The Economics of Healthcare - Part 1

The Economics of Healthcare - Part 1

The Economics of Healthcare Revisited July 2022,  Part 1 : Recession

In this new series of our blog, we will address what I see as the macro of healthcare economics and its several roles in the U.S. economy. I will take some liberties every now and then to give you my own perspective on things. It’s hard to deny that we have been in some type of recession, and a recent date from the Atlanta Federal Reserve basically confirmed it. I wanted to write these blogs from the view of someone with some maturity and experience not only in healthcare, but also in national finance, real estate, and banking – all related to the U.S. economy.

Soon, we will experience the adage that all recessions start different, yet the same, in effecting a contraction in U.S. Gross Domestic Product (GDP). Through my view and reasoning in this series, you will witness why I have found the healthcare business so fascinating, and why I see the next decade in our “Post-COVID world,” demanding the ‘right” combination of technology as an aging world continues to create great opportunities for innovation and entrepreneurship.

First, I will admit right up front that my entry into healthcare at the end of the 1980s was as an “accidental,” purely opportunistic investor and trying diversity before the next recession; and, as nearly all investors in that period now, it is about the potential to make a big return on my investment. My business was real estate and construction, what was really the family business. However, when a friend of mine approached me about investing in a new healthcare technology company, I jumped at the idea. No due diligence, no deep dive into the model or business plan; the idea was I would be in healthcare. A few years later, the company ran into trouble, and I stood to lose my investment. I recall asking my friend, “how do you lose money in healthcare?” The answer was complicated; however, the more I dug into the industry, the more fascinated I became not only the technology, but also the industry. Our industry product was a “medical device,” not really a service, and it was complicated by requirements our company had dealing with the US Food and Drug Administration (FDA), the government agency that regulates everything from COVID vaccines to medical devices that range from pacemakers to MRI machines.

As I prepared for the coming loss, I kept digging deeper and deeper into the industry and was fascinated by the economics. By 1990, I was working for free (stock in reality) for the same company. After maybe a year of unpaid work, I decided to change the model, and the company went from $0 revenues to over $6M in a matter of months not years.

What I had discovered about healthcare fascinates me still to this day. At the time, demographics told me the story, that around 77 million U.S. Baby-Boomers would be getting older and older with time, and that by 2012, they would be entering the U.S. program for those over 65, known as Medicare. Now, we should understand that unlike most developed European countries, our “socialized medicine” project started not after World War II, but in 1965 under the presidency of Lyndon B. Johnson and his “great society” program.

You could say that in 1990, 2012 was a very long way off; however, as Alan Greenspan, former Chairman of the Federal Reserve was credited in saying, “demography is history.” I interpret that as meaning if you know demographics you can predict the future. Also, around that time in 1990, I got my Life and Health Insurance License, and that extensive educational program taught me about “actuarial” tables, mortality, and morbidity rates. It was like discovering a secret language.

In my review of history, it’s clear that since 1960 (really after 1965), the U.S. Healthcare industry had not had a recession. That was huge for a guy who has lived through real estate booms and busts for as long as I could remember. Again, I thought I discovered alchemy.

Throughout this upcoming blog series, my goal is to dive deep into the economics of healthcare today in Mid-2022, post-Covid, and discuss what still fascinates me as the Technology of Healthcare.

I will leave you with one graph. The graph below shows that since 1970, healthcare has not seen a contraction relative to U.S. GDP.  In fact, I have noticed that in bad times (like recessions) the healthcare portion of GDP comparatively leaps forward, every time.

I remain fascinated by healthcare economics – healthcare in U.S. is the single best, most predictable and secure industry today! In good times and bad, healthcare is the safe place to be.

Yes, we will also discuss the opportunity to use modern technologies, systems, and a consumer-based delivery of care to improve quality and reduce cost. Counter-intuitive to most, you will see how we can reduce cost by improving quality.

-Noel J. Guillama, President