The Hidden Revolution | Transcript

Sean Dodge: We view value- based care as an eventuality. We talked about the cost and quality problems the US has, this we see as being the best way to fix it. And so we really see, even those transitions taking a while and we still have a long way to go, that this is where the puck's headed.

Joe Coletti: Hello and welcome to another edition of Pathfinders in Biopharma, podcast series from RBC Capital Markets that explores the fast moving world of Biopharma investment. I'm Joe Coletti, your host, and today we have a special guest, Sean Dodge. Sean is a healthcare technology analyst in our global research team here at RBC Capital Markets. I'm excited to have Sean today for a few reasons. One is this is our first crossover episode of the podcast. And what do I mean by that? This is something we hope to do a couple times a year, really try to bring you fresh perspectives from other parts of the healthcare industry that are both relevant and important to how this industry may evolve and what it may look like in the years ahead. Sean's also going to educate us a little bit more on the really quickly evolving healthcare information technology, digital health space, and talk to us about his new report that highlights an emerging class of tech enabled providers that are really poised to transform the healthcare system in the future. So without further ado, Sean, thanks for joining us on the program today.

Sean Dodge: Yeah, thanks for having me, Joe, and happy to be here.

Joe Coletti: So before we dive into deep, I do want to give our listeners just a chance to get to know you just a touch more. I'm wondering if you could maybe talk a little bit about your background and then maybe from there we can sort of jump into the broader perspective that you've got on the healthcare information technology space, or HCIT space.

Sean Dodge: Yeah, great. So my coverage is pretty heterogeneous. It spans from digital health, healthcare IT space that we'll talk about today, to healthcare services, and that includes medical product sterilization, medical waste collection, outsource dine- in and janitorial services for skilled nursing, and then all the way to the CDMOs, which are the outsource drug manufacturers. HCIT's really the core of my coverage and I've been covering that group for the last 13 years. It's about three and a half here at RBC, and then for just about 10 years before that at a different firm and then before that I covered the consumer space for another four years.

Joe Coletti: When we start to look at the HCIT digital health space, they're broad terms. Can you give us sort of a quick primer on how companies and investors are defining this space right now? What type of companies or products and services that fall into or are included in this part of the industry?

Sean Dodge: Yeah, it's a great question, it's one we get a lot too. So the HCIT space is a very broad one, but if we kind of take a step back and just think very high level, the best way to think about it is there's a lot of work being done in healthcare to try and keep people healthier, deliver better outcomes and experience when they do need care, and overall to reduce costs. And there are a lot of different elements of this and strategies people are using to do that. Exactly what a lot of the companies I cover are focused on, and again, a lot of heterogeneity there, but within this, it ranges from things like virtual care, so using video interfaces to interact with a doctor instead of having to travel to meet them in person, which makes getting care of course cheaper and more convenient, to even companies that are creating the tools to make it easier to interact with health systems.

So things like enabling patients to schedule their own appointments or more easily see and understand their medical bills or figure out the cheapest pharmacies to get their prescriptions at. And then it even includes outsourced tech- enabled services like billing and collecting, which is we think about billing and collecting for a hospital or health system, it's a super complicated task, and one that doctors and hospitals tend to not be very good at. So there are companies that specialize in just taking that process over completely and using technology and automation to do a much better job of it at a lower cost. So again, HCIT is kind of a real broad, wide encompassing term that includes a lot of the things that, again are focused on just making healthcare better and cheaper.

Joe Coletti: When you think about where the space is today versus maybe when you first started covering companies or the space, how's it kind of evolved?

Sean Dodge: It's really incredible to think about how much the space has changed just over the last 13 years that I've been covering it. A couple of data points or things that come to mind here are in 2010, for example, less than a third of the healthcare data in this country was even digitized. Most of it was still being recorded using pen and paper and being stored in big chart rooms. So we've come a long way on that front now, just the vast majority now of our data's even being captured electronically.

We also think about the iPhone, for example, was only first available in 2007, and so adoption of smartphones has changed a lot over the last 10 years and now has become a very important tool when it comes to keeping people engaged with their wellness and health. If we just think about the landscape of publicly traded HCIT companies, just the change that's happened there recently, there are 62 stocks we effectively track across what we call the digital health universe, and over half of those, 34 of those, came public just in the last three years, what we're seeing happen on the private side too. So we can comfortably say that the amount that's being invested in this space, the amount of innovation that's happening is very much accelerated. We see that continuing to be the case.

Joe Coletti: It's really incredible. Now I imagine the speed at which it's evolved to date is only going to accelerate going forward. What are the big themes that you're paying attention to or investors are paying attention to, most exciting to you about the space moving forward?

Sean Dodge: I think a lot of it has to do with the quality and the cost of healthcare in the United States. We know healthcare costs have been growing well in excess of GDP for a long time now, to the point where now healthcare is 20% of GDP. So I think everybody realizes that we have a big cost problem and alongside of that a quality problem. And so I think our system isn't necessarily broken, but the point here is it isn't operating as efficiently as it should either. There's a lot of data out there that shows the US spends on a per capita basis a lot more than almost all other developed countries, and we're not getting commiserate benefits for it, that life expectancy and disease prevalence here are worse than in those other countries. And why this is I think has a lot to do with really two things, and this kind of gets back to your question around the themes, is the two disconnects that we see is one is how healthcare is paid for right now.

We have this misaligned payment model where we pay healthcare providers on a fee for service basis, meaning they're compensated for how much they do, not for how well they do it, and so this creates an adverse set of incentives and inefficiencies that come along with that. And then the other dynamic and kind of tangential to that is there's this disconnect that has been created between who consumes healthcare and who pays for it. So since the advent of health insurance, individuals have barely ever had to pay directly for their own healthcare out of their own pocket, they had insurance that paid for it, which meant there was no economic constraint that gated how much they consumed or how discerning they were when it came to shopping for it. And so we're left with this system that really marginalizes the consumer. And so now what we're doing to try and fix all of this is transition how we pay for healthcare to more of a value- based system. And under a value- based system, the design or goal is to reimburse providers based on how well they take care of their patients, not how much healthcare they deliver.

Joe Coletti: So value- based care is kind of being held out as a panacea, but it seems like transitioning how we pay for healthcare is obviously not an easy thing to do. How's this all being driven and how long do you think it will actually take?

Sean Dodge: So not an easy thing to do, that's exactly right. So switching how we compensate doctors, for example, to these value- based models, it completely upends their practices. It's a really difficult transition, a risky one for them to make. And so if we think... just a quick example of this, under fee for service, which again is the current model that we're using to reimburse doctors and hospitals for healthcare, how they get paid is very simple. It's based on how many patients they see and how much they do to each patients. It's easy to conceptualize, and this is how practices are built to operate. By comparison under a value- based model, these same docs get paid instead of how many patients they see times how much they do, they get paid a fixed number of dollars per patient, for each patient that's attributed to them for the year and that's all they get. And in return, they're responsible for all of that patient's healthcare for the year. If it ends up costing less than what they get paid, they get to keep the difference, but if it costs more, they're on the hook for it.

And so you think about just how much more complex this is from the standpoint of the doctor or the hospital. There's so much more they need to know and they're responsible for. They need to know first, who their attributed patients are, who they're responsible for, and then they need better, more complete data on the health status of each of those patients, which is no easy task when you figure that each doc may have a thousand or more patients in their panels. And then because everybody has a finite set of resources, they need some way to prioritize or stratify which patients they should be most focused on taking care of. You can't be on top of everybody all the time. So you need to be able to identify which of those patients are most at risk of showing up in the hospital in the ER, which of those that you can spend or use your resources on to improve their situations.

Because it's being able to avoid those situations, those visits to the hospital or the emergency room, it's being able to avoid those that are key to really bending the healthcare cost curve. And so this is a long- winded way of saying making the transition for providers is very complicated. It requires them to have much more sophisticated and capable systems to be able to track and monitor everything they need to be able to deliver more proactive care. And it's really risky because if they don't do a good job, not only will they not make money, but they might lose it. And so that's a big part of the reason why the transition is taking so long. It began in earnest over a decade ago and why we think we're still in the early stages, but we are seeing signs that the transition accelerating, but we're still a long way from this being we think the standard.

Joe Coletti: What does the path for adoption then kind of look like? Where are we in terms of defining and implementing some of these value- based care strategies right now?

Sean Dodge: It's difficult. It really upends the way doctors practice medicine, and it's risky for them because if they don't do it right, they're on the hook for the money and so financially are at risk here. We're a decade plus into trying to make this transition now. We've made some progress, but I'd argue it's still really early days.

Joe Coletti: So Sean, tell us a little bit more about this report.

Sean Dodge: Yeah, so we've talked about the complexity and the sophistication and the risk of these new programs for providers, but there's this new group of companies that are emerging, and this is what we profiled in this report that we published a few months back. So this group we call the Tech Enabled Providers, it's these problems, helping docs transition to value, that they're all designed to solve. Within this subgroup, there are a lot of different approaches there, but they're all pretty much focused on helping docs navigate the transition and succeed in these new value- based models. Most of them offer these turnkey programs that docs can participate in where all of the things, like the actual where we all work, all of the contracting with the payers, they provide them new technology and systems. So everything that they need to be able to successfully participate in these new models. And it's something that, when they're successful, enables the doctors to make a lot more money. Doing so and all of the difficult stuff is managed behind the scenes for them in a way that doesn't really change much about the doctors' kind of day- to- day behavior. So it's really, from the doctor's standpoint, enables them to do an effective job in these programs, but really not disruptive at all to their day- to- day tasks. We see them as being kind of win- win- win, that docs get an easy transition into value- based care, they get paid more, their patients get a better experience and get taken better care of, and then the insurance companies on the other side of these contracts lock in better margins. And it's the emergence of these with some more of the kind of regulatory pushes and docs just growing a little bit more comfortable with the idea that this is an eventuality that we think are helping to accelerate this pace of transition that makes us a little bit more hopeful that it will continue to accelerate.

Joe Coletti: Now what about the environment around this evolution that's trying to go on from a regulatory perspective? In the report, you talk a little bit about this. What's kind of happening there right now?

Sean Dodge: It was really policy that started to get the ball rolling on this over 13 years ago that providers for the most part were resistant to this, and so they needed a little bit of push from the regulatory side to get it moving. But since then, the transition's really begun to take on its own life, its own momentum. And so I don't think we need much more push on the regulatory front to keep this going. But the good news is we're still seeing some help there, and an example of that would be CMMI, which is the division of CMS that that's helping to drive this, they've been in place now for over 10 years and over that timeframe have run over 50 different pilots or demonstration programs that test different models and approaches because value- based care is new to everyone.

And so there's a lot of learning and experimenting that needs to happen to figure out what kind is the strategies work and which don't. And they went back recently and reviewed all of the experimenting that's been done over the last 10 years and used that to guide their approach to the next 10 years. And so they recently came out and really reaffirmed their commitment to driving the US to value- based care. And then they used a lot of these learnings to make some tweaks at the models that they're now introducing. So there's a lot of just really encouraging momentum that's happening without the help of policy, but we're still getting some kind of tailwind or push from policy too.

Joe Coletti: Now you mentioned some of the tech enable providers. Are there certain, not specific companies, but are there certain types of companies that you see sort of taking lead or there certain areas in the market that you feel like are maturing faster or may mature faster than others?

Sean Dodge: We are. There's a lot of variation, as I've I've mentioned, and it's another reason why this space has been really exciting and interesting to cover is because of all of the different strategies and approaches that we're seeing happen. And what I mean there is, for example, we're seeing the payers so that the health insurance companies beginning to move more in this direction through vertical integration. So United Health, which is one of the largest insurers in the country, has now also become the largest employer of physicians in the country. And on top of that, they've also been buying and building their own physical network of brick and mortar clinics that they're directing their members to as part of their strategy to help improve experience and lower costs. Similar but different, we're seeing the drug retailers. CVS and Walgreens have both been active investing in more healthcare assets. CVS, which acquired the insurance company Aetna a few years back, is in the process of acquiring a company called Signify, which it intends to use to begin moving care into people's homes.

And then you have non- traditional healthcare players like Amazon, which is in the process of buying a company called One Medical, which owns a network of brick and mortar clinics. So even Amazon is getting in the actual physical clinic business. And then we kind of go to another end of the spectrum in the virtual health companies like Teladoc for example, are now offering what they call or what they've termed Virtual Whole Person Car,. And they've talked about that being something they can use to begin taking risk around. So there's been this really interesting convergence that's happening of the healthcare providers, the healthcare payers, and the tech companies that are all kind of coming together and creating these more vertically integrated models. And it's something I think we're still very much in the early stages of, but again, if we think about just the M and A activity that's happened across the space in late 2021 and in 2022, seems like we're seeing a lot of acceleration there, and that that'd be something that we expect to continue into the years ahead.

Joe Coletti: Sean, why are value- based care strategies attractive to investors and what does the future hold for value- based healthcare in the next five plus years?

Sean Dodge: First, I think this is a common view, is that we view value- based care as an eventuality. We talked about the cost and quality problems the US has. This, we see, as being the best way to fix it. And so we really see, even those transitions taking a while, and we still have a long way to go, that this is where the puck's headed. Second, the addressable market here is massive. You figure the US spends nearly $ 4 trillion annually on healthcare, the vast majority of which is going to be affected by the shift that we're seeing. Number three would be we're 11, 12 years already into this transition, actually more if you count some of our prior attempts at this, but still very early in adoption. So lots of runway left for growth for these value- based care companies. We're seeing sign as transitions accelerating. Last I'd say most of the sub- sectors in healthcare, we've seen valuations reset pretty significantly over the last 12 months, and so just from a valuation standpoint, I think we're getting an opportunity for much more attractive entry points into these value- based care companies.

Joe Coletti: And I think we'll end there. Sean, thanks so much for being here today. It's just been a really great conversation.

Sean Dodge: Yeah, it's been a pleasure chatting, and thanks again for having me.

Joe Coletti: Well, that's it for our conversation with Sean today. I'd like to thank you for listening to Pathfinders in Biopharma, brought to you by RBC Capital Markets. If you're interested in reading a summary of Sean's report, we'll leave a link in the show notes for this episode. This episode was recorded on January 5th, 2023. If you'd like to learn more or continue the conversation, please visit rbccm. com/ biopharma.

Narrator: This content is based on information available at the time it was recorded and is for informational purposes only. It's not an offer to buy or sell, or a solicitation, and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives. For disclosures, please visit www. rbccm. com/ disclosure.