weiwentg (98.30)

Intuitive Surgical - likely to survive health reform

June 18, 2009 – Comments (2) | RELATED TICKERS: ISRG

I do health policy for a living. If you've been listening to the Congressional debates, you've heard some interesting statistics. The US spends the most among all OECD countries per capita on health care but gets no better results - often poorer results.

 The Institute of Medicine says as much as 30-50% of all procedures conducted are not backed up by solid medical evidence - this doesn't mean all 30-50% should be eliminated, it means that the evidence base is lacking. 

More convincing for me, researchers at Dartmouth (Fisher and Wennberg) find significant regional variations in Medicare spending for certain procedures. Higher spending does not produce better outcomes. It is also not related to local costs of doing business. They are connected to practice styles - some doctors are more likely to use expensive and/or invasive tests and medical interventions than others. You can read an interview with the lead researcher on CNN Money. He says that if we could flip a switch and make every doctor use the practice styles of doctors in the lowest spending fifth of the country, Medicare spending alone would decline 20%. Of course, there is no one switch we can flip.

 Consumers Union's Best Buy Drugs reports find that most of the time, one should use the cheapest generic drug. It's true that there are individual variations in biochemistry, and that there are some people who will not respond to a generic but will respond to a branded drug only. Those folks are in the minority. 

Healthcare costs take up 16% of GDP and are expected to grow at 6.8% annually - faster than expected GDP growth and inflation by several percentage points. Families are already spending a large share of their income on healthcare - if the trend continues they will spend more, and healthcare will get less and less affordable. If the trend continues, more and more employers will stop offering insurance. The healthcare system will have to focus its efforts on creating and using high value interventions - drugs, technologies and treatments that produce more result for less money. We cannot afford to simply use the newest technology without questioning its effectiveness. This will cause drug and device manufacturers to be less profitable - it's either that or bankrupt the country.

I had been lightening up on the healthcare sector. However, I am long Novartis, which has its Sandoz generics division, and Johnson and Johnson.  I believe these manufacturers have robust portfolios. Even if we cause healthcare costs to grow no faster than GDP, these companies will still be very profitable.

I am also long Intuitive Surgical. I have not seen cost-effectiveness literature on ISRG, but I believe that the minimally invasive procedures that its da Vinci devices enables are high-value medicine. They will dramatically cut recovery time and complications - that saves society money. ISRG has a great growth runway ahead of it. It may well be that they'll have to charge less for their machines - they'll still be very profitable. I picked up some shares around $100 - I believe that's a good entry point.