JP Morgan Healthcare Conference 2010: Speakers Address Reform

by: Raymond Chung, CFA

The annual JP Morgan (NYSE:JPM) Healthcare Conference, held at The Westin St. Francis in San Francisco, California, is arguably one of the most popular conferences. Its timely January date gives investment managers a good refresher on the industry as they position their portfolios for the coming year. With over 330 companies present, the breadth of sectors represented and depth within each were unmatched. For example: Big Pharma, Biotech, CROs, EMR software, Generic Manufacturers, Diagnostic Products and Services, HMOs, Home Health, Med Tech and Veterinary were present from big, mid and small capitalization, public and private.

Unlike many other sellside sector events, this conference also serves non-presenting private companies, venture capitalists, fixed income and loan professionals well. This event enables them to analyze competitors, build relationships, gain industry knowledge and/or raise capital all in four days. Seeds of mergers and acquisitions are also ever present. Representatives of larger companies are often in the audience of small company presentations and breakouts.

That being said, the subtle “big” message from the conference was the macro, not the micro.

Healthcare reform is definitely front and center, and guest speakers of the conference addressed this difficult issue head on. Below is a summary of some of their key messages.

Monday, January 11: Jamie Dimon, Chairman and CEO JP Morgan Chase

  • Inexcusable that a country as wealthy as the U.S. should have so many uninsured. Believes that they can be insured rationally.
  • Americans allow themselves to live unhealthy lives whether it is through obesity, smoking or drug use. Is it fair that all Americans pay for this?
  • In addition to existing benefits, JP Morgan is internally establishing its own health and wellness programs, including cash incentives for healthy behavior.

My Thoughts: Jamie Dimon’s long-term approach to healthcare flies in sharp contrast to companies that believe it should be an area of cost cutting and not a company concern. For example, on January 13, the mob of Local 2 protesters outside The Westin St. Francis Hotel was unavoidable. Local 2 is a union organization for housekeeping staff, cooks, dishwashers, bussers, bellpersons, servers, bartenders and other workers who serve 61 San Francisco hotels. Local 2 has been involved in a five month labor dispute with the hotels over their unwillingness to help pay healthcare benefits. This situation focuses on the issue of whether employers should cut costs by not offering healthcare benefits to all of its employees. Local 2 contends that for a hotel that earned over $11mm in the 9 months YTD 2009, spending an additional $500,000 should be a reasonable request. Starwood Hotels & Resorts Worldwide (HOT), the parent company of the Westin, asserts that Local 2’s request cannot be granted due to economic conditions.

Contrast Starwoods’s short-term cost cutting approach to Dimon’s which actually involves making an upfront investment/expense (health and wellness programs) in hope of achieving lower costs later. Coming from a bank that managed the financial crisis better than others, this is strong statement. Yes, spending more on employee benefits may lower EPS in the near-term, but so can the willingness to forego underwriting many potentially dangerous loans. This is affirmation of management’s goal to manage the business for tomorrow, not today. At JP Morgan Dimon is striving for a balanced approach where both employee and employer benefit. Healthy employees make for good workers, and good workers are more likely to help an employer accomplish its goals. Dimon’s way to healthcare is sensitive, yet potentially cost saving in the long run. Sometimes losing the battle (making less now) means winning the war (earning more, gaining market share).

As much as it is natural for companies to be cost conscious, there is a fine line for firms that wish to be leaders throughout time. History shows that the successful and enduring franchises, such as JP Morgan, focus heavily on investing in their employees. The irony of all this is that investors often criticize companies for overspending. One need not look farther than another elite company in the making, Google (NASDAQ:GOOG), which is regularly criticized for the amount of money it spends on its employees such as free transportation and meals. Good for Google that it has remained steadfast and not succumbed to investor pressure to reduce perks. Perceived extravagant employee expenses is not a result of its success, but in the company’s eye, a large reason for their achievements and ability to produce the sales, earnings and cash flow that investors desire. It should also be noted that since inception, taking care of their workers has always been a part of Google’s culture. Google wants its employees purely focused on the task at hand without unnecessary distractions. In short, investors should not be too quick to look at employee expenses as black or white. This can have serious negative consequences. We all know of companies with high employee turnover, and coincidentally these companies are consistently struggling. Attracting, developing and keeping talent at all levels is a culture. Leading companies know that their success lies in having a strong team behind its management team. Message for cost cutting companies: cut expenses with a strategic vision in mind and spend appropriately.

Tuesday, January 12: Thomas Scully, General Partner, Welsh, Carson, Anderson & Stowe, and Former Administrator of the Centers for Medicare and Medicaid Services

  • The proposed healthcare bill is not a reform bill, just a universal coverage/giant spending bill. The notion that this bill is scary for the healthcare system is false. Hospitals which were perceived to be the natural place for cost cutting, because they represent 31 percent of spending, have emerged unscathed. Concessions by medical device and pharmaceutical companies are weak. Instead the bill is predominately a massive expansion of Medicaid benefits, adding coverage for an additional 15 or 21 million people.
  • The biggest fight left is how the health plan will be structured. Right now the proposals are either a national exchange run by a healthcare czar or leaving these exchanges up to individual states.
  • At some point the government must figure out how to pay for all this. In the short-term it will be necessary to have higher taxes, and later, a pullback of Medicaid and Medicare benefits.
  • In the long-term the insurance agents will be the biggest losers, as exchanges will render them useless.

My Thoughts: The saying is, “Wall Street loves gridlock.” However, this is an example of how gridlock is not beneficial for America, since the current compromised bill has resulted in no cost savings. Instead, the bill likely may not benefit Americans for higher taxes and more U.S. debt should follow. If gridlock was not present, healthcare expenses could be lowered, but less constituents would be pleased. Let’s assume that lowering healthcare as a percentage of GDP is the goal. If the Democrats were in charge, then more Americans would have coverage at lower prices, and healthcare services and manufacturers would become less profitable. If the Republicans were in charge, public funding of healthcare benefits would be less bloated. This is certainly a simplification of the situation. Albeit, it does underscore that an attempt to appease all constituents eventually results in a highly diluted solution where we may all be worse off in the long run.

Wednesday, January 13: Tom Daschle, Former Senate Majority Leader

  • Healthcare spending as a percentage of GDP has more than doubled since he was a child.
  • A good model to consider is France’s healthcare system, which is consistently ranked among the best in the world and costs half the U.S.
  • Healthcare is an opaque industry. It is not like other goods and services that Americans purchase. The users do not know the costs up front or the quality of service he/she might receive.
  • The two major political parties do agree that health costs are too high. The conflict lies in figuring out the appropriate solution.
  • Historically, most healthcare reform has resulted in cost shifting, not cost saving.
  • The current healthcare reform bill has at least accomplished no denial and no limits for Americans.

My Thoughts: All of us will get old at some point, and some of us may be hit with an unpredictable illness through no fault of our own. Our healthcare bills will certainly rise. Escalating healthcare costs in the long run will hurt all of us. Do we really want an economy that is driven by healthcare? That’s if you believe that free markets have caused this to happen. If not then resources could be misallocated, thus hurting the overall U.S. economy in the future. How can we control costs? From a quality/cost tradeoff France’s healthcare model might be able to help Americans. Healthcare in France is actually a mix of private and public, just like in the U.S. This is in contrast to their European counterparts. The French do pay higher taxes, but net-net they save more on healthcare expenses while having choice because their out-of-pocket expenses are much less. We could learn something. Here are links to a couple informative articles regarding French healthcare.


Conference attendees were very fortunate to have such relevant speakers at this time. From listening to just three speakers, their healthcare reform thoughts had components of accord, conflict and diversity. Tom Daschle mentioned it best -- try to find any two people and see if they can come to an agreement. These leaders’ speeches are a microcosm of U.S. opinions. Healthcare reform is highly complex and will require iterations. The current version of the healthcare bill should not be looked as a panacea, but a signal that this is just the beginning.

Disclosure: No positions