Healthcare Overview 2005

Healthcare is on every CEO’s agenda these days. Although healthcare is very much a local business, our healthcare efforts at General Atlantic focus on multiple geographies including the United States, Europe and the UK, and India.

As the healthcare sector has evolved over the past few decades, the current set of conditions truly puts the sector at an inflection point – thus garnering the attention that it has received of late. The three most prevalent themes in healthcare that have come to the forefront are i) the increasing cost burden of care provision, ii) increasing the efficacy of clinical results, and iii) preparing for the massive shift in demographics. Sophisticated use of technology has become a key enabler to address these three trends.

Healthcare costs have become an important issue at every level, from the government to the corporate employer to the individual. In the United States, healthcare costs comprise 16% of national Gross Domestic Product, the single largest use of funding by the government (over four times that which is spent on national defense) and expected to reach 19% in 10 years. Medicare, the government program that primarily provides funding for the over-65 age group, has grown to cover 42 million members with an annual budget of $333 billion. Medicaid, the government program which primarily funds healthcare for the low-income population, has grown to 55 million members with an annual budget of $316 billion. At the employer level, healthcare costs as a percentage of salaries have risen from 1.1% in 1960 to 7.5% in 2002. The burden of healthcare costs has further shifted to the individual. One example of this trend is the prevalence of individual Health Savings Accounts (HSAs), which have grown to 1 million since these tax-assisted accounts were formalized in the Medicare Modernization Act of 2003.

Before we discuss the major areas where we see solutions being developed, we should mention the shifting demographic. In 2011 the first wave of the Baby Boom generation will reach the age of 65. This is a group of seventy-seven million Americans born between the years of 1946 to 1964 who will become an enormous fiscal and medical responsibility of the healthcare system. This group will live longer than previous generations – on average about 15-20 years past retirement, and they are wealthier – 39% richer than their peers 65 years ago. This group will inevitably be costly to the healthcare system due to the prevalence of chronic disease conditions, as 81% of the population over the age of 65 has one chronic disease, and 62% have two or more.

Over the past decade, the healthcare industry has increased its purchase of technology. The global spend on Healthcare IT grew to $28 billion by 2003 and is projected to reach $41 billion by 2008. Hospitals and physician groups have significantly transitioned to an electronic world, although there is still some way to go. We see a real trend towards electronic health records (EHRs), evidence-based medicine, and improved clinical outcomes due to process accuracy. Five of our portfolio companies, Eclipsys and Healthvision in the US and iSOFT, Compugroup, and GWI (recently acquired by AGFA) in Europe, have been leaders in developing the technology infrastructure for the providers in this industry.

In addition to the pure use of IT, we see other trends which are led by businesses that have a sophisticated application of technology in their approach to care. Here are five important trends to follow:

Disease management. DM has evolved as an important model for managing the high-cost, chronic disease populations. Today it is a $1 billion market which has gained significant traction across payers, self-insured employers, and to some degree at CMS. The market is projected to grow at 25%-40% over the next five years. Leading players are proving out ROI by using sophisticated data models and nurse triage centers to perform population management for diseases such as diabetes, congestive heart failure, coronary artery disease, and asthma.

Home care and disseminated models of care. The aging population will increasingly look to receive care at home and to reduce difficult trips to hospitals and physician’s offices. Technology and services are rapidly being developed for remote network monitoring and for low-cost devices for home use. The reimbursement trends will shift in favor of these businesses, as the cost of hospital inpatient care for a cardiac condition is $28,000 versus $2,000 for home monitoring. These solutions will shift healthcare from a reactive system (i.e., patients go to the hospital when a health event occurs) to one that is proactive in managing conditions before they become acute.

Center for Medicare and Medicaid Services (CMS). CMS is becoming increasingly proactive in looking for ways to improve clinical and, ultimately, fiscal outcomes for the lives that are under Medicaid and Medicare. The government is turning more and more to private solutions to manage healthcare for their systems. Over the past decade, Medicaid has shifted from 30% to 60% managed care; Medicare is only 11% in managed care today but we see the trend moving strongly in that direction. In addition, the complexity of both systems is driving growth in IT solutions for program enrollment, adjudication, claims processing and data analytics. One of our portfolio companies, Schaller Anderson, continues to be a leader in the Medicaid space.

Consumer Driven Healthcare. With employers facing 12%-15% annual increases in healthcare costs and bell weather companies like the big three automakers attributing at least part of their earnings shortfalls due to healthcare costs, there has been a shift of costs over to the consumer. Government legislation and tax-advantaged programs such as FSAs and HSAs are supporting this; as are new deductible structures offered by payors. Successful companies will capture the move towards personalized access to healthcare information, more direct access to accounts and finances, and a consumer-centric decision-making paradigm.

Outsourcing. The quality of healthcare-related IT services in India is fast reaching Western standards and HIPPA compliance. The healthcare models we have seen will fundamentally change the cost-of-delivery side of the equation on a global basis for certain segments. Key to success for India-based efforts will be distribution and access in Western markets. Leading trends to look for include manufacturing of generic drugs, remote processing of lab diagnostics work, clinical trials for drug discovery, and outsourcing of non-core healthcare processes such as claims processing and clinical dictation.

These are impressive solutions which the healthcare industry will experience in the next few years. The overall impact should be highly positive for patients, corporations, and for the government and payor plans