"I am the laziest man in the world. I invented all those things to save myself from toil."
- Benjamin Franklin
There was no shortage of opportunity to save oneself from toil in a developing nation in the 18th century.
It was the hard life in the colonies and nation building that permitted Benjamin Franklin, a man of modest means and even less education, “a mutt” as a witty friend once put it, to explore science, demography, meteorology, literature and politics, unfettered by the traditions and conventions of the European academies and the influence of the Church.
There were no “experts” in America at that time; no specialists or subspecialists. According to Franklin’s biographer, Walter Isaacson, there were but 10 practicing physicians in Boston in the first quarter of the 18th century and only one had a medical degree.
Invention’s capricious mother, combined with near unlimited curiosity and creativity, was all that was needed to advance quality of life, reduce required labor and advance the colonies toward nation status.
With periods of forgetting – like the last decade or so – Franklin’s story is that of America.
Back to the Health Policy Grind…
Productivity, the great inflation antidote, has been largely absent from the American economy over the last decade. The Great Recession stalled 20 years of steady gains and it has yet to recover. The demise of productivity has, ironically, coincided with rise of the Tech Titans. It has also coincided with what looks like the last blast of political obsession with health care and specifically, health insurance.
We are always careful not to confuse causation with correlation but the fact pattern for health care does not favor an interpretation that the industry has produced a net good for the American economy. With inflation bearing down post-COVID, it might even be net negative.
Health care is wildly inefficient. Hospitals, even well-run ones, operate at about 70% of capacity. Some of that dismal performance is by design. Hospitals and health care are subject to significant regulation. There is also a lot of “measure twice, cut once” that is necessary to avoid bad outcomes.
Even accommodating for the essential nature of health care, the sector’s productivity is dismal. The system runs almost entirely on labor and not very well. Despite adding about 500k jobs between 2010 and 2020, General, Medical & Surgical Hospitals’ discharges have remained largely constant at about 9 million per quarter. In other words, each additional unit of labor, has not produced incrementally more product.
If health care occupied a small part of U.S. Gross domestic product, it might not matter. When it was a mere 5% in 1960, any inefficiencies could be overcome elsewhere in the economy. In 2019, the last year of published “official” data, health care accounts for 18% of GDP. That portion, however, only recognizes expenditures for services and ignores many of the non-health care businesses that thrive on the system, like information technology, consultants and third-party administrators. The true portion of GDP preoccupied with health care is probably closer to 20%.
The sheer size of health care, the number it employs and the regulatory system that limits innovation has and probably will continue to be a headwind for productivity. However, that gift that will keep on giving, COVID-19, appears to be in the early stages of bearing fruit.
As of the July print, health care is still about 400k workers below pre-pandemic levels. The longer this gap endures the more likely it becomes permanent. Providers, especially hospitals, are exhausting the near-term strategy of making fewer people work harder as demonstrated by JOLTS data on quits.
What is beginning to unfold – really what is required - are new productivity solutions. HCA has formed a relationship with Google to develop the analytical capabilities for “the development of next generation operational models focused on actionable insights and improved workflows” That press release-speak should be interpreted as less people getting more done.
Telehealth services (incorrectly thought of as a care provider) are slowly emerging as a productivity enhancer through services like Doximity (DOCS). This is a service so integral to workflows, it becomes part of the operating system on which physicians depend.
Meanwhile, genetic testing is quickly moving to replace staffed outpatient procedures with simple and safer blood tests as Natera (NTRA) is doing with amniocentesis. The development of Liquid Biopsy by Guardant Health (GH) and others will have the same effect on imaging and biopsy procedures.
All that before Artificial Intelligence, Robotics and Machine Learning are sufficiently developed for health care.
Health care moves very slowly. Much needed gains in productivity are not likely to save the U.S. from the post-COVID wave of inflation that is setting in. It does offer hope that the economic drag the industry has contributed to American life may be finally coming to an end.
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Immediate-term @Hedgeye Risk Range™ with TREND signal in brackets:
UST 10yr Yield 1.33-1.57% (bullish)
UST 2yr Yield 0.21-0.29% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
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Tech (XLK) 143.15-150.99 (bullish)
Energy (XLE) 52.51-56.20 (bullish)
Financials (XLF) 35.72-37.41 (bullish)
Utilities (XLU) 62.73-64.91 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 28,307-29,202 (bullish)
DAX 15,406-15,794 (bullish)
VIX 14.47-18.58 (bearish)
USD 90.22-92.81 (bearish)
EUR/USD 1.181-1.205 (bullish)
Oil (WTI) 72.78-76.27 (bullish)
Nat Gas 3.35-3.78 (bullish)
Gold 1 (bearish)
Have a great day out there,
Emily Evans
Managing Director Health Policy
