#1 Rule for Healthcare Investing

This video, presented by Dr. Eric Bricker of AHealthcareZ, delves into what he posits as the "Number 1 Rule for Healthcare Investing": the principle that investors can only truly make money if the patient comes first. Dr. Bricker critically examines the prevailing financial models within the American healthcare system, arguing that they often prioritize investor returns by exploiting the unique market dynamics of the "pain, suffering, and death industry," rather than genuinely serving patient needs. He uses fundamental economic principles of supply and demand to illustrate how current practices lead to exorbitant costs and significant patient burden.

The core of Dr. Bricker's argument rests on two pillars of healthcare's pricing power: perfectly inelastic demand and limited competition. He explains that when individuals or their families face severe pain, suffering, or the threat of death, their demand for healthcare services becomes "perfectly inelastic," meaning they are willing to pay almost any price to alleviate their condition or prolong life. This inherent vulnerability is then compounded by a lack of competition in the supply side of the American healthcare market. Dr. Bricker cites examples such as extended pharmaceutical patents, the dominance of a few PBMs and insurance carriers, and localized hospital monopolies, all of which contribute to an "inward shift" of the supply curve, resulting in artificially high prices and exceptional investor returns at the expense of patients.

To underscore his point, Dr. Bricker provides a detailed case study of cancer care in the United States. He highlights that American cancer patients with insurance face average out-of-pocket costs of nearly $2,600 per month, significantly higher than in Europe ($609) or Australia ($438), despite similar inelastic demand for treatment. He reveals that while oncology drug revenues have doubled in a decade, the average cost of a cancer medication can be $150,000 per year, yet these drugs often extend life by only 2.9 to 3.7 months on average. This stark imbalance leads to severe financial distress for patients, with over half accumulating medical debt and nearly a third depleting their savings. Dr. Bricker extends this critique beyond pharmaceutical companies to include hospitals, PBMs, and private equity firms that consolidate physician practices, all of whom, he argues, actively work to decrease competition and maintain pricing power, ultimately profiting from patient vulnerability. He concludes by challenging investors to consider the ethical implications of where they choose to allocate their capital.

Key Takeaways:

• Ethical Imperative in Healthcare Investing: The fundamental rule for healthcare investing should be that profit is only justifiable if the patient's well-being is prioritized, a principle often violated by current industry practices.
• Healthcare's Unique Pricing Power: The industry benefits from a combination of "perfectly inelastic demand" (patients will pay anything to alleviate pain, suffering, or death) and severely "limited competition" (due to patents, consolidation, and market concentration), enabling exceptionally high prices.
• Exorbitant Patient Costs: The lack of competition and inelastic demand in the U.S. healthcare system leads to significantly higher costs for patients, exemplified by cancer patients' average monthly out-of-pocket expenses being several times higher than in other developed nations.
• Disproportionate Drug Value vs. Cost: Many high-cost pharmaceutical interventions, particularly in oncology, offer only marginal improvements in life expectancy (e.g., 2.9-3.7 months for drugs costing $150,000 annually), raising questions about their true value proposition relative to their price.
• Widespread Patient Financial Distress: The high cost of care results in severe financial consequences for patients, with over 50% of cancer patients incurring medical debt and nearly 30% depleting their life savings, often forcing families into extreme measures like taking out second mortgages.
• Systemic Industry-Wide Issue: The problem of profiting from high prices due to limited competition is not confined to pharmaceutical companies but extends across hospitals, Pharmacy Benefit Managers (PBMs), and private equity firms that consolidate healthcare practices.
• Consolidation as a Profit Strategy: Various players in the healthcare ecosystem, including private equity firms consolidating oncology practices, actively engage in strategies to reduce competition and maintain pricing power, directly contributing to inflated costs.
• The "Pain, Suffering, and Death Industry" Framing: Dr. Bricker reframes the "healthcare industry" as the "pain, suffering, and death industry" to highlight the inherent vulnerability of its consumers and the ethical implications of profit generation within this context.
• Investor Responsibility: The video serves as a direct challenge to investors, urging them to critically evaluate whether their investments are contributing to a system that profits from patient suffering or one that genuinely prioritizes patient well-being.
• Global Cost Disparity: The significant difference in cancer treatment costs and patient out-of-pocket expenses between the U.S. and countries like Europe and Australia underscores that high costs are a function of market structure and policy, not solely the inherent value of care.

Tools/Resources Mentioned:

• Book: "16 Lessons in the Business of Healing" by Dr. Bricker.
• Sources for Data:
  • ncbi.nlm.nih.gov/pmc/articles/PMC8025828/
  • dailynews.ascopubs.org/do/sales-revenue-cancer-drugs-has-doubled-among-top-pharmaceutical-companies-last-10-years
  • kffhealthnews.org/news/article/in-america-cancer-patients-endure-debt-on-top-of-disease/
  • focusbankers.com/private-equitys-increasingconsolidation-of-oncology-practices/

Key Concepts:

• Perfectly Inelastic Demand: An economic concept where the quantity demanded for a good or service does not change in response to price changes. In healthcare, this applies to critical care where patients are willing to pay any price.
• Pricing Power: The ability of a firm to profitably raise the market price of a good or service above marginal cost. In healthcare, this is driven by inelastic demand and limited competition.
• Supply Curve Shifts: Changes in the supply curve due to factors like competition. An "inward shift" (less competition) leads to higher prices, while an "outward shift" (more competition) leads to lower prices.

Examples/Case Studies:

• Cancer Treatment Costs: Detailed comparison of average monthly out-of-pocket costs for cancer patients in the U.S. ($2,598) versus Europe ($609) and Australia ($438).
• Oncology Drug Revenue & Efficacy: Discussion of oncology drug revenue doubling from $53 billion to $104 billion (2010-2019), average drug cost of $150,000 per year, and the average life expectancy increase of only 2.9 to 3.7 months from these treatments.
• Patient Financial Burden: Statistics on 51% of cancer patients having medical debt, 53% of those with debt going into collections, and 28% depleting their savings.
• Private Equity Consolidation: Mention of private equity firms consolidating over 700 oncology practices in America, illustrating a strategy to reduce competition and increase pricing power.