US healthcare still shines amid political hostilities

With healthcare to once again host a key battle in US presidential elections, we look at whether the role of the private sector in the world’s single largest healthcare market has anything to worry about.

Politics may have put US healthcare companies on edge, but the deep roots the private sector has in the system means it remains the dominant player in a rapidly growing market. 

The US boasts the largest single healthcare market in the developed world in terms of population, and it is growing. Analysis by Deloitte predicts the US market will grow to $4.1 trillion by 2022, up from $3.5 trillion in 2017. 

To put this into a broader context, the global healthcare market is expected to grow from $7.7 trillion to $10 trillion over the same period. 

The growth in the sector has provided healthy gains for investors over the longer term, with the MSCI World Healthcare Index up 286% over the past decade and the Nasdaq Biotechnology Index delivering an even more impressive 407%.

However, investors would be forgiven for taking a more cautious approach to healthcare, with the sector underperforming broader markets as US politicians wrangle over what the country’s medical system should look like in the run up to the 2020 presidential election. 

Paul Major, manager of the £525 million BB Healthcare (BBH) investment trust, is ‘optimistic’ about the US despite the Democrats’ plan – most vocalised by senator Bernie Sanders – to extend the government-funded healthcare programme ‘Medicare’, which makes free healthcare available to elderly and disabled individuals, to cover everyone. 

While these plans have thrown a shadow over the healthcare sector, Major said the ‘US governmental system was designed to prevent radical policies coming through’ and the independent Congressional Budget Office has to present cost analysis on any legislation. 

‘If you look at what’s being proposed in the US on the Democratic left, it doesn’t stack up economically,’ said Major.

‘They cannot deliver what they’re saying at the cost they’re saying,’ he said.

Innovative edge 

While the US healthcare sector may be experiencing turbulence, it remains the largest developed market with a single regulator and its size continues to give it an edge in terms of innovation.

‘Bringing a product to market in the US is quicker and easier than it would be to get approval across Europe’s 27 countries,’ said Major, although it is not a speedy process, with the average drug coming to market after nine years and more than $1 billion. 

This investment in both time and money deters investors from outside of the US, re-enforcing the US’s dominance in the market.

‘For reasons that frustrate me and I don’t fully understand, I think venture capitalists in America are much more willing to accept the reality of medical development, which is high levels of regulatory oversight, large upfront costs and long timelines,’ said Major.

Major said the probability that a drug will turn a profit is around 4-5% so the ‘odds of success are low and the risks are high’. 

‘We in Europe, and particularly here in the UK, don’t seem as willing to back companies, which is why you see, for example, GW Pharma started here, British research and development, but it’s ended up being listed in the US,’ he said.

Democratic overhaul 

Extricating the US healthcare system from private companies is a mammoth task that has been made harder post-Obamacare. For example, the Affordable Care Act levies a tax penalty on those who choose not to purchase health insurance.

Major said Obamacare ‘facilitated and accelerated the management of healthcare risk by the private sector on an outsourced basis’ and argued private companies ‘do a better job’ than the US government. 

The fund manager backed the idea put forward by Democratic politicians Michael Bennet and Tim Kaine for ‘Medicare X’, a half-way house that sees Medicare offer health insurance at a price, competing directly with the private sector, and eventually winning out if it proves to be the better solution.

‘That’s probably more of a logical gradualist expansion route that all of this will take,’ said Major.

Changing the US healthcare system is a difficult task but it is not impossible and Major said ‘it’s clear that there are a number of consumers who are very dissatisfied with how the healthcare system works’.

He does not believe, however, that expanding Medicare is the correct solution, as there are many of the 160 million Americans who are happy with the private health insurance they receive through work and would be reluctant to pay more tax for Medicare.

‘When you start facing the realities of it, which is, are you prepared to pay more tax, are you prepared to accept less choice? [And] remember, choice is pivotal in everything in their society, I think it becomes a much less clear-cut issue,’ said Major.

Trump targets drug pricing 

Expanding Medicare isn’t the only political shake-up that healthcare companies are facing, as US President Donald Trump has opted out of reforming the system, preferring instead to narrow part of it: drug pricing, which accounts for around 9% of healthcare expenditure in the US. 

Major said it was ‘technically true’ that drugs were more expensive in the US than the rest of the world and ‘there are easy ways that you can deliver something to change that’. 

‘So [Trump] wants a win and feels he’s got this win,’ he said. 

However, Trump has only talked in ‘broad terms’ around reducing pricing, failing to provide any detail, and it is likely he will face resistance from his party, which is ‘opposed ideologically to the idea that the government dictates anything’, said Major. 

Garry White, chief investment commentator at Charles Stanley, agreed that the Republicans are likely to vote through a drug pricing bill as it would be regarded as ‘socialism’. 

‘The Republican party [was] against Trump’s proposal to try and get lower prices on drugs,’ he said. ‘So it’s probably not going to happen through the Senate, so it’s not really going to happen.’  

Pricing of pharmaceuticals is an issue that both parties are keen to address, although Trump has made it the key tenet of his healthcare reforms. Currently the Republicans are promoting the Prescription Drug Pricing Reduction Act and the Democrats are touting the Lower Drug Costs Now Act. 

However, neither are likely to vote through the others’ bill in the House of Representatives and Andrew Harradine, head of fund research at EFG Asset Management, said there will be a period ‘of political deadlock over the next six to 12 months’. 

This deadlock will come despite both bills seeking to reduce ‘out of pocket expenses’, or the excess paid on the insurance policy. 

‘[There are] definitely some bills on the table that are seeking to get drug prices down, but given that we have an election next year, what is the appetite of either party to give ground?’ he asked. 

Hilary Coghill, founder and chief investment officer at City Asset Management, said that despite noise around pricing in healthcare and Trump putting at the forefront of his previous election campaign ‘nothing has moved since he’s been elected’. 

‘I can’t really see, with everything else that’s going on, anything happening in the next few months,’ she said. 

‘I think it would be quite low on his priority list and I don’t think he wants to upset business because if nothing else, Trump is pro-business.’

Solving the underlying issue 

While reducing drug prices may be, from a headline point of view, a vote winner, Major said the real concern is the absolute cost of healthcare to individuals in the US. 

He said as a percentage of GDP, Americans spend 18% on healthcare versus the OECD average of 12%, which has been driven up by ‘overtreatment’ because of fears from medical professionals over litigation.

There is also the broader demographic trend of an ageing population, which inflates the cost of healthcare for all, and this issue is only set to increase. 

White said demographic shift ‘underpins the long-term future of the healthcare sector’. 

While Major agreed there ‘are lots of things wrong with the drug industry and lobbying, and pricing in the US versus the rest of the world, but as a way of moving the dial, it’s pretty small beans’. 

While reducing out of pocket costs may ‘optically’ make consumers feel better, it doesn’t address the underlying issue. 

‘If you don’t actually address real costs, all that does is resurface somewhere else in higher premiums or lower wage growth the next year, because their employer is subsidising more of the healthcare cost,’ said Major.