The growth in U.S. healthcare spending is outstripping GDP growth once again, which places enormous strains on governments, employers and consumers. U.S. healthcare spending is now $3 trillion per year or 18% of GDP and grew 5.3% in 2014. The current estimate is that it will grow at a 5.8% annual clip through 2024. This growth is driven by 10,000 baby boomers hitting age 65 every day, millions of newly insured Americans, and a moderately expanding economy. As a result, entrepreneurs and investors correctly perceive a multi-decade opportunity to grow cloud, mobile, software and data services companies that will improve the quality and lower the cost of care in our dysfunctional system.
2014 was the breakout year for the Digital Health sector, as most data sources agree that venture capital investment in the sector grew by over 100% to approximately $4bn (the range of estimates varies between $3.5bn and over $6bn). In 2015, the growth rate for venture capital investment in the sector was flat and a greater percentage flowed into later stage investment rounds given the proliferation of corporate investors and growth equity investors. We also saw more private companies merge with other private companies as they tried to appeal not only to customers, who want broader solutions and fewer vendors, but also to investors who want companies with more scale and a quicker path to exit. A disproportionate amount of value creation will accrue to entrepreneurs and investors who know how to overcome, quickly, the usual obstacles of merging private companies together.
Many of the new technology companies in the sector believe that risk shifting is the key growth driver. Risk is being shifted to healthcare providers from government and commercial payors, which will increasingly only pay for the quality of care delivered rather than the volume of procedures they perform. In order to adapt to this new environment, providers will need better care coordination software, data analytics, and mobile solutions. They will also need better digital engagement with and compliance from their patients. Consumers are also being forced to assume more risk. In the next three years, 44% of self-insured employers will offer high deductible health plans as the only health benefit option. In fact the vast majority of health plans sold on the public exchanges are high deductible plans. As consumers are forced to spend thousands of dollars from their own pockets before insurance kicks in, they will need technology and data to make better decisions and to monitor their health. They will also need to seek out a better value when they purchase healthcare just as they do with other major expenditures.
The importance of restoring market-based price signals to the healthcare system is the thrust of a great book I read recently, Catastrophic Care: How American Health Care Killed My Father and–and How We Can Fix It, by David Goldhill. His father died of a hospital-acquired infection in a New York-based hospital, which motivated him to use his considerable skills in business outside of the healthcare industry to figure out what is wrong with our system. He is a life-long Democrat and proponent of universal healthcare. He was dismayed to discover that hospital-acquired infections kill over 100,000 people each year, which is 2x as many who die from car crashes and 5x as many who are murdered each year. He is dumbfounded that waste accounts for as much as 25% of all healthcare spending. He points out that healthcare spending has increased from 6% to 18% of GDP in 30 years and yet the 5 year increase in a longer average lifespan achieved during that period cannot be tied to our massive increase in spending. For example, while the reduction of early cardiovascular death has been the most important driver of increased longevity, a study published in the New England Journal of Medicine estimated that lifestyle changes (reduced smoking, better diet, and exercise) contributed 7x more to reduced death rates than costly procedures such as angioplasty and bypasses.
Surprisingly, seniors are spending 50% more of their income today on healthcare than before Medicare. Goldhill is rightly concerned that seniors are being over-treated. Between 1995 and 2008, seniors between the ages of 65 and 74 increased their annual number of doctor, clinic and hospital visits per person by 30%. Furthermore, 30 years ago physician visits by seniors skewed toward general practitioners and geriatricians while today they skew toward specialists, which visits are much more likely to result in costly new procedures and prescriptions. Fully a third of Medicare patients have surgery in the last year of life, but, surprisingly, the rate isn’t much different if the patient is 65 or 85. Even at age 90, 20% of Medicare beneficiaries have surgery in their last year of life. Atul Gwande’s powerful new book, Being Mortal, which is about geriatric care and how choices are made at the end of life, also examines how suffering, complications and the length of the recovery period are often poorly factored into care decisions at the end of life.
Goldhill’s solution is inspired by Singapore’s health system, which spends 4% of GDP on healthcare and has outcomes that compare favorably to U.S. outcomes. Singapore’s citizens pay a significant part of their income into the system and there is a safety net for everyone, but consumers are invested in their care decisions because “patients make a meaningful financial contribution at the point of purchase” and subsidies vary according to service level and the patient’s income. These ideas are thought-provoking and of course require greater study, but with $36 trillion in unfunded future liabilities we will have to consider all manner of reforms if we are to create a better system. Otherwise, in 70 years, the U.S. will spend 100% of its budget on healthcare. Milestone hopes to play its part in this reform process by investing our capital in technology companies that facilitate this transformation.