A few weeks ago, we published, in collaboration with our friends at the venture fund, Jumpstart Health Investors, a series of intersecting triangles that describe the health care ecosystem. The point of the exercise was to recognize that the traditional taxonomy of health care; services, facilities, devices, pharma; are falling well short of describing the businesses most health care companies are in.
The inadequacy of the existing classification system also failed to recognize the innovation at young and growth companies underway before COVID-19 and greatly accelerated by it. The taxonomy also seeks to recognize the important and central role of regulators, government policy advisors and non-governmental organizations not to mention the patient.
We have little influence over the way in which funds design ETFs, which at this point, is ignoring the dramatic evolution of the industry. For the active manager of health care assets – be it angel and seed funding or public equity and debt – the actual structure of the industry matters.
The taxonomy we designed (and yes, it needs a designer) consists of four major components: Providers of Care and Allied Groups; Payers and Allied Groups; Information Providers; and Regulators and Policy Advisors.
- Providers of Care and Allied Groups includes those providing items and services directly to patients plus all the tools and services necessary to do so including devices, supplies, waste management and infection control.
- Information Items and Services includes companies that develop, collect and communicate information necessary to support direct patient care or to develop the tools and services necessary to do so. Information providers are not confined to IT companies and include all types of information involved in clinical decisions.
- Payers and Allied Groups consist of insurers and those working on their behalf like consultants, auditors and laboratory benefit managers.
- Regulators and Policy Advisors consist of federal agencies like the U.S. Department of Agriculture, Centers for Medicare and Medicaid and the Labor Department. These federal agencies are influenced by NGO policy advisors and think tanks like Brookings and the American Enterprise Institute. Entities like the Congressional Budget Office and MedPAC advise Congress but indirectly influence other policymaking entities.
Within each major category – Providers of Care, Information and Payers – we then divided up publicly traded companies with a market cap of more than $100M into subcategories that reflects their primary business. In a handful of cases, like Laboratory Benefit Managers and Electronic Health Record vendors, private companies are included because their influence on the health care industry is so significant. These subcategories are marked with an asterisk. To recognize the diversity of their businesses, some large multiline companies like health insurers are classified multiple times.
For the time being we are ignoring the pharmaceutical industry, which requires its own taxonomy, aesthetics, dental and veterinary, all of which generally operate outside of the influence of payers and most regulators. More on that later.
The value of drilling into each category a little deeper and in a way that reflects the actual business conducted by a similarly focused group of companies is that the role of disruption and share gains and losses become a bit more obvious. Understanding these relationships has become especially important as referral patterns have been disrupted during COVID, deregulation has crept in and technology has advanced.
This classification system also affords us an opportunity to apply policy and other macro trends such as wage inflation in a more surgical manner. For example, inpatient hospitals are likely to benefit from higher acuity because of delayed care but ONLY if they can manage burgeoning labor costs.
Below is the “house” policy view for each of the subcategories with illustrative tickers and an estimate on how long the bias might endure plus notes for clarification.
The print on these charts is small so feel free to download spreadsheet here. Taxonomy triangle here.
Ideally, once you identify a subcategory that fits your mandate or factor considerations, you will apply the Microquads analysis provided by Tom Tobin and the Health Care Team to make long/short and level of conviction decision, etc. Fundamental and factor exposure considerations may ultimately trump any policy influence.
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Like everything we do at Hedgeye, the Health Care Taxonomy and the House View are works in progress so please send in your ideas. We will update monthly when and as things change.
