State of the West 2016: Saum Sutaria

I would say a couple of things how I came at this. I ended up in this space of really thinking about investors in health care more or less as what I would call a reformed cardiologist who was kind of uninspired by the incentive structure that Charles talked about, where anybody who came in with pain between their knees and their neck and ended up on the cardiology service I would take to the cath lab, which I found to be very odd. But that's literally my interpretation of what I was doing at the time. And so I decided to back up into a second degree in economics I had, and I believe I started that journey in an introductory economics class with Professor Kaine many years ago, and started to just look at this in a relatively dispassionate way. So healthcare is not Obamacare. First of all, I just want to be very clear about that. And I'm going to make some comments that may be a little bit different about the role of government in health care, which I find to be less than productive with respect to machinations that occur. But healthcare is a big industry, and the way I follow the healthcare industry is to look at where equity and debt flows in the industry to help me predict what's going to happen in healthcare. And I find that that ends up being a much better predictor of the future, at least on a short-term basis, for where the healthcare industry is going to go and what changes we're going to see. So let me just spend a few minutes on that. I have like three or four slides with some basic numbers.

In the last five years, we have seen a tremendous amount of capital inflow into this industry. Some of that is the result of the ACA. After all, we had a tax bill, which is what the ACA is, that injected a huge amount of dollars into the health care system, which then caused private capital to flow rapidly into the sector. $21 billion of additional venture capital into the sector, a 150% increase in the amount that private equity firms invested. Some of you may have seen today our publication of a 25-year analysis of private equity returns that showed that the health care sector over that period of time has returned more to private equity firms than any other sector, by the way, including energy over that period of time. There's a reason why healthcare is 20% of our gross domestic product. It's a big industry that attracts a lot of capital that grows a lot of private sector jobs over this period of time. Hedge funds have invested an additional $160 billion into the sector. If you think about a typical hedge fund that invests in a publicly traded company, they can't really invest above 10% ownership without having to then declare that ownership and ultimately be limited in their ability to trade in those equities privately without declaring those trades in advance. If you look at the major healthcare institutions today, including the types of institutions that Leonard used to run, those institutions' largest owners are hedge funds that now have, if you think about their maximum cap of about 10% ownership, have about 7% or 70% of their theoretical maximum stake that they can own in those entities today based upon the capital inflows that have occurred in the payer and the provider sector over the last few years. And then finally, if you look at the recent past, the amount of debt that the healthcare industry has taken on, that $440 billion is basically 80% of our annual trade deficit. Think about that, right? Just in the healthcare sector in the last few years, it's a very, very large number. And I think these gentlemen have already covered the sources of that financing. The industry is growing and creating a huge amount of economic opportunity for the United States at the same time that it's costing us a lot of money. Fundamentally, from my point of view, the issue is not what we spend in healthcare. Ultimately, you could take a view that this is the most important retail good we will consume. The issue is the return we get on that healthcare expenditure. And I'm going to spend a few minutes talking about that. But fundamentally, unless you believe markets both on the debt and equity side are totally irrational, the flows of capital indicate that the economy is not at a breaking point because of health care. It may be at a breaking point because of the return we're getting on the healthcare investments we're making.

Now, what's the problem? Just to aggregate up much of what was said, there is a tremendous amount of waste in the system. And this gets at the notion of why the return on the investment in health care, while maybe good for debt and equity investors, has not been equivalently good for consumers, and that is measured in outcomes. So let's just give you a few facts. First of all, health care and, parenthetically, education are the two sectors over the last 25 years that have had either flat or real negative workforce productivity. They also happen to be the two sectors that have grown the most jobs outside of government in that period of time. So it's absolutely unsustainable to have a situation in which the primary source of job growth are in sectors including health care where you don't make productivity gains of any significance and in some cases five-year periods with real negative workforce productivity. That's a problem that has to change. It's a definition of waste. The second thing that you find when you really look underneath why the waste is there is you start to look at how we finance health care. So just to boil it down into a simple set of things, we finance healthcare in three ways: insurance, savings (meaning what we may spend out of pocket), and subsidy. That subsidy comes from two sources in this country. One is government, which is taxpayer driven. And two is employers, and many of us obviously have employers that subsidize our healthcare. Look at what we try to do. Many of you understand insurance. We attempt to insure uninsurable events. First dollar coverage for a primary care visit that everybody needs is not a random, infrequent, catastrophic event that insurance should be for. So we try to insure uninsurable events. We then have a cross subsidy system where those who don't have insurance end up getting coverage by having an enormously high price for those who can afford the insurance. So that every time we spend $12,000 per person to cover a typical family of four, you're talking almost $50,000. You're really buying insurance for your family and probably two or three other families or partial families and a little bit of Medicare that is being underfunded on a unit basis. So, if you go to my subsidy side of the equation, we have two forms of subsidy. Government subsidy, which is enormous, on a unit basis underfunds the care that they consume. I think most would agree that Medicare or Medicaid reimbursement in general underfunds the unit cost of what is consumed and it's cross-subsidized by everybody else in an ever-shrinking employer sponsored insurance coverage pool. So you have this cross subsidy that is irrational and coming to a breaking point. The other source of subsidy, of course, is the employer, and the employer is saying no, we can't continue to support that subsidy. Between the two sources of subsidy, what are you left with? You're left with essentially savings. And so you see this enormous push into HSAs and high-deductible health plans and other things as a way to attempt to push some of that into people's personal savings to finance their health care. The problem with that is you have a market that's totally intransparent. It's not transparent, right? So it's very difficult to understand the price of what you're consuming for the benefit that you are going to receive, like you would in any other consumer market. So while this could be a very well functioning consumer goods market that would easily support 20% of the GDP were the results and value people were getting from the health care system good, it's not because you have a market that lacks price transparency and an understanding of the value that's derived from that price.

Now, the one comment I'd make about government policy in this area is if you go all the way back to Medicare and you think about every intervention from that period to now in the health care sector, they've all been supply side interventions. Let's restrict care. Let's make narrow networks. Let's have gatekeepers. Let's have HMOs. And every one of those has successfully and sequentially failed to scale in this country. I don't know how it's going to end up, but what I would say is that I am encouraged by the fact that we are trying demand-side interventions for the first time. And those demand-side interventions are beginning to treat health care a little bit more like it is a consumer good. And that demand side intervention is going to have to be coupled with more transparency and understanding of value derived if we're going to have a consumer good that is effective and ultimately reduce much of the waste that we see in the health care system. And I honestly can't predict for you; we have not had any substantial or scaled demand-side interventions in this sector since the advent of Medicare. So it's very hard to predict what will happen over time as a result of these demand-side interventions. By the way, that does not in any way mean that it won't be painful for individuals that have to go through that type of transition, especially those who are the most vulnerable. But from an economic policy standpoint, I would say that supply side interventions we have enough history to suggest that they've failed.

Now where are we seeing the capital flows occur in this period where we have some demand side intervention? So what's interesting about this and maybe a little bit disappointing, other than when you start to look at the more innovative systems like Intermountain Healthcare, is that we have seen four times the capital flows we saw historically into back office solutions. A lot of money is going into reducing administrative waste. That's good, of course it makes healthcare more affordable. One of the things to realize though is when those returns are generated, the real question is whether those returns will be given back to consumers ultimately or simply taken to the bottom line of the organizations that are investing in those solutions. You've seen about one and a half times the capital flows into care coordination. Now, care coordination is a waste basket term, no pun, for a lot of the things that I think the folks at Intermountain do really well that much of the rest of the health care system don't have the incentive to do. But it is interesting to see the contrast there. And then you've seen about $5 billion invested in what I would call the revenue cycle. What you should just think of is how do we actually make payments more efficient effective within the system. Again, not entirely clear that that will improve the outcomes in the health care sector, but again it may make the dollar flows and the efficiency of the administrative side more effective. So what I would say is if I were looking over the next 3 to 5 years, I don't actually see very many fundamental changes coming in healthcare delivery nor the outcomes that we're going to see in healthcare delivery as a result of policy. And the capital flows in my mind would suggest that what we're going to see most often as a result is actually the administrative cost burden in healthcare coming down. And until we start to put our money into better care coordination, better care management, better medical management, perhaps some outcomes-based initiatives, we're unlikely to see a lot of movement in the fundamental measure of what I call productivity in the healthcare sector, which is how do we get better outcomes for what we spend.

Now, the last slide I'll leave you with, and I apologize that this is a little bit hard to read, is that the capital flows move very quickly. So this is basically stock price reaction on the day after the election. And if you look, basically on the left hand side there, the yellow that you see is mostly the life sciences companies, the pharmaceutical companies, biotech, even the generics manufacturers that saw pretty significant gains. I mean, if one were to translate five to six to seven, eight, nine percent gains in the equity values of these organizations, you're talking about billions of dollars of equity value added. And if you look on the right hand side and you look at the acute care hospitals, the folks who attempt to manage Medicaid patients more effectively, the outpatient arena, and maybe some of the health insurers who are involved in care management, you see pretty substantial value destruction that occurred as a result of the perceptions after the election. Effectively, a lot of capital flowed out of those parts of the sector. So I won't draw any conclusions for you about what this means, but what I will say is two things. One is, you have to think about whether or not our focus on very innovative but sometimes expensive pharmaceuticals that drive our approach to chronic disease management and acute care management and technology that largely is hospital-based is the right area for capital flows to be occurring to improve ultimately the outcome environment that I described. And at the same time, if you look at the other side of the spectrum at the delivery side, the threat to the healthcare delivery industry from at least the perceptions of the capital markets about what this administration will do is likely to take resources pretty quickly away from those that actually are in a position to restructure their businesses to do more in population health than acute care. And it may be a message that says that the current healthcare delivery industry is not the best suited or the best natural owner for that transition. That's a very fair interpretation given how long the industry has lived in a fee for service model and an incentive structure that has prevented them from making that transition to population health. I will say that my concern here is that the bulk of employment that we have seen, which has kept the economy relatively healthy in the last few years, is sitting on that right hand side of the chart, and rapid capital flows out and rapid changes in the job structure, in many cases when these institutions are the largest employers in their community, probably poses some risk to the stability of the health care system. Again, I don't want to predict necessarily whether these capital markets reactions are correct or overstated, but I do think it represents a risk to the agenda of the healthcare delivery industry trying to achieve what many of them would say they would like to achieve in population health. My message overall is basically to follow the capital flows very carefully because for me they give a better indication of what's actually going to change and what's not going to change in the industry looking forward regardless of policy and regulation. And I would close by saying something that Leonard started with: there's plenty of money in the health care system to get this right. We don't need more money in the health care system. The question mark is how do we use that money to get better returns. And maybe that'll launch us into a good dialogue here. Thank you.