NCI: Healthcare Stocks: Value Trap or Generational Buy?

NCI_Healthcare Stocks Value Trap or Generational Buy

Speaker1: [00:00:00] Good afternoon, and we are live with the next episode of Lumina Non-Consensus Investing. I am Ram Ahluwalia, your host and chief investment officer at Lumina Wealth, where we specialize in the craft of alternative investments. So I'm pleased to join with a friend, AVIC Roy Avic is a policy analyst and he speaks on healthcare crypto economic opportunity.

He's a co-op founder of Free Op Foundation for research on equal opportunity's, a think tank focused on helping Americans with below median incomes. And he's also been a policy advisor to presidential candidates, including MIT Romney and Marco Rubio. He's got a background in medicine, the Yale School of Medicine and Healthcare Investing, who's at Bank Capital, JP Morgan.

He's been a prolific fault leader in the category future in Wall Street Journal, CNBC. And here we are at Lumida Non-Consensus investing. Avi, good to see you again. How are you? [00:01:00] 

Speaker2: Hey, Rob. I'm fine. 

Speaker1: How are you? Good, good. We first met, I think it was two years ago at the Bitcoin Miami Conference that our mutual friend David Bailey puts on.

Speaker2: Yeah. You were saying a lot of really smart things about the Grayscale ETFI remember. Oh, that was a, that guy. Gotta get to know that guy. 

Speaker1: That was a, those was a long time ago. I remember when I was speaking to you, we were talking about biotech investing and 10 plus years ago I used to allocate to hedge funds and you had done the same and you also had invested in the same funds.

We won't talk about those funds now. It's 10 years later. The world's changed, different kind of opportunity set. But I remember saying, oh wow, AVIC is super sharp. Really enjoyed the conversation. And here we are, we're gonna try to solve all of healthcare's problems in the next. 45 minutes or so.

Alright that should be fun. We'll talk about digital assets as well. We'll talk about 13 f filings in biotech investing. One of the topics we had, 13 Fs are dropping 45 days after quarter and [00:02:00] close are dropping now all around us. And every quarter Lumida does a 13 F walkthrough actually. Super timely.

Let's start with healthcare. Healthcare stock's been absolutely decimated. The cost of care, the utilization has increased. So any Medicare advantage linked name like UnitedHealth or Elance has dropped considerably. They're off the lows. And now I noticed in the 13 F filings have been released, it seems like every hedge fund has accumulated share including very notable funds.

I know you can't comment on stocks but taking a step back, how did we get here around Medicare Advantage, the costs, the and what are the issues at play? 

Speaker2: Yeah, there's a bunch of things happening in the and we're talking specifically about the insurers now managed care. For those of your listeners and viewers who spend a lot of time in this space, they'll be aware that the vast majority of the equity market [00:03:00] cap in healthcare is pharma and biotech, let's say 10%, 10, 15% is non therapeutics.

But managed care is the big, is certainly a big chunk of the non-therapeutic market cap in healthcare. And the managed care stocks have generally been hammered. And not just the stocks. By the way, if you look at the the nonprofit Blue Cross plans, for example a number of them, not all of 'em, but a number of them have announced in 2024.

Significant financial losses. So people are getting hit across the space depend, even regardless of what part of health insurance you're involved in. So there's specialists that focus purely on low income Americans, the Medicaid population, like Centene and Molina. There are people who focus a lot on the employer sponsored market, the commercial market.

And then there are people who focus a lot on Medicare Advantage. And sometimes those overlap. But United and Humana, for example, are certainly heavily known and ance for [00:04:00] their Medicare Advantage plans, along with their presence in the commercial business. They some of them also have Medicaid presence as well, but in across the space, regardless of which sector or sub-sector of health insurance they're playing in, there's a couple things happening.

There's some things happening that that the newspapers and the, and are covering reasonably well, which is. What they usually focus on, which is what's called trend. So the increase in healthcare spending year over year per capita that has been elevated or is, has re rebounded to its historical, let's call it six to 8% a year trend as opposed to during COVID obviously there was a bunch of funky things happening because you couldn't actually get a lot of doctors appointments during COVID and there, then there was a kind of a rebound effect.

We're seeing some of that rebound effect now. So people are really worried about that. That's one factor. Another factor is GLP ones Ozempic and Wegovy and Manjaro. What you're hearing, a [00:05:00] lot of what you're seeing in a lot of the newspaper coverage and the analyst reports is that GLP ones are driving a lot of the increased trend.

And that's something that a lot of insurers are really worried about how to crack down on GLP one utilization. I would say, and this is a personal view my personal view is that there's a missing piece to the story, at least the way it's been covered and reported. And that is ai. So the narrative around AI in healthcare is that, oh, AI is gonna be so amazing.

We're gonna figure out all these beautiful ways to reduce the cost to healthcare by using ai. It's gonna be so awesome. And the truth is, has in my view, in my assessment, has turned out to be the exact opposite, which is that the initial use of AI today is predominantly among doctors and hospitals and the p and the vendors they use for billing services like Epic Systems for basically using AI to [00:06:00] navigate around insurer roadblocks.

So if you're insured, like reimbursement, 

Speaker1: coding, roadblocks, the compensation, all of that. 

Speaker2: All of that. So it's it's let's say there's a prior authorization saying, Hey, you need to fill out all these forms before we will agree to this very expensive treatment. AI is filling out the forms in a millisecond.

If you have a a kind of a protocol that the insurer wants you to adhere to, to to get paid, the AI agent will basically tell you that will auto, auto automate that process for you. So there's no extra friction on your end to to hit the the insurer's hurdles. And the insurers have been, in a sense behind the curve in terms of being aware of these these tactics used by the providers, again, facilitated by Epic and Athena Oh, wow.

And other healthcare IT companies. So the end result has been TR utilization is higher. Not necessarily because people are consuming more healthcare services, but because AI is [00:07:00] enabling, that's incredible providers to bill for more healthcare services. So that's 

Speaker1: the first time I've heard that. By the way, that's the first, let me play out the alternative hypothesis.

You let me know if this is accurate, not accurate. Alternative hypothesis is you had COVID and people embraced emergency room care. You are seeing emergency room care utilization increase to levels we never saw before. COVID, and they've remained elevated. Obviously, some players like tenant health are folks on that emergency care.

So my hypothesis is that there was a behavior shift, a permanent behavior shift after COVID because people were entrained to consume healthcare. That's one. And there also, telemedicine took off. They consumed it even more. You get a scratch on your back. Maybe it's a bite or something and you call your doctor.

So is that a contributing driver? I'll give you one little anecdote. In COVID, there's a period of time where you couldn't go to the gym, as it's hard exercise. I started getting back issues and [00:08:00] back pain. And so for the first time I took advantage of chiropractor services on healthcare and essentially it was like acupuncture and like a massage.

And I was like, oh, wait a minute, is this, what is this why healthcare costs so expensive? I'm getting a free massage. I've already had this benefit, I've just never utilized it. So what's your reaction to that? 

Speaker2: That could be part of it. That could be part of it, but you know what really drives trend is not so much those smaller ticket items on a relative basis.

It's the big ticket items. It's the person who gets a stroke and goes into the hospital for that, the cancer drugs, the GLP ones, these things that are multi-billion dollar spends. That's what really drives the trend more than the smaller things. So it's possible that some smaller things are helping, but yeah I'll stick to my thesis of the AI is really what's what's the hidden story here that a lot of people don't know about or don't appreciate?

Because [00:09:00] again, it hasn't been quantified. This is I'm putting together what you, what we what in the investment committee we used to call the mosaic theory putting together a lot of puzzle pieces or disparate data points and connecting the dots, and that's what I'm seeing. 

Speaker1: Lemme challenge you real quick on this one too.

Have boomers really adopted AI and obviously chat BT and XAI, they've grown tremendously, but it's, the Silicon Valley, the founder types the New York City types for thinking type people listening to this podcast creators, people on social media. Look, of course it's over 10 million plus people, but like my parents are not.

Using ai. It's not the patients. So the way it's working, is it the doctors navigating through I see it. Okay. There, 

Speaker2: there's a small kind of oligopoly of billing and IT systems dominated by these two comp, particularly Epic is the biggest one. Okay. 'cause they're the one that are in like 90% of the hospitals.

Okay. The second biggest player is Athena [00:10:00] Health which was actually founded by one of my colleagues on the free op board, Jonathan Bush. But basically almost all hospitals and most doctor practices use these products to to Got it. It's like Microsoft Excel, right?

It's like in Google Sheets, everybody. If Microsoft and if Microsoft decides that they're gonna rename Columbus Day, indigenous People's Day. Then every calendar on every computer in America suddenly says, indigenous People's Day. Nobody, the user, end user did not make that change. So similarly here, epic and Athena are automating this stuff, and the providers just have to input the chart and the case.

Got it. The billing services do the rest. 

Speaker1: So is there a winner then in healthcare service providers, their revenue should be going up and their stocks have not done too well. Medical device stocks have been fine, like Medtronic and the ResMed of the world is how do you think about healthcare service [00:11:00] provider stocks like United UnitedHealth and HCA and the tenants?

Not coming into the stocks specifically, but 

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