5 Changes to Expect as Healthcare Transitions to a Technology-Driven Data-Based Industry

Hello again friends and colleagues,

In last week's newsletter, I discussed the transition of healthcare data from stocks to flows and that this will usher a restructuring of the healthcare industry. Technology-driven data-based transformations previously happened in other industries such as the news industry, the financial industry, and the real estate industry (looked at Zillow recently?). In today's newsletter, I will use those precedents to predict some aspects of healthcare's restructuring.

Consolidation

Data flows are collected from networks with the ensuing creation of network effects. As the networks created to collect the data grow, the value of those networks grow exponentially (Metcalfe's Law). This leads new users to want to connect to the largest network since it offers the most value, which further increases its value, in a continuous virtuous cycle.

By extracting value from the data flowing through the network, the network owner generates the largest revenues allowing for bigger investments which creates more of a competitive disadvantage against incumbent competitors or new new challengers. When you look at the industries mentioned above, the consolidation trend is easy to spot. In the graph below, you can notice that since the mid-1980s, there net annual change in the number of banks is in the negative range.

Accelerating Change

All the underlying technologies driving the data-flow-transformation of healthcare are exponential technologies including information technology (devices and storage), artificial intelligence, and genomics. In information technology, the exponential trend of technology development is known as Moore's Law, the doubling of the number of transistors on a computer chip every 18 months. The exponential trend is transformed the $1M room-sized computers of the 1980s to the $400 pocket-sized smart phones of today. And today's smart phones are MILLIONS of times faster than the old room-sized computers.

As the graph below shows the rate of technology improvement and price drop is even faster for genome sequencing from $100M just 20 years ago to less than $1000 today. Genomic data flows are gong to be one of the fastest growing and most consequential in healthcare. The same is also true for the rate of improvement of machine learning and artificial intelligence models. Note that this curve is exponential with each vertical unit representing a 10 fold drop from the previous level not a single unit drop with the six levels shown dropping from $100M to $1000 not from $6000 to $1000!

Just a few days ago, Illumina announced the next data point on this curve with the cost of genome sequencing on their newest machines reaching $200!

De-skilling

When data is scarce, there is a need for education, training, and experience to compensate for the lack of data, and to use the small amount of available data to make decisions. But even then the decision making is usually suboptimal. In the presence of large amounts of data, especially in the presence of artificial intelligence that can use this data to train models that can make better decisions from future data flows. There are again many example of this fact from the many industries that have already gone through this transformation. Credit decisions used to require applications, experienced credit officers, and days or weeks of processing. Today, using the abundance of credit and other data flows, algorithms are make those decisions in minutes with no human intervention.

Decentralization

As the tools of value creation exponentially shrink in size and the skills needed to operate those tools significantly decrease (eventually allowing the end user to operate the technology themselves as has happened with ATMs then phone apps for banking which usually required a trip to bank building and interaction with a trained employee). Decentralization is what is driving the mobile/retail/home transformation of healthcare with the patient, their care-givers, and a daily visiting nurse being able to operate the equipment needed to deliver care that previously required a hospital stay or a visit to some other healthcare facility.

Deflation

This one is going to be tricky for healthcare. In other industries that underwent the restructuring the cost went significantly down. For those old enough, you will remember the day when you used to call a stock-broker who you paid hundred of dollars to be able to buy or sell stocks. Today the same can be done on a phone app for free. The healthcare financing structure and insurance industry in the United States, however, will likely be a huge barrier to significant price drops. I do expect, however, that the value and service quality received for the price will significantly improve. We will also see this increase in value appear in the form of expanded scope of what is "healthcare services". In Medicare Advantage plans for example, we are starting to see "Supplemental Benefits" in the form of meals, transportation, housing assistance covered by those plans. Those traditionally non-healthcare benefits are being funded by the savings achieved from the technologically-driven deflation of healthcare services mostly hospital and emergency department care. You can think of it as healthcare dollars being transferred form the hospital to the grocery store to almost everyone's benefit. This article from the New York Times a couple of days ago is relevant.

Let's wrap things up here today.

See you next week,

Sam

________________________________________

I share news and analysis about the companies and technologies driving the Mobile/Retail/Home?#NewHealthcare?transformation. Opinions are personal, based on public information, and not reflective of current or past affiliations.