It's just not the current election-year antics that will put pressure on the health care sector as Bernie, Hillary and even the Republicans throw rocks at the group and demand lower pricing. Experienced health care analysts are trimming their earnings estimates for the next three years, some by as much as 10%, and margin projections by 5%, for many names. Two significant, but subtle forces are at work that may threaten the perception and valuation of the group in the next 12 months.
These trends will affect all the major hospital, medical device and pharmaceutical companies. Think HCA Holdings (HCA), Abbott Labs (ABT), C.R. Bard (BCR), Becton, Dickinson (BDX), Baxter International (BAX), Bristol-Myers Squibb (BMY), Action Alerts PLUS holding Eli Lilly (LLY), St. Jude Medical (STJ), Pfizer (PFE) and many of their suppliers.
One concern is application programing interface (API). It's the software that's making every industry change dramatically.
API is a modern extension of the concept of disintermediation that we learned in college (at least those of us who took econ). Think of all the travel agents, stock brokers, office secretaries, bank tellers, retailers, etc. who were disintermediated in the first wave of the digital revolution. The same process is well under way now for real estate agents, financial planners, college professors, local taxi companies, lawyers handling routine documents and filings, bookers of appointments at restaurants ... and doctors and health care.
Download the new app called "Pager." It looks and feels exactly like the Uber app because it is just like the Uber app. This is a venture capital company funded initially with $14 million in part by co-founders Oscar Salazar, the first technology chief officer and third employee of Uber Technologies, and Ashton Kutcher among others.
For $200, a doctor from Pager will come to your home within two hours between 8 a.m. and 10 p.m. in San Francisco or New York (the first test markets), assess your illness and have a prescription delivered to you within an hour.
This trend is destined to do to health care service providers what Uber, Lyft and others did for the taxi medallion business. In the health care world, that means more efficiency and competition is coming for traditional providers putting pressure on the multiples on hospital stocks, HMOs, pharma companies and medical device firms.
A second concern is that the rise in higher health care premiums has been stealthy. Imagine how angry folks might feel about higher health care insurance premiums if they had not gotten the extra cash flow from lower oil prices in 2015. For every dollar consumers have saved from lower oil prices, some experts suspect health care costs have been going up two dollars.
When the folks start doing the math without the extra cash flow from oil price cuts in the months ahead, they will start shouting about the financial pain in their budgets. The noise will be deafening, I promise. This sentiment will force health care providers to shave some of their pricing assumptions.