Podcast Summary: "How AI Is Revolutionizing Healthcare"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode Title: How AI Is Revolutionizing Healthcare
• Release Date: December 9, 2024
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

Introduction

In the December 9, 2024 episode of Thoughts on the Market, Craig Hettenbach, Morgan Stanley's U.S. Healthcare Technology and Providers Analyst, engages in an insightful conversation with his colleague Steve Rogers from Morgan Stanley Capital Partners. The discussion centers around the transformative role of artificial intelligence (AI) and machine learning (ML) in the healthcare sector, particularly focusing on cost containment and the enhancement of patient care through behind-the-scenes technologies.

Market Overview and Macroeconomic Trends

1. Healthcare Sector Growth and Demographics

Craig opens the discussion by highlighting the substantial growth trajectory of the U.S. healthcare sector, which stood at $4.5 trillion in 2022 and is projected to surge to $6.8 trillion by 2030, representing 20% of the overall U.S. GDP. This growth is underpinned by an aging population, with expectations of 71 million U.S. citizens aged 65 and over by 2030, escalating the demand on healthcare systems.

2. Key Macro Trends Driving Change

Steve outlines four major macro trends shaping the healthcare landscape:

• Cost Containment: Escalating healthcare costs are becoming unsustainable, prompting a need for strategies to control expenses.

• Demographics: An increase in chronic conditions, driven by factors like rising obesity rates, heightens the utilization of healthcare services.

• Consumerism: Patients are assuming greater financial responsibility for their healthcare, leading to more informed and decisive patient behavior. Steve refers to this shift as the "retailization of healthcare," where patients demand better service experiences and may switch providers based on these experiences.

  "We call it the retailization of healthcare. Waiting in the office for your appointment for 30 minutes used to be standard. Today that's unacceptable because these patients will move to the next provider who's providing them a better retail experience." [00:01:04]

• Enabling Technology: Historically lagging, technology is now pivotal in driving efficiency within healthcare. Steve provides examples such as personalized chemotherapy treatments based on genetic makeup, which not only improve patient outcomes but also reduce system costs.

  "Enabling technology has impacts on both demand and supply." [00:01:04]

These trends interact through the dynamics of demand and supply, with demographics and consumerism driving demand, cost containment influencing supply, and enabling technology impacting both.

Impact of Digitization and Cost Containment

1. Behind-the-Scenes Technology Infrastructure

Craig emphasizes that the impact of AI and ML extends beyond visible sectors like big pharma and hospitals to the intricate infrastructure that supports healthcare operations. Steve elaborates on how investment managers are increasingly interested in these behind-the-scenes technologies due to their potential to enhance efficiency and reduce costs.

2. Examples of Technological Enhancements

• Personalized Communications: Health plans can now tailor communications to individual patients, increasing engagement and better utilization of benefits.

  "Technology allows the health plan, at the point of generating that communication to know information about the person that's getting it and having the ability to personalize it." [00:03:37]

• Hospital Efficiency: Technologies that identify duplicative invoices and optimize vendor contracts help hospitals reduce administrative costs.

• Pharmaceutical Procurement: Consolidated purchasing and dynamic pricing models enabled by technology allow for cost-effective pharmaceutical procurement across multiple hospital systems.

Steve underscores that these technological applications are leading to significant efficiencies across various operational areas in healthcare.

Revenue Cycle Management (RCM) and Technological Opportunities

1. Understanding Revenue Cycle Management

Craig delves into the concept of Revenue Cycle Management (RCM), which encompasses the entire process from patient eligibility verification to billing and payment collection. Historically, RCM has been a manual and labor-intensive process.

• Automation of Basic Functions: Initial automation through Optical Character Recognition (OCR) has digitized tasks like claim entry, but many processes remain manual due to their complexity.

  "We're entering an automation cycle where some of these new technologies are making it possible to reliably automate these more complex functions." [00:07:54]

2. Technological Advancements in RCM

The integration of machine learning and AI is now enabling the automation of more intricate RCM tasks, such as:

• Pulling data from multiple sources
• Making subjective determinations regarding claim allowances
• Applying complex rules and benefits
• Minimizing risks associated with large-dollar claims

These advancements are driving efficiencies that present compelling investment opportunities.

Exploring Additional Sub-Sectors

1. Cost Cycle Management

Steve introduces the concept of Cost Cycle Management, which applies the principles of RCM to the procurement side of healthcare, including supply costs and inventory management.

2. Self-Insured Employer Outsourcing

Another area of interest is the outsourcing of self-insured employer benefits. Technology companies are developing solutions to improve the utilization of employee benefits, leading to a healthier workforce and cost containment.

Framework for Analyzing AI and ML Impact

Craig shares Morgan Stanley's research framework for evaluating AI and ML's impact on healthcare:

1. New Business Opportunities: Identifying innovative services and products enabled by AI.
2. Efficiencies: Streamlining operations to reduce costs.
3. External Productivity: Enhancing the productivity of external stakeholders like providers and patients.
4. Content Creation: Generating new content or data-driven insights.

This framework helps in assessing the comprehensive impact of AI and technology within healthcare services and technology sectors.

Efficiencies Through AI and Technology

Steve and Craig discuss the tangible benefits of AI in achieving efficiencies:

• Administrative Cost Reduction: Approximately 25-30% of healthcare costs are tied to administrative functions. Automating tasks like prior authorizations can yield significant savings.

  "AI is going to save time before it saves lives." [00:10:26]

• Clinical Enhancements: Long-term, AI is expected to aid clinical operations by reducing administrative burdens on healthcare professionals, thereby alleviating burnout and improving patient interactions.

• Ambient Listening and Electronic Health Records (EHR): Technologies that can listen and populate notes in real-time can save time for physicians and enhance patient care.

Investment Insights and Recommendations

1. Strategic Investment Focus

Steve advises investors to prioritize companies that enhance quality care while reducing costs. He cautions against investing in businesses that exploit system inefficiencies, advocating for those that drive genuine efficiency and value.

"Focus on companies that are providing better quality care at a lower cost and staying on the right side of healthcare." [00:11:36]

2. Long-Term Outlook

Investments in AI and technology are poised to eliminate outdated business models that rely on systemic inefficiencies, positioning forward-thinking companies for sustainable growth.

Conclusion

The episode concludes with Craig and Steve emphasizing the critical role of AI and ML in transforming healthcare. From enhancing administrative efficiencies to improving patient care, technological advancements are paving the way for a more sustainable and effective healthcare system. Investors are encouraged to focus on innovative companies that leverage these technologies to drive meaningful improvements and cost savings within the sector.

Notable Quotes:

• "We call it the retailization of healthcare. Waiting in the office for your appointment for 30 minutes used to be standard. Today that's unacceptable because these patients will move to the next provider who's providing them a better retail experience." — Steve Rogers [00:01:04]

• "Enabling technology has impacts on both demand and supply." — Steve Rogers [00:01:04]

• "Technology allows the health plan, at the point of generating that communication to know information about the person that's getting it and having the ability to personalize it." — Steve Rogers [00:03:37]

• "We're entering an automation cycle where some of these new technologies are making it possible to reliably automate these more complex functions." — Steve Rogers [00:07:54]

• "AI is going to save time before it saves lives." — Craig Hettenbach [00:10:26]

• "Focus on companies that are providing better quality care at a lower cost and staying on the right side of healthcare." — Steve Rogers [00:11:36]

Final Thoughts

This episode of Thoughts on the Market provides a comprehensive overview of how AI and ML are revolutionizing healthcare by addressing key challenges such as rising costs, administrative inefficiencies, and the need for personalized patient care. Through detailed discussions and expert insights, Craig Hettenbach and Steve Rogers illuminate the integral role of technology in shaping the future of healthcare, offering valuable perspectives for investors and stakeholders alike.