Lisa Gill has been covering healthcare services for over 20 years at JPMorgan, securing a reputation for being one of the top analysts in the field.
In 2019, Gill was inducted into Institutional Investor’s All-America Research Team Hall of Fame, having earned her first No. 1 analyst ranking in the healthcare sector with them back in 2010.
Here she weighs in on how healthcare is evolving because of demographics, changes in Medicare and technology; why Teladoc is still one of her favorite stocks; and whether we’re likely to see much M&A activity in the sector later this year. What follows is a lightly-edited transcript of our conversation.
What do you think will be the dominant themes for the sector for the rest of the year?
As we think about dominant themes for the rest of the year and really for the next several years going forward, there’s this shift we’re finally seeing away from fee-for-service towards value-based care.
There’s a couple of things that are happening. I’ve been talking for years about consumerism in health care and what I think you’re seeing right now is a combination of an aging population -- 10,000 Baby Boomers turn 65 each and every day between now and 2030. And two, you have this shift towards value-based care where you’re having more people join Medicare Advantage versus traditional Medicare. So the consumer is aging and shopping for coverage.
When you look at today, Medicare Advantage makes up about 37% of the total number of Medicare lives -- that’s about 24 million people out of the 62 million people that have Medicare. This growth in the aging of the population and shifting towards Medicare Advantage, and then what you have in the market now are these new emerging models that are taking risk.
So really driving that consumer towards wellness; instead of treating the sick, incentivizing the primary care doctor to be able to manage that patient’s health over time. And that’s a really important theme because for a long time, the primary care doctor wasn’t viewed as the most important physician in the patient’s continuum of care. Now the primary care doctor is seen as the quarterback of your overall health care journey and it’s really important because if you go and get your routine visits done -- whether it’s a colonoscopy or a mammogram, etc. -- you can potentially catch those cancers or cardiovascular disease in the earlier stages, potentially reducing the cost of care.
What we’re seeing is “payviders,” who are essentially payers that are taking on risk, but they’re the actual provider as well. The reason we’re seeing this emerge now is that with technology, we’re finally in a place where the physician can truly take risk.
In the late 90s, there were physician practice management companies, and they all went bankrupt. Why? Because in the 90s, how did you correspond with the doctor? A fax machine. As our population ages, a person in their mid-60’s is generally a lot more comfortable with technology than that person in their mid-60s was twenty years ago. That’s a really important reason why we believe these kinds of models will do well this time around versus 20 years ago when they failed.
What are the other trends you’re seeing now?
The other trend that we’re seeing is that thanks to technology, with telemedicine, you’re starting to see more of a shift to the hospital in the home. If you and I were having a conversation a year ago in January, I would have told you that generally speaking, people who use telemedicine for the first time during a flu season, once they use it, they will use it two more times in the calendar year. Obviously with the pandemic, that accelerated things tenfold.
And so you now have people who used it during the pandemic and say, well, that was easy -- I didn’t even have to leave my house. For example, I recently moderated a panel where New York Presbyterian Hospital was on the panel, and they talked about the fact that in many cases, the first time a patient will meet the surgeon will be on the operating table. So let’s say you have a routine surgery and your primary care doctor recommends you to the surgeon. Your first appointment will probably be a virtual visit, then you’ll go and get your lab work done, followed by a virtual visit again with that surgeon, the pre-op, then the first time you physically see that surgeon may be when you’re on the operating table.
Why is that good for both parties? It’s great for the individual -- they don’t have to leave their house. It's good for the doctor because they can be a lot more efficient. And especially during the pandemic -- there’s a limit to the number of patients you can have in a waiting room, the cleaning you have to do between treatments, the fact you have to leave the exam room vacant for 30 minutes after you’ve sanitized it. You don’t need to do that for a virtual visit.
That doesn’t go away. I think there’s a number of things we learned from this pandemic that will stay in place post-pandemic. And I think virtual care is one of them.
Following up on your themes, what are your favorite companies right now in the sector?
One of our favorite names is UnitedHealth (UNH) - Get Report. It’s a very large company and it trades at a higher multiple than other health care services companies. When you look at what’s embedded within that company, especially the Optum business -- Optum Care, Optum Insight and Optum Rx -- and when you think about the number of patients they have on their platform for Optum Care, which touches 20 million patients -- they’re so much bigger than anybody else in the marketplace.
The other name we really like is Teladoc (TDOC) - Get Report. They’ve been under some pressure since reporting the quarter, but they’re the biggest virtual health care company out in the marketplace and they’re the only one with an end-to-end solution. I think a lot of investors are concerned about telehealth becoming commoditized. I think when you look at that one-fifth of care into the home, Teladoc is going to be incredibly well-positioned with the chronic conditions that they serve.
Speaking of Teladoc’s most recent quarter where they reported a wider-than-expected loss, what do you think happened?
Wall Street analysts -- there’s around 30 of us that now cover Teladoc -- seemed to take different approaches to modeling the quarter. If you look at the visit fees, the Street was at $75 million, and Teladoc reported $54 million, which you would think was a massive miss. At $55.5 million, our estimate was in the ballpark with TDOC’s number.
Secondly, Teladoc has all along talked about the fact they have 1.5 million to 2 million members that were on their platform on an interim basis because of the pandemic.
And thirdly, they had deferred revenue of just over $6 million for the Livongo business. So it looked like they missed our Livongo number by about $4.5 million, but when you take into account the deferred revenues, they didn’t miss our number.
But a year ago, Livongo had a really big contract that they added in the first quarter of 2020, which makes the comp tougher.
It feels like it’s this expectations game with Teladoc. We have followed the company since they went public in 2015, and they generally don’t raise numbers in the first quarter; they did last year because it was a really unusual time.
I also think that unfortunately there’s a lot of retail investors in this kind of name, and they tend to invest in themes. Similar to when you see a name like Peloton hasn’t traded well because it’s a post-COVID play. When you think about Teladoc, it’s the same thing.
Over time I expect the stock to trade better. It had an impressive year last year, but I think there’s still a lot of future opportunity in all the things I talked about -- having the full platform for health care services with the shift of more services happening in the home. And I think with [Teladoc CEO Jason Gorevic’s] background, coming from a health plan and knowing what health plans want and working with employers, I just think everybody’s got to have telehealth today. But there’s a difference between just having a telehealth product and actually having a telehealth platform. That’s why we still really like Teladoc here.
Do you think the Biden Administration will pursue any changes that will significantly affect the sector?
There’s been a few things that have been talked about. Obviously, the health care exchanges have been up and running under the Biden administration. If you look historically, a number of health plans could not participate in the exchanges previously -- that’s a future opportunity to perhaps participate there. There has been some talk about potentially lowering the age for Medicare eligibility. And as I talked about earlier, Medicare Advantage is a really big growth product for the health plans that would potentially be an opportunity for these companies.
It doesn’t feel like a public option is on the table. From what we’ve currently heard from the Biden administration it feels like the changes that are coming will be nuanced instead of big, sweeping changes.
The last thing is back in the Obama administration, they were doing a number of initiatives around value-based care. Under the Trump administration, something was started called direct contracting, and the Biden Administration has embraced that as well. Direct contracting is where members that are under fee-for-service for Medicare have an opportunity for these public entities to directly contract for those lives with Medicare and the person doesn’t have to sign up for Medicare Advantage.
Do you foresee much M&A activity in the sector the rest of the year? If so, what kind of deals do you think we’ll see?
If you think about sizable deals, like CVS buying Aetna or Cigna buying ExpressScripts--those were big deals done in late 2018--I don’t think we’ll see anything of that size. You certainly have You certainly have UnitedHealth buying Change.
I think you’re more likely to continue to see tuck-in type deals where companies are looking to add capabilities. For example, Cigna just closed the acquisition of MDLive, which is also a telehealth provider. At the end of the day, all of the other health plans want to look like UnitedHealth -- they want to have a business model like the Optum business model that United has and so they’re all out there making acquisitions to enhance the health care services aspect of their business.
What about potential acquisitions from outside the healthcare space, such as Microsoft recently buying Nuance? Do you think we’ll see more tech companies getting into the space through M&A?
Well, they certainly have a lot of cash. I’ve been following health care at JPMorgan since the early 2000s and traditionally the tech companies have never really been able to break in from a health care perspective, even when they make these acquisitions. If you look back over time, you’ve had Google trying to do things on the health care side, as well as others. They know that there’s growth potential in health care, they know we have this aging population that you and I talked about, so we could absolutely see some incremental acquisitions in that regard. But it’ll be interesting to see what they buy and what it does to the competitive marketplace.
Pretty much everything Amazon has done has been homegrown. The big players to me that seem to have some interest in health care would be Microsoft (MSFT) - Get Report, Alphabet (GOOGL) - Get Report and Amazon (AMZN) - Get Report, but none of them have made large acquisitions to date.