News & Our Thinking

After years of underperformance, healthcare stocks are showing troubling symptoms. Could AI be the prescription that turns things around?

Ward Brown breaks down the sector’s ailments, along with the innovations that might revive it, in our latest Argent Market Insights video.

Transcript

Hello, I’m Ward Brown. If you think of every hundred dollars the US economy produces, nearly 18 of that flows to healthcare. About five trillion dollars or so, or 15,000 from every American. Yet, all the stocks linked to health care spending have acted really poorly over the last few years. The S&P 500 Healthcare sector has trailed the broad index by more than 50% – its worst gap in decades. So, how could both of those things be true? And how might artificial intelligence disrupt the whole thing? Let’s take a look.

Healthcare’s economic dominance is pretty easy to understand. First, America is just aging. By 2030, about one in five US adults is going to be 65 or older. And those seniors consume about 3 times as much health care services as younger people do.

We’ve also just had the big proliferation of chronic conditions like heart disease or diabetes. Right now about 6 in 10 US adults have at least one of those, and 4 in 10 have two or more. That alone accounts for about 90% of the total US health care spend.

But we’ve also had the big surge in technological progress. We have things like advanced imaging or biologic drugs, and these things have been great for outcomes, but they’re also more expensive and do help explain why healthcare has become such a bigger part of the economy.

One of the more surprising drivers is all the increase in administration. The number of healthcare administrators has just exploded, especially in contrast to the number of physicians we’ve added into the system.

We all know that today healthcare is very costly to treat, but it’s also pretty expensive to operate and to run. That same complexity is exactly why healthcare is considered so ready for the disruption brought on by AI. Healthcare produces huge amounts of data. They have lab results and imaging scans and patient records. And at the same time, they’re still facing labor shortages, which is pretty hard to believe when you look at this chart. Nearly every state in the United States employs more healthcare workers than anything else. And we all know that something just isn’t working right under that circumstance. AI is ideally suited for these kinds of challenges.

Already the FDA has approved over a thousand AI-enabled medical devices and even Medicare is starting to reimburse for certain AI tools, things like stroke detection algorithms and there’s also a new service offered by Microsoft Copilot that’s helping reduce physician documentation time by more than 60%. That gives them more time to spend on patient care, something we’d all appreciate.  The big consultant, McKinsey, estimates that AI could cut US healthcare spending by anywhere from $200 to $350 billion each year, mainly by removing inefficiencies and just automating a lot of that administrative work.

So why have health care stocks faltered so badly while things like AI advanced like they have? Well, regulatory uncertainty is a key factor. Medicare Advantage, the the big profitable private Medicare program, is being put under the microscope a little more here recently. You’ve got companies like United Healthcare Group that’s undergoing audits and rate cuts and even DOJ investigations. We felt that pretty hard in the Argent portfolios.

Meanwhile, the post-COVID recovery and elective surgeries keeps putting medical costs higher. All the weekend warriors out there are getting new hips and shoulders and knees and that’s squeezing margins on top of it for health insurers. Hospitals and providers are facing wage inflation, labor shortages, and also an increase in use. And finally, just investor capital has shifted to things with just more excitement right now. Again, things like tech and the AI stocks and more defensive sectors like healthcare has fallen out of favor, at least for now.

The key takeaway for long-term investors is this. While healthcare stocks have recently underperformed, the sector is experiencing a giant technological shift and ripe for more of it. AI is starting to deliver the kind of productivity gains that healthcare desperately needs. As those gains become more apparent, the market may start to reward companies that adopt that innovation. Healthcare’s economic significance remains strong. It’s not going anywhere, but the tools to manage it are changing rapidly, and that could change a bunch and could be where the next investment opportunities start to arise. Thanks very much for watching.

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