Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Imagine going shopping and not being able to scan the barcodes of your goods at the check-out; imagine not being able to withdraw cash from an ATM machine; or, imagine not being able to book your next holiday from the comfort of your own home. The use of information technology (IT) in these examples is so commonplace that it barely deserves comment, yet the very lack of IT within large parts of the healthcare industry does merit consideration. Since at least 4,000 BC medical records have been kept, originally on papyrus scrolls in Egypt. It hence seems anomalous, particularly against a background of data ubiquity, that most such records are still kept on 21st Century papyrus (i.e. paper) and not in an electronic format. As we discuss in more detail below, the benefits of digitising healthcare – both medical records and prescriptions – can be significant, and many companies are already seeking to exploit this important dynamic.
Healthcare information technology is a nascent field and broadly refers to the application of data processing in order to facilitate the storage, retrieval, sharing and use of healthcare information and knowledge for communication and analysis. Developments in this area are consistent with at least two themes on which we have written in the past: the growing deployment of healthcare IT is part of the broad data deluge and, it is also linked to the idea of medical practice becoming increasingly proactive rather than reactive (as we discussed, for example, when considering the prospects for DNA testing and molecular diagnostics). Moreover, in the longer-term, it is not wholly implausible to imagine a scenario where some tasks currently performed by doctors (such as dispensing medicines) are replaced by robots, a topic for potential discussion in a future paper.
#While digitisation first came to the healthcare sector in the 1970s, its widespread adoption has not occurred, for a variety of reasons discussed later. As a consequence, the healthcare industry has not benefited from the productivity benefits that have accrued to other industries as a result of their IT investments (McKinsey estimates this to be to an annualised gain of. 2-3% in the food retail and travel sectors, for example). In healthcare, quite the contrary has occurred, with costs having risen rather than fallen in the last forty years. Healthcare spending as a percentage of GDP has burgeoned in the US from just 7% in 1970 to over 17% today, and is forecast to reach 25% by 2025. OECD data support this observation, with average per capita total healthcare expenditure having increased by 75% in the last decade.
The logic for embracing IT within the healthcare industry would therefore seem clear. Broad and consistent utilisation of information technology would not only reduce healthcare costs but, more importantly, improve healthcare quality and help prevent medical errors. In an ideal world, all patients would have electronic medical records (EMR) and there would be full computerised physician order entry (CPOE) for prescription drugs and other similar treatments. Over the longer-term, the widespread adoption of these concepts could enable the detection of early infectious disease outbreaks on a nationwide scale, support comparative effectiveness research in determining the best treatments for specific patients and allow for advanced analytics to identify those people who could benefit from proactive care or lifestyle changes.
Wide-ranging estimates have put the benefits from introducing electronic health records and other similar projects at between $80bn and $450bn annually for the US (depending on what is included within the definition of healthcare IT; most, conservatively, average at about $300bn), while McKesson, a healthcare technology solutions and service provider suggests that a typical healthcare provider adopting its software could experience a 3-5% annual cost saving. Beyond the advantages enumerated above, additionally, it is clearly much harder to mislay a digital than a manual record. Large spaces within hospitals/ medical practices that currently store such records may also be freed up for more efficient use and notable sums of money could be saved in not having to procure and then print on relevant stationery.
If the financial logic were not compelling enough (particularly given that most governments would like to cut current healthcare expenditure at present), then consider that nearly 7,000 deaths per year occur in America alone owing to prescription error. Moreover, prescribing faults constitute the largest identified source of preventable mistakes in hospitals. A 2006 report by the Institute of Medicine estimated that a hospitalised patient is exposed to a medication error on each day of his or her stay, while a recent study by RAND (a US non-profit health policy research institute) suggests that American hospitals end up spending around $1bn annually on treating some 200,000 ‘drug-adverse events’ in hospitals. A combination of EMR and CPOE would increase the information available to the physician (and the patient) about appropriate dosage levels, potential interactions with existing drugs and other important factors. Additionally, CPOE would offer the ability to audit information on drug usage while monitoring prescription and wastage patterns, again helping to curb rising healthcare costs.
Given the apparent benefits, it therefore seems surprising that adoption of healthcare IT has not been particularly widespread. Some smaller countries with integrated healthcare systems such as New Zealand and Estonia (the latter became the first in the world to implement nationwide EMRs that record residents’ history from birth to death) have embraced the technologies but many larger nations have had notably less success with adoption. The UK’s National Health Service, for example, began a deployment of EMR in 2005, with the intention being for all patients to have a centralised record by 2010. While many hospitals did acquire the relevant systems, there was no nationwide exchange or system for facilitation. The programme was hence dismantled (at a cost of over £12bn) and alternatives approaches are now being implemented on a more ad-hoc basis. Even in the US, where the Obama administration provided some $19bn of incentives for hospitals to shift to electronic records (via the American Recovery and Reinvestment Act), fewer than 25% of hospitals and 20% of physicians’ offices have adopted these practices thus far.
The reasons for such sclerotic progress are numerous. At the most basic, however, for a modern (digitalised) healthcare system to work, two important criteria need to be satisfied: first, information stored in one IT system must be retrievable by others, including doctors and hospitals that may use alternative networks. This is particularly crucial in emergency situations. Next, healthcare IT systems must be engineered to aid the work of clinicians, and not hinder it. In other words, systems need to be intuitive, usable by medical personnel in potentially stressful circumstances and not require significant levels of training (something which older doctors may be reluctant to embrace). The primacy of patient confidentiality also needs to be embedded within systems and the US Department of Health and Human Services notes, for example that in 2011 there were 380 major data breaches involving 500 or more patients’ records. Cyber-terrorism is also a potential concern.
Beyond these practical considerations stands the major issue of cost. There are clear acquisition and implementation costs, which may also have a disruptive impact on healthcare practices. In addition, while providers must absorb the costs of EMR and CPOE systems, consumers are most likely to reap the savings (yet not pay for them directly). Furthermore, even if such practices are adopted, there is no guarantee that the broader healthcare market will develop interoperability and robust networks for information exchange. As the UK experience (and arguably the US too) unfortunately shows, if there is a lengthy and uneven adoption of systems that lack standardisation and interoperability, then this would only delay moves towards a digitally transformed healthcare system.
Nonetheless, global spending on healthcare IT is estimated to rise by 6% annually through to 2020, according to Cerner, an IT provider. In the US, for example, although fewer than 20% of practices currently use CPOE or other related technologies, the Pharmaceutical Care Management Association expects this figure to reach 90% by the end of the decade. The Obama administration also set a goal at the time of the American Recovery and Reinvestment Act for 70-90% EMR adoption rates in the US by 2019. Various other countries including Australia, Canada, Denmark, Jordan, the Netherlands and the UAE have also publicly detailed ambitious plans for expanding their provision of digitalised healthcare technologies.
Several companies have positioned themselves to benefit from this potential boom in healthcare IT. McKesson is a US-listed healthcare technology solutions and service provider with a market leadership position in medical management software (in addition to being a dominant player within the field of pharmaceutical distribution). Its products have been sold into more than 50% of US hospitals and McKesson has over 200,000 physician and 50,000 retail pharmacy customers. The company manages more than 21m patient records and processed over 14bn pharmacy transactions last year. Cerner (also US-listed) is the largest standalone healthcare IT systems provider globally, with its technology located in more than 10,000 facilities globally. The company has enjoyed over 10% annualised organic revenue growth since its inception in 1979 and recently reported record demand levels. Athenahealth, is a newer entrant into the field, but has differentiated its offering via the provision of cloud-based electronic health record management systems. It has achieved notable success thus far. All three companies have delivered annualised shareholder returns of at least 15% over the last five years. A number of smaller (public and private) companies are also active in the field.
For those medical practices that have embraced healthcare IT in the form of electronic medical records and computerised prescriptions, as well as the shareholders of the businesses mentioned above, the benefits have been clear. The key is now to see adoption shift towards a broader scale. Despite the obvious challenges, the message is a very simple one, namely: data can help save lives.
Alexander Gunz, Fund Manager
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