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Healthcare Pair Trade Idea: U.S. Hospitals versus Medical Devices

Short U.S. Health Care Providers has been on MRP’s list of themes since October 16, 2017, and we’ve been monitoring its performance with the US Healthcare Providers ETF (IHF). In the 8 months since initiation, the theme has gone against us, with the IHF rising 26% versus the S&P’s gain of 7.8% and the more diversified Healthcare ETF (IYH) climbing just 4.3% over the same period.

Half of the IHF’s exposure is to insurance companies, and they have benefited from President Trump’s rollback of some onerous coverage obligations mandated under the Affordable Care Act (“Obamacare). While this administration has also discontinued funding for Obamacare Cost-sharing Reduction Subsidies (CSRs), which reimbursed insurers for discounted care provided to low income Americans, the insurance groups have been able to raise premiums on other segments of the insured population to recoup some of that short fall. This compels MRP to close the Short US Health Care theme in its current form.

In its stead, we would like to highlight two segments of healthcare undergoing change and which we think investors should pay attention to.


America’s hospitals are having a tougher time than ever due to high labor costs and lower reimbursements from commercial and federal payers. Gains achieved from the insurance expansion policies of Obamacare have been mostly realized for hospitals at this point. Now that President Trump has rolled back government spending on health services and repealed the individual mandate that required all Americans to have health insurance, hospitals will feel the squeeze going forward. Last year, their profitability sank to levels not seen since the 2008 financial crisis, as expense growth outpaced revenue growth for the second consecutive year.

Furthermore, America’s aging population and growing debt problems could add additional pressure to hospital systems in the years ahead, according to Moody’s. As it stands, the trust fund that pays Medicare’s hospital expenses will run out of money in 2026. In the meantime, home health care and hospice services are increasingly diverting patients and revenues away from community hospitals. Health insurer Humana just teamed up with two investment firms to become the nation’s largest provider of hospice care, a rapidly growing and booming business.

With the notable exception of Tenet Healthcare (THC) and HCA Healthcare (HCA), the stock prices of many hospital operators have underperformed the general healthcare industry this past year. This includes Community Health Systems (CYH), LifePoint Health (LPNT), Tivity Health (TVTY), and Universal Health Services (UHS).


In contrast to the hospital sector, the U.S. medical device market is experiencing powerful tailwinds thanks to an aging population, rising life expectancy, growing healthcare awareness in emerging economies, and product innovation. As if that wasn’t enough, the sector just received another boost when the recently passed US tax law suspended the 2.3% tax on medical devices for another two years. The temporary reprieve incentivizes companies in the sector to invest in strategic consolidations and R&D before the tax goes into effect in January 2020. Medical device companies will reportedly save as much as $3.7 billion during the two-year suspension. There’s already more M&A activity occurring in the space and even rumors of a potential merger between two MedTech giants, Boston Scientific (BSX) and Stryker Corporation (SYK).

Investors who want exposure to the growing medical device market can do so through the iShares Medical Devices ETF (IHI). 

There is no pureplay ETF for hospitals, but investors can gain long or short exposure to that group via the Health Care Facilities REIT (HCP). The caveat is that REITs are highly sensitive to interest rates, so Fed policy could affect the performance of HCP as much as the financial operations of the companies in the portfolio. 

For investors looking for broad exposure to the healthcare industry, the iShares U.S. Healthcare ETF (IYH) may be the way to go, given its composition of 30% phamaceuticals, 20% healthcare equipment makers, 20% biotech, and 14% managed care. The remainder of the portfolio is invested in lifescience tools & services, healthcare services and healthcare facilities. In retrospect, that is probably the ETF we should have used for the Short U.S. Healthcare theme. As noted above, that theme is now closed, although we are maintaining our Short U.S. Pharmaceuticals theme launched on October 27, 2017 and updated on December 4, 2017.

We’ve also summarized the following articles related to this topic…


Healthcare: When a Health Insurer Also Wants to Be a Hospice Company

Humana, which provides Medicare Advantage plans to about 3 and a half million people for their medical needs, also wants to dominate care for those at the end stages of life, whether it provides aid in a home setting or in a facility. Death has always been lucrative enterprise, whether it involves mahogany caskets or teams of estate and tax lawyers. But hospice, the business of caring for those who are nearing death, has become a booming multibillion-dollar.

Medicare has largely driven the recent interest in hospice, spending about $17 billion on such care in 2016. The program began paying for hospice in 1983, a time when many people at the end of life were forced to spend their last days in a hospital bed, receiving expensive but futile treatments. In hospice, people typically agree to stop treatments aimed at curing their disease in favor of care that makes them more comfortable at home.

While a hospice is paid about $150 to $200 a day for routine care, they can get paid nearly $1,000 a day if someone needs round-the-clock services. Patients can stay in hospice as long as doctors agree they remain terminally ill. Some private companies make as much as 40 cents of profit for every dollar of revenue they take in, an extremely high profit margin of 40%.

Under the current system, the federal government pays for all of the costs for anyone who is in hospice. If a patient does not enroll in hospice and stays in a Medicare Advantage plan, the insurer remains responsible for all of the medical bills. NYT


Healthcare: U.S. Healthcare not in good health and ready for innovation

The focus of many healthcare providers is now turning to how they can boost operational efficiencies to streamline health services to patients and increase accuracy of diagnoses. The challenge a lot of healthcare providers find themselves battling against is capital trapped in existing IT infrastructure. The rise of mobile devices and the role of patient data are highlighting the limited functionality of legacy systems.

In a digitally-connected healthcare environment, wearable devices allow patients to have real-time support. The increasing digitization of medical records, which host a wealth of patient knowledge, empowers patients with access to that data in real time. It also enables health providers to accurately diagnose and manage a patient’s healthcare. According to IDC, 20 percent more people will be aware of their health by 2020 because of real-time care plan adjustments with cognitive/AI and data from wearable devices.

Amazon is the latest tech giant to enter the healthcare space, further suggesting that technology-enabled healthcare will dominate in 2018. Apple recently announced a trial enabling U.S. customers to automatically download and view their medical records using their iPhones. DotMed


Healthcare: The Nasty Surprises That Plague Our Health-Care System 

According to a study published in the New England Journal of Medicine in 2017, 22 percent of patients received bills they did not expect. That same year, a study published in Health Affairs found that “20 percent of hospital inpatient admissions that originated in the emergency department, 14 percent of outpatient visits to the [ED], and 9 percent of elective inpatient admissions likely led to a surprise medical bill.” Patients treated at EDs in McAllen, Texas — already infamous for being the highest-cost county in the U.S. for Medicare — were especially unlucky. Eighty-nine percent of them received balance bills from doctors who didn’t take their insurance, even though the hospitals they visited did.

When providers are in-network, they give enormous discounts on their rack rates — known as “chargemaster” prices in the trade. But when an out-of-network provider bills a patient, no discount is applied. The hospital or physician may “charge” $3,000 for a service, but the insurer will disallow a huge chunk of that — say, 75 percent — and pay only $750. The real price is $750; the $3,000 charge is a fictional price plucked out of thin air. But when an out-of-network provider bills a patient, no discount is applied. The insurer then pays the same $750, leaving the patient responsible for the $2,250 that remains. The out-of-network provider has no duty to accept the insurer’s payment as full compensation and is free to bill the patient for the balance. NR


Healthcare: Is This the Hospital That Will Finally Push the Expensive U.S. Health Care System to Innovate? 

By almost any measure, American health care costs are out of control but the system refuses to change. What if you could provide excellent care at ultra-low prices at a location close to the U.S.? That’s what Narayana Health (NH) did in 2014 by opening a hospital in the Cayman Islands — Health City Cayman Islands (HCCI) — which was close to America but outside its regulatory ambit.

Narayana Health brought innovative practices honed in India to HCCI to offer first-rate care for 25-40% of U.S. prices. To be sure, this was not as cheap as NH’s services in India, where prices were 2-5% of U.S. prices, but HCCI’s prices are still a whopping 60-75% cheaper than U.S. prices, and even at those prices it could be extremely profitable as patient volume picked up. Three years after its launch, HCCI had seen about 30,000 outpatients and over 3,500 inpatients. It had performed almost 2,000 procedures, including 759 cath-lab procedures. Despite low prices, HCCI’s outcomes were excellent with a mortality rate of zero

The HCCI model is potentially very disruptive to U.S. health care. Even with zero copays and deductibles and free travel for the patient and a chaperone for 1-2 weeks, insurers would save a lot of money. U.S. insurers and employers have watched HCCI with interest but so far HCCI is not one of the options available to their patients. But this is bound to change, especially as HCCI builds a track record and health care costs continue to soar in the U.S. A team of American doctors that visited HCCI came away with this warning: “The Cayman Health City might be one of the disruptors that finally pushes the overly expensive U.S. system to innovate.” HBR


Healthcare: Pill Delivery And Medical Payments: The Latest In Healthcare Disruption 

A prescription delivery program and a deal involving medical payments data show how the healthcare industry is quickly changing as technology develops, and as Amazon prepares its own major moves. First, the news that’s most directly related to payments: Verscend Technologies has agreed to buy Cotiviti Holdings for $4.9 billion in cash, the two healthcare technology firms said in a press release on Tuesday (June 19).

Cotiviti described itself as a provider of “payment accuracy and analytics-driven solutions that helps payers, other risk-bearing healthcare organizations and retailers achieve their business objectives,” according to the statement. Services provided by Verscend drive “better healthcare outcomes through data analytics, supporting payers’ financial performance and quality improvement initiatives.” Verscend is a portfolio company of Veritas Capital, a private equity firm.

Meanwhile, CVS Health is trying to stay a step ahead of Amazon, according to reports. On Tuesday (June 19), the retailer launched prescription delivery from CVS Pharmacy locations nationwide. The CVS service is a preemptive strike against Amazon, according to CNBC. Amazon not only offers same-day and two-day shipping, but “is now eyeing the prescription drug market,” the report noted. “The eCommerce giant already sells private label over-the-counter drugs through a partnership with Perrigo, and has obtained pharmacy licenses in a handful of states. Amazon has licenses to distribute medical devices in nearly all U.S. states.

Google, too, is getting deeper into healthcare. It is hiring staff to work on an early-stage research project called Medical Digital Assist, which will use voice recognition to help physicians take notes Pymnts


Health Care: The top 5 startups disrupting healthcare using AI, digital therapeutics, health insurance, and genomics

The healthcare industry is facing disruption due to accelerating technological innovation and growing demand for improved delivery of healthcare and lower costs. Tech startups are leading the way by seizing opportunities in the areas of the industry that are most vulnerable to disruption, including genomics, pharmaceuticals, administration, clinical operations, and insurance.  BI

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