Investing In Healthcare
The baby boom cohort has changed the world in which we live and the lens through which we view it. The aging of this cohort (roughly one third of the population) will continue to usher in dramatic changes across most business sectors and areas of our lives in the years to come. The boomer demographic in North America is also presenting unique challenges for government run social programs and presenting unprecedented opportunities for businesses with the right entrepreneurial mindsets and resources. While boomer consumptive patterns have evolved over time, there are still strong correlates between their wants/needs (and the wants/needs of their children) and the flow of capital across virtually all economic sectors. Clearly, as boomers are aging, their spending habits are evolving as well. This re-prioritization of spending has become an area of study for governments and investment organizations alike. One area that surfaces repeatedly and is becoming pre-eminent in the study of boomer consumption patterns is healthcare.
Healthcare is one of the industries that are most acutely impacted by this demographic shift. While many boomers will continue working, many are also retiring or are getting close to retirement. Most boomers are or still view themselves as reasonably young (mentally and physically) – the oldest, born in 1946 one year after the “boys came home” from WWII. For those of you without a calculator handy, the oldest boomers will be 62 years of age in 2008. This small but important factoid is lost on many bullish investors who see the present time as the “halcyon days” in healthcare investment in seniors housing options or Long-term care. Yet it will be 15 to 20 years before the leading edge of the boomers reach the age where these services will be in higher demand.
What many people, including even professional investors, forget or never learned is that much of the the current demand for healthcare is being driven by WWI babies, or what has been coined The Greatest Generation. The Greatest Generation is compromised of those who reached adulthood just before, and served in WWII. Many came from rural areas of Canada and the U.S. and settled in the larger centers after the War. This generation was entirely different than succeeding generations. While the differences are beyond the scope of this article, suffice to say that those who seriously study demographic shifts expect the baby boom generation to have an entirely different set of expectations regarding healthcare service and other services than their parents.
So, to recap thus far, there are a significant number of opportunities in the United States and Canada in healthcare investment; but these opportunities are not limitless and nor are they a sure bet. Demographic shifts are significant drivers of healthcare consumption patterns. It is important to attribute healthcare supply and demand drivers to the market and demographic to which they rightfully belong.
So, while healthcare investment opportunities abound, there is no replacement for sound judgment based on analytical inquiry. This is true of any investment decision. It is also key that current and projected changes across the following domains are reviewed in detail: demographics, finances, macro-economics, geography, consumer attitudes and behaviours, motivating factors (e.g., luxury, fear), urban/rural, SES, educational, cultural, risk orientation, and other personal and group-related factors. While this article zeros in on the effect that the baby boom will have on the healthcare investment market, there are a multiplicity of other factors and population segments that are, and will continue to exert significant pressure on healthcare economics and consumption patterns.
The following businesses related to healthcare delivery are and will continue to be worthy of consideration by individuals, private equity, and venture capital investors. Again, it should be noted that the list is only a starting point, and that investment decisions should be made on the best current and projective information possible. It will be necessary to use an array of analytical tools and methods (e.g., Porter’s Five Forces and other financial and statistical methods and models) to assess the industry/sector/business opportunity prior to making a significant investment into healthcare. Having said this, potential healthcare investment opportunities exist in the following areas:
- Integrated Healthcare Centers, i.e., primary care (particularly where physician services, diagnostics (X-ray, CT, MRI), laboratory, and pharmacy are delivered within a short radius)
- Providers of products & services for diabetes management, congestive heart failure, COPD, coronary artery disease, and other high incidence chronic diseases
- Providers of mobility and other daily living assistive devices for those with a range of impaired gross or fine motor skills or other mobility limitations (e.g., caused by pain, arthritis, joint immobility)
- Pharmaceutical and biotechology innovators and providers (care must be exercised due to patent limitations, proliferation of substitutes – generic drugs, lengthy approval processes, and other process and outcome risks such as the Vioxx controversy )
- Health and hospitality services outsourcing (again, highly contextual and requires significant demand/supply driver analysis, political, environmental, union/non-union and other forces analysis)
- In-home healthcare services (e.g., nursing, physical therapy, occupational therapy, care and support)
- Medical or surgical retreats (highly specialized, significant risk)
- Assisted Living or Long-term Care (these resources are capital intensive and targeted at the parents of the boomers, i.e., the WWI babies) – it will be 20 years before boomers will require these services in any great volume (be careful)
- Major equipment and major/minor supplies providers (e.g., MRI, CT, ultrasound through to re-useable and disposable equipment)
- Providers of re-furbished medical equipment to secondary markets, which include more price-sensitive purchasers (e.g. re-furbished CT scanner for a smaller rural hospital)
- Alternative medicine centers (e.g., offering Ayurvedic Medicine, acupuncture, traditional Chinese Medicine)
Since information technology is a core function in healthcare, the following is a stand alone list of technology-related opportunities related to data/information collection and transfer:
- Devices: quick, simple to use, portable, and ease workflow in high stress healthcare environments (e.g., emergency departments, tele-health)
- Devices whose operating systems converge with mainframe of networked systems that admit, track, audit, and generate reports with minimum input and robust rule-based error checking
- Devices or system that integrates disparate healthcare network data and traffic
- Devices or systems which accurately expedite services
- Devices or systems which improve the accuracy and speed of diagnosis
- Devices or systems which improve reduce human error and increase the probability of appropriate and targeted treatment options
- Translational devices and applications of all sorts, i.e. translating actual “hands-on” data into useable, and interoperable information which can be used for diagnostic, treatment, recovery, and planning purposes
- Electronic dashboard technology for strategic decision-makers
- Providers of software applications that integrate disparate healthcare value chain and supply chain fragmentation
- Providers of software applications that integrate in-hospital processes (e.g., admission, discharge, transfer); care-finance-payments; care-supplies-payments and other A/P and A/R alignment platforms and applications
- Providers of software applications which refine, simplify, or facilitate the care planning of patients
- Providers of systems integration
- Providers of software applications for Human Resources, CRM, Finance, and other corporate functions
These are a few opportunities which currently exist in the healthcare context. As you might guess, many areas are being explored by larger firms. Healthcare IT is particularly attractive to larger, more highly capitalized companies and software developers. The competition amongst these groups is fierce due to the large volumes of funds in healthcare and the market opportunities driven by demographics and the need to constantly improve system performance. To date, there is no one firm with a strategic competitive advantage in any one area, though some healthcare sectors (e.g., diagnostics) have a high concentration of highly capitalized firms (e.g., GE and Siemens competing in the CT, MRI market).
Whatever investment decisions you decide, the amount of money you risk should be in proportion to your risk tolerance. Even “slam dunk” opportunities can turn out to be dogs if the circumstances are not right; or a context specific barrier is not weighed; or social attitudes do an about face.
If you are scanning the healthcare markets for opportunities to invest, be sure to do your due diligence and get help to investigate this complex and ever-expanding area. The due diligence you do prior to investing significant capital is essential to ensuring high double digit returns whilst minimizing your risk.