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30 November 2017
M&G fund managers Aled Smith and Gautam Samarth look at the challenges facing the US healthcare sector.
The cost of healthcare in the United States is notoriously high. Increasingly, the model is looking unsustainable, raising questions for investors in this US$3 trillion-a-year sector.
As with many other industries, innovation and technology can help make healthcare more affordable for individuals and the US government alike. This will, however, pose challenges – as well as opportunities – for investors.
When we look at the US healthcare system, it clearly exhibits three characteristics associated with a bubble.
Healthcare price inflation has consistently outstripped price growth in the broader economy – as measured by the consumer prices index (CPI) – for more than 50 years.
In total, the US spends around 16% of its gross domestic product – a measure of the size of its economy – on healthcare. This is significantly higher than any western European country. Despite higher spending, life expectancy is lower in the US.
Healthcare spending has steadily risen over the past decades, reaching 17% of personal consumption expenditure (PCE) and 28% of total federal government spending by 2016. The US government expects this latter figure to reach 30% by 2026.
Bubbles burst when reality does not meet expectations. Whether the US healthcare bubble bursts or just slowly deflates will depend on government policy and the role of technology in deflating costs – or stemming rising costs – within the system.
As those footing the bill get more serious about controlling rising medical costs, and technological innovations transform the delivery of healthcare, there are certain to be companies that emerge as winners and losers. Our priority is to avoid investing in those on the wrong side of the following trends.
For some time, we have been talking about the shift from analogue to digital as one of the biggest changes happening in the investment world today. The US healthcare system offers another example where such digitisation can solve the potentially insurmountable problem of rising costs, while still improving the quality of care.
As investors, we are looking to benefit from key drivers of innovation, better population health management and shifting incentives to value-based care that are at the core of this digital transformation.
Even though looming pressures threaten the pace of future growth in US healthcare, we believe there are great opportunities for investing in the solutions to the sector’s challenges.
Please remember that the value of investments goes up and down and will fluctuate over time, and you may not get back the original amount you invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.