17
Oct
2019

Share

The U.S. Healthcare Quandary

While many lament the sad state of the U.S. healthcare system, with U.S. healthcare expenditure being multiples of other developed nations on a per capita basis, attempts to reign in this inflating healthcare expenditure have been ineffective, with the gap widening between U.S. healthcare spending and that of other comparable countries. However, there are a number of proposals on the horizon that could drastically impact U.S. healthcare expenditure and the various firms in the healthcare value chain.

In 2018, the U.S. spent $3.5 trillion, or $10,739 per person, on healthcare, equating to approximately 18 percent of GDP. The 2017 figures below, which are PPP adjusted, show just how far ahead the U.S. is in per capita expenditures on healthcare compared to other developed countries.

Screen Shot 2019-10-17 at 1.27.35 pm

Source: Peterson-Kaiser Health System Tracker

While the dynamic of U.S. healthcare expenditure being greater than other developed countries is not a new one, the spending gap has widened in recent decades. In 1970 the U.S. spent around 6 per cent of its GDP on healthcare, compared to 5 per cent for other wealthy countries in the same year. However, the U.S. now spends around 18 per cent of its GDP on healthcare, with the next highest comparable country, Switzerland, spending 12 per cent of its GDP on healthcare.

Screen Shot 2019-10-17 at 1.28.04 pm

In late 2018 the Department of Health and Human Services (HHS) proposed the Medicare Part B IPI via what is known as an Advanced Notice of Proposed Rulemaking (ANPRM). The ANPRM document sets out what the IPI Model seeks to achieve: “The IPI Model aims to drive better quality for Medicare beneficiaries and reduce Medicare drug spending by offering comparable pricing relative to other countries and addressing flawed incentives in the current payment system.” In other words, the IPI Model applies to a subset of physician-administered drugs under the Medicare Part B program, and aims to cap U.S. drug acquisition costs based on prices paid in an index of developed nations.

How significant will the impact of this IPI Model be in reducing the prices paid for U.S. drugs? This depends on the magnitude of the difference in the cost of drugs between the U.S. and comparable countries, and an analysis undertaken by HHS suggests that this difference is material. The HHS study looked at drug acquisition costs for a set of Medicare part B physician-administered drugs for the U.S. compared to 16 other developed countries. Looking at 27 products in the analysis, the drug acquisition costs in the U.S. were found to be 1.8 times higher than in developed peer nations, with the cost ratios ranging from on par, to prices in the U.S. being 7 times greater than those paid offshore.

A number of years ago in a Twitter exchange, Steve Miller, the Chief Medical Officer at Express Scripts, summed up the issue faced by the U.S.: “The U.S. is 4.6 percent of the world’s population, we’re 32 per cent of the world’s drug revenue, and we’re somewhere between 50 and 70 percent of world drug profitability”. In effect, the U.S. is subsidising the drug costs of other nations, acting as a profit centre for pharmaceutical companies to fund their R&D expenditures. This dynamic is unsustainable, and with bipartisan support to tackle this issue, as well as an administration willing to enact transformative policies, it’s likely that the healthcare industry could see substantial change over the next few years.

Healthcare costs are a top-of-mind issue for U.S. voters going into the election late next year. If the IPI Model were to be put into action, there are likely to be significant impacts to the various players in the healthcare value chain, and the Montaka team continues to monitor changes in the healthcare landscape in order to identify opportunities on both the long and short side.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Alpha Plus Fund

  • GLOBAL
  • A market neutral strategy
  • From $50,000
Learn More

Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
Learn More

Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
Learn More

Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More
Close

Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montgomery Alpha Plus Fund

Global
Aims to generate positive returns in both rising and falling markets. Invests in 80 to 180 global businesses expected to deliver above-average returns, while selling short a similar-sized portfolio expected to deliver below-average returns. Priced daily.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.