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Category: The Business of Health Care

Simple Bills are Not So Simple

By MATTHEW HOLT

I went for an annual physical with my doctor at One Medical in December. OK it wasn’t actually annual as the last time I went was 2 & 1/2 years ago, but it was covered under the ACA, and my doc Andrew Diamond was bugging me because I’m old & fat. So in I went.

I had a general exam and great chat for about 45 minutes. Then I had blood work & labs (cholesterol, A1C, etc) and a TDAP vaccination as it had been more than 10 years since I’d had one.

Today, about one month later, I got an email asking me to pay One Medical. So being a difficult human, I thought I would go through the process and see how much a consumer can be expected to understand about what they should pay.

Here’s the email from One Medical saying, “you owe us money.”

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Matthew’s health care tidbits: #DigitalHealth valuations

Each week I’ve been adding a brief tidbits section to the THCB Reader, our weekly newsletter that summarizes the best of THCB that week (Sign up here!). Then I had the brainwave to add them to the blog. They’re short and usually not too sweet! –Matthew Holt

For my health care tidbits this week, it’s time to bring up the disconnect between the continual collapse of #DigitalHealth stock prices and the continued increase in private sector investment and valuation in the same sector.

All of nine months ago, way way back in March 2021 market leader Teladoc hit a stock price of $308. Last week it hit a low of just under $90. Meanwhile several companies have IPOed or SPACed this year and almost all of them have seen their stock fall dramatically. For example, pioneer online mental health company Talkspace is now at a market cap of under $300m. This week a different mental health company Cerebral which was only founded in January 2020 raised $300m at a private valuation of over $4 billion. Yes they could have bought out Talkspace for that amount! In October Medicare Advantage plan Devoted Health raised money at a $12 billion valuation which exceeded the market cap of rivals Clover, Bright Health and Oscar–each of which has more members.

So what’s going on? Part of this is the wash of money still going into venture funds. Interest rates are historically low, while inflation is picking up, so that money has to go somewhere. Additionally some of the companies that SPACed out were probably unable to get such a good valuation in a private round. But it can’t be that all the 50 or so public companies are lower quality than the private ones. That indicates that either the private valuations aren’t real (because there are so many protections built into the deal for investors), or that the private and public valuations are going to get closer together. There is of course one more possibility–some of the private companies may pursue M&A and buy out some of the public ones. But in any event, this current arbitrage cannot last forever.

It’s not unlikely the public stocks may pick up. But we’ve seen private and public market bubbles before and the aftermath isn’t usually pretty.

Matthew’s health care tidbits: Athenahealth & Private Equity

Each week I’ve been adding a brief tidbits section to the THCB Reader, our weekly newsletter that summarizes the best of THCB that week (Sign up here!). Then I had the brainwave to add them to the blog. They’re short and usually not too sweet! –Matthew Holt

For my health care tidbits this week, it’s time to delve into the private equity firms’ buying and selling of Athenahealth. That’s of course the practice management/EMR firm bought by private equity companies led by Elliot Capital Management–they of the Israeli spy agency dirty tricks division–for roughly $6.5bn in 2018. Many (including me) have wondered how, given it was already doing about $1bn a year in revenue then, Athenahealth could be sold for $17bn three years later. After all it’s hardly likely to have tripled its revenue in a mature market! This comment by “Debtor 23” on @histalk is very instructive:

“Elliott did quite a bit better than 3x on its investment. The original deal was funded with about $4.8B of debt and $1B of equity from the hedge fund sponsors. Add in the acquisition cost of Centricity (call it $500M of equity, $500M of debt) and the equity investors are all-in with $1.5B of equity and $5.3B of debt. They sold off some assets for a total of ~$600M in cash, so net equity in play is $900M. They turned that equity into $11.7B (assuming no interim debt pay down), which is a 13x return. 13x feels ridiculous….but….if you’d invested that same levered-up $6.8B in the Nasdaq (QQQ) on the same timeline (Elliott began buying ATHN in spring 2017)…you could sell today for $18.1B. Absurd as this whole deal sounds, it has actually underperformed the market. This story is more about tech multiple expansion/bubble broadly than it is about improving management or running the business.”

So much like Renaissance and other hedge funds that rely on leverage, essentially Elliott leveraged Athenahealth up with debt to the tune of 80% of its value. So after slashing and burning R&D, selling assets (like the HQ which they apparently got $500m for) they probably got costs down & profits way up. When it was public under CEO Jonathan Bush, Athenahealth never tried to be that profitable. It was always fixated on the next big thing (the last one was building the future state inpatient EMR with Toledo & using the BIDMC tech it bought from John Halamka). That’s one reason its PE ratio was 100+.

So if Elliott can get some sucker to pay up and manages to turn $1bn into $13bn, how do the next greater fools–H&F and Bain Capital–do it? Well they need to layer Athenahealth up with even more debt (as money is currently so cheap) and keep generating enough cash to pay the debt. Of course at that price and with this mature a market it’s going to be super hard to grow the company enough to justify another leap in sales price, but it might be doable to service or even pay down some of the debt and take it for an IPO for a couple of billion more if the market stays nutso. So if H&F and Bain Capital basically shrink their equity portion down to $1-2 billion, and get it to IPO in a year or so for say $20Bn, they will at least double or triple their money. Not quite 13 x but not terrible.

And if it all goes wrong and Athenahealth can’t service the debt? Well the beauty of leverage and debt is that it attaches to the company – not to the PE fund that put it in that position. So all the new owners will have at stake is a reasonably small amount of equity. Of course if the shit hits the fan and Athenahealth goes bankrupt the employees and customers may not be so happy, but who cares about them? (Apart from that hasbeen CEO who got kicked out!)

Matthew’s health care tidbits: Drug prices

Each week I’ve been adding a brief tidbits section to the THCB Reader, our weekly newsletter that summarizes the best of THCB that week (Sign up here!). Then I had the brainwave to add them to the blog. They’re short and usually not too sweet! –Matthew Holt

For my health care tidbits this week, I am going to talk drug pricing. Anyone who gets basically any health policy newsletter has seen some of the cash PhRMA has splashed trying to make it seem as though the American public is terrified of drug price controls. But as Michael Millenson on a recent THCB Gang pointed out, when Kaiser Health News asked the question in a rational way, those PhRMA supported numbers don’t hold. 85% of Americans want the government to intervene to reduce drug prices.

Big pharma whines about innovation and how they need high prices to justify R&D spending but health care insiders know two things. First, for ever Big Pharma has spent about twice as much on sales and marketing as it’s spent on R&D. This was true when I first started in health care thirty years ago and it’s still true today. Second, the “R” done by big pharma is resulting in fewer breakthrough drugs per $$ spent now compared to past decades. Which means that they should be increasing that share spent on R&D and need to improve the “R” process. But that’s not happening.

Finally, pharma is very good at increasing prices of branded products and extending their patent protection. Lots of dirty games go on here. Look into it and you can expect a lot of discussion about insulin pricing or discover how Humira is still raking in $16bn a year in the US, despite the fact its original patent expired in 2018. With 85% of the American public in favor, you’d think then that a Democratic Congress would leap at the change to pass a bill that might save the taxpayer $50bn a year in drug costs. But of course that’s not going to happen. There is about $30bn a year in savings in the House version of Build Back Better that passed last week, but there’s little chance of much of that being in the Senate version given Joe Manchin’s daughter’s role running a drug company, and Krysten Sinema being a recent recipient of PhRMA’s largesse. And that’s assuming any version of #BBB gets through the Senate.

Instead hope something small happens to help desperate patients, and wonder how we ended up in a political system that apparently disregards what 85% of the public wants.

Breaking Up is Good to Do

By KIM BELLARD

Last week General Electric announced it was breaking itself up. GE is an American icon, part of America’s industrial landscape for the last 129 years, but the 21st century has not been kind to it. The breakup didn’t come as a complete surprise. Then later in the week Johnson and Johnson, another longtime American icon, also announced it would split itself up, and I thought, well, that’s interesting. When on the same day Toshiba said it was splitting itself up, I thought, hmm, I may have to write about this.

Healthcare is still in the consolidation phase, but there may be some lessons here for it.

For most of its existence, GE was an acquirer, gobbling up companies with the belief that its vaunted management structure could provide value no matter what the industry. This was most famously true in the Jack Welch days, but since those days it has been gradually shrinking itself, spinning off some of its more problematic divisions, like appliances, locomotives, and much of its once-huge financial services business. It will spin off its healthcare business in early 2023 and its renewable energy and power business in early 2024; its aviation business will keep the GE name. 

“A healthcare investor wants to invest in healthcare,” CEO Larry Culp explained. “We know we are under-owned in each of those three sectors, in part because of our structure.”

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Not Your Father’s Job Market

By KIM BELLARD

If you, like me, continue to think that TikTok is mostly about dumb stunts (case in point: vandalizing school property in the devious licks challenge; case in point: risking lives and limbs in the milk crate challenge), or, more charitably, as an unexpected platform for social activism (case in point: spamming the Texas abortion reporting site), you probably also missed that TikTok thinks it could take on LinkedIn.  

Welcome to #TikTokresumes.  Welcome to the Gen Z workplace.  If healthcare is having a hard time adapting to Gen Z patients – and it is — then dealing with Gen Z workers is even harder.  

TikTok actually announced the program in early July, but, as a baby boomer, I did not get the memo.  It was a pilot program, only active from July 7 to July 31, and only for a select number of employers, which included Chipotle and Target.  The announcement stated:

TikTok believes there’s an opportunity to bring more value to people’s experience with TikTok by enhancing the utility of the platform as a channel for recruitment. Short, creative videos, combined with TikTok’s easy-to-use, built-in creation tools have organically created new ways to discover talented candidates and career opportunities. 

Interested job-seekers were “encouraged to creatively and authentically showcase their skillsets and experiences.”  Nick Tran, TikTok’s Global Head of Marketing, noted: “#CareerTok is already a thriving subculture on the platform and we can’t wait to see how the community embraces TikTok Resumes and helps to reimagine recruiting and job discovery.”  

Marissa Andrada, chief diversity, inclusion and people officer at Chipotle, told SHRM: “Given the current hiring climate and our strong growth trajectory, it’s essential to find new platforms to directly engage in meaningful career conversations with Gen Z.  TikTok has been ingrained into Chipotle’s DNA for some time, and now we’re evolving our presence to help bring in top talent to our restaurants.”

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Money and Values: For Healthcare Workers, It’s Time They Align

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By WYNNE ARMAND and CHRISTIAN MEWALDT

It shouldn’t be controversial to say that promoting the well-being of patients and our community should be at the core of our decisions in health care — even when competing factors exist. Yet we have grown increasingly uncomfortable to realize that we’ve been investing in companies whose products — including fossil fuels — are at the crux of diseases we treat.

In 2018 alone, fossil fuel combustion-produced particulate matter was responsible for an estimated 9 million deaths worldwide, according to a recent publication by researchers from Harvard University and the Universities of Birmingham and Leicester in the United Kingdom. Other health effects are extensive, including increased cardiovascular disease and respiratory illnesses, especially in small children. Fossil fuels are also widely considered a primary driver of climate change, and their combustion contributes to the increased numbers of record heat waves and heat-related deaths, as many US communities are facing this summer.

Our hospitals, as tax-exempt nonprofits, provide us retirement plans in the form of 403(b)s, financial accounts similar to 401(k)s that are offered by for-profit companies. As employees who are eligible for benefits, we are typically automatically enrolled in the retirement savings plan, with contribution limits determined by the Internal Revenue Service (IRS). Recently, we learned that by the end of 2020, of the $35 trillion in US retirement assets, $1.2 trillion were invested in these 403(b) plans, according to Investment Company Institute, the trade association for investment companies.

With healthcare representing the largest sector of employers in the US, with nearly 7 million employees at hospitals alone, our employers should provide us with options for retirement funds that do not contain fossil fuel investments that ultimately undermine our duty to patients.  While retirement finances aren’t our focus during our workdays, the effects of our collective $1.2 trillion investment do appear in clinical settings.

The default choice at our institution, like many, is a target-date fund composed of “passive investments”, i.e. indexed stocks and bonds that rebalance as the employee’s retirement date nears. Most also offer pre-screened mutual funds chosen by the employer’s investment committee, or allow participants to transition retirement funds into a brokerage account to self-manage investments. To choose an alternative investment strategy requires financial know-how and effort, so, unsurprisingly, most of us invest in the default. The largest, most-used are the Vanguard Target Retirement Index Funds, which have an estimated $292 billion invested in fossil fuel companies.

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A Plan to Conquer U.S. Drug Shortages

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By JESSICA DALEY and WAYNE RUSSELL

COVID-19 has focused the nation’s attention on the risks associated with complex, global supply chains, particularly related to healthcare products and prescription drugs. While supply disruptions of personal protective equipment (PPE) captured headlines, the pandemic also compromised the drug supply chain. With much of the United States’ generic drugs manufactured overseas, exportation bans coupled with increased global demand created significant challenges for U.S.-based providers to secure basic, life-sustaining and life-saving therapies.

As an “easy” solution, many are now calling for manufacturers to produce medications domestically. While expanding investment in U.S. drug-making capacity is a vital component of a reliable supply strategy, moving the majority of production onshore is unrealistic.

Creating a dependable drug supply chain is a multi-faceted issue that requires a thoughtful, diversified strategy.

Repairing the Market is Job #1

Drug shortages have been pervasive for more than a decade – well before COVID-19’s onset. While shortages are triggered in a number of ways, arecent Food and Drug Administration (FDA) report says economics are a main causative factor.

Almost all shortage drugs are older, low-cost generics costing less than $9/dose. Because these products don’t generate blockbuster profits, manufacturers are less willing to invest capital to improve quality, build redundant capacity or source safety stock. Over time, market competition continues to erode price and further compress profits, leading to a war of attrition where competitive players exit the market – leaving behind as few asone or two manufacturers in many important categories.

Relocating production to the United States will not address generic drugs’ inherent profitability problem. Increased regulations, environmental and otherwise, could lead to higher production costs, which begs the question: will healthcare providers trade the potential for higher costs for predictability in supply?

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Redefining Values in American Health Care

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By RICHARD HOEHN, MD

Experts claim we could have been better prepared when the COVID-19 pandemic struck in early 2020. With an annual budget of $400-700 million, the Strategic National Stockpile (SNS) is designed to respond to chemical, biological, and other disasters. Its $8 billion inventory included 13,000 ventilators and a limited supply of personal protective equipment, N95 masks, and medical supplies. This left state and local governments scrambling as the COVID-19 pandemic accelerated and the capacity of many hospitals was overwhelmed.

Faced with immediate and visible death and suffering, leaders took drastic steps to contain the virus, “flatten the curve,” and mitigate economic consequences. Trillions of dollars were allocated to recovery and stimulus packages.

This scenario mirrors our general approach to health care: chronic underfunding of public health followed by high costs and loss of life.

While not as shocking as a sudden pandemic, millions of Americans struggle daily with medical and socioeconomic challenges. Our health care system is designed to care for these patients when they have a problem, not to keep them well. This creates a dichotomy where a minority of the population spends most of the health care dollars and little is invested in the remaining majority

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The Medical-Industrial Complex Pads Its Pockets As We Empty Ours

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By MIKE MAGEE, MD

A report this month published in the British Medical Journal found that 80% of 293 physician leaders and board members of 10 of the most influential medical associations in the United States (including the American College of Physicians, American College of Cardiology, American Psychiatric Association, Infectious Disease Society of America, American College of Rheumatology, the American Society of Clinical Oncology, Endocrine Society, American Thoracic Society, and Orthopaedic Trauma Association) received financial payments of $130 million in total for “leadership” activities between 2017 and 2019.

In doing so, they were replicating the behavior established in 1939 by Vannevar Bush. Born March 11, 1890, in Everett, Massachusetts, the only son of a Universalist preacher and the grandson of a whaler, Bush earned a math degree from Tufts, followed by a PhD in engineering from MIT. From the beginning of his career he straddled the academic and the industrial in a way that anticipated the future of almost all scientific research.

In 1939, with the Second World War consuming both Europe and Asia, the father of the Medical-Industrial Complex met with the president of Harvard University and the president of Bell Labs, and mapped out a strategy for overcoming our lack of scientific preparedness. Out of that small meeting came a short, four-paragraph proposal for a centralized science operation—outside the control of the military—which he presented to President Roosevelt on June 12, 1940.

The president read the report, seized his pen, and scratched at the top, “OK-FDR.” With that stroke, the National Defense Research Committee (NDRC) was created, and with it, the fully codified and institutionalized era of academic-industrial partnerships in research.

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