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Lyceum Associates
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Talking Transitions
  • The Missing Stakeholder in Health Reform 0 comments
    Sep 7, 2009 08:56 PM | about stocks: MHS, CVS, WAG, UNH, WLP, CI, AET, HUM, DRG
    Pop quiz: who's missing at the health care reform discussion table? Is it: (a) government (b) patients (c) doctors (d) employers or (e) owners of health care companies?
     
    Guess what? Of all the stakeholders in the health care universe, it's the corporate shareholders—the very owners of those health care companies, large and small—who are left out in the cold.

    Why is this? Like every other industry, health care depends on Wall Street for much of its capital needs. Growth requires investment, investment requires capital, and the financial markets are the spigot from which capital flows. So why don't shareholders have a voice in the reform debate?

    At $2.4 trillion, the total annual spend on health care is well-publicized. Few of us, however, realize that this expenditure translates into a market capitalization just under $2 trillion. Within the S&P 500, only information technology and financials boast higher total values. The 52 companies that comprise health care equal 13.5% of the index's total value.

    S&P 500 Health Care Constituents
    And while docs, drugmakers and drugstores may come first to mind when we think of health care, shareholders represent a critical stakeholder. Without their money and collective judgment, there is no research and development, no new plant facilities and no incentive for clever business strategies.
     
    Individually, a shareholder might be any other stakeholder: a physician, corporate executive or consumer. No lawmaker, though, is weighing the sum total of these individuals.

    Out of sync
    Despite the stock market size of the health care industry, it lacks breadth, and does not adequately represent the entire universe. Drugmakers, for example, make up 60% of the listed market capitalization. Hospitals, on the other hand, constitute less than 1%. (Of 5,000 hospitals across the country, just eleven hospital groups are publicly listed.) In terms of total spend, prescription drugs and hospital care represent 12% and 37%, respectively.
     
    National Health Care Expenditures
    Source: Centers for Medicare and Medicaid Services
     
     
    Health Care Industries
    Source: Yahoo! Finance
     
    The market, moreover, values commercial health plans—36% of the source of funds spent on health care—at just 4% of the total health care universe. (We wonder: How much does head-to-head competition with government programs contribute to this under-representation?)
     
    If we break down spend between private and public money, majority public- (Medicare/Medicaid-) funded services feature substantially less in the investment universe, and private-funded services substantially more. Of course, the two questions that naturally follow this are: one, what's the impact of market forces? And, two, to what extent do these forces drive efficiency?

    While most folks would probably argue that drug manufacturers underachieve in operating efficiency, no one would dispute the fact that the pharmacy "value chain" (the dollar flow from manufacturer to consumer) is inherently more efficient than the public spending-led medical side. The best example for this is claims processing—a major source of administrative inefficiency across health care (more than a half according to one study). Pharmacy systems adjudicate claims instantaneously, whereas the medical system can take several weeks or months.
     
    The table below breaks down types of service by funding source.
     
    Source: Centers for Medicare and Medicaid Services

    We can only speculate, unfortunately, whether market forces would drive efficiency the same way in hospital care.
     
    The disconnect between the market and the industry extends to the way Wall Street pros analyze health care. Sell-siders and buy-siders, for instance, still segment drugmakers into biotechnology and non-biotechnology companies, even though all manufacturers—even the generics—now target biological products.
     
    Rarely do these same "drug analysts" also cover pharmacy benefit managers ("PBMs"), even though these companies directly affect pricing and market share. In fact, Standard & Poors doesn't even categorize CVS Caremark and Walgreen as health care stocks, despite their obvious focus, which includes major PBM franchises. Broader indices also don't include the smaller capitalized health information service companies such as Allscripts-Misys Healthcare and Cerner Corp., and instead add them to the technology sector.
     
    As a result, information does not flow as seamlessly as it could across the marketplace. Compounding this problem, coverage teams on either side of the Street don't normally exist across health care, as, for example, they do in technology between software and hardware.
     
    And what about employers? The employer-based insurance market provides coverage to two-thirds of the US population under the age of 65. A large company with 50,000 employees, for example, likely exceeds $500 million per year in total health care spend, including dependents and retirees. As with Starbucks, this level often surpasses investment in core products and services.

    Assuming $500 million of spend on average for the largest 100 companies, we can estimate a total annual budget of $50 billion. How management allocates this money directly affects a company's cash flow. Are shareholders prepared to ask the right questions? Are they asking questions at all?

    Still relevant
    What if lawmakers did include shareholders as a stakeholder? At a minimum, shareholders would urge more efficiency. They would also articulate viewpoints based on return on investment, and frame health care as an economic good—rather than as a right or privilege.
     
    In a recent Wall Street Journal opinion piece, Greg Karpel describes health care as a value-creating industry: "The $2.4 trillion Americans spend each year for health care doesn't go up in smoke. It's paid to other Americans." Mr. Karpel refers to job growth and medical innovation as two examples, and addresses health care as a "significant, perhaps a principal, driver of the economy".
     
    Shareholders could be advocating this uncommon position in precise fashion—except for dislocations across market participants. Still, the market can provide critical and dispassionate information and assessment, which the health reform debate desperately needs.

    Even though the shareholder stakeholder may have far to go in developing his own voice, what he can contribute to the reform discussion would be relevant enough.

    Disclosure: No Positions
    Themes: Health Reform, Health Care, Managed Care, Pharmacy Benefit Management Stocks: MHS, CVS, WAG, UNH, WLP, CI, AET, HUM, DRG
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