Corporate Strategies Aim to Catch ‘Age Wave’ : Health-Care, Other Industries Realize There’s Gold in Them Thar Old Folks
Investing for one’s old age is always a good idea. But investing in the aging of the nation as a whole can mean big profits.
If projections are correct, the current “age wave” in this country is just a ripple compared to what is coming. More than 75 million Americans who helped make up the ‘60s generation are approaching a different sort of 60s decade.
Although the typical horizon of U.S. business tends to be measured in years rather than decades, companies catering to the graying masses are proliferating as the realization grows that this wave of older Americans is building.
Few industries are as securely assured of a piece of the market as the health field. The figures behind the industry’s growth are staggering.
More than 30 million Americans are older than 65--more than the total population of Canada. The fastest-growing segment of the U.S. population is 85 and older. And within 30 years, nearly one in four Americans will be at least 65.
Difficulty Keeping Pace
Economists estimate that a 100-bed nursing home would have to be built every day for the next 40 years just to keep pace with demand. The amount spent in this country each year on personal health care--which excludes money spent on research and the like--is expected to reach $1.4 trillion in the year 2000, up from $443 billion in 1987.
And nearly all segments of the health-care and medical fields are expected to take part in the explosive rate of growth.
How does an investor, then, take advantage of these burgeoning industries? Carefully, analysts say.
Although no one doubts that these goods and services will be needed in the year 2012--when the first of the baby-boom generation pass the age of 65--few know where the money will come from to pay for the medical care.
“The elderly represent about one-third of health-care spending,” said Gerard Anderson, director of Johns Hopkins Center for Hospital Finance & Management. “Of course it’s a significant impetus (for business). But it’s unclear whether Medicare and the Social Security programs will have any money to cover them in 2010 or 2020.”
Government Share to Increase
The federal government picks up slightly more than one-fourth of the amount spent in this country on personal health care each year through Medicare and Medicaid payments. That figure is expected to increase to nearly one-third, or $460 billion, of total medical costs by the year 2000.
At that time, however, there will be just two workers paying into the nation’s coffers for each Medicare recipient, instead of the current four workers per recipient, according to estimates from the Health Care Financing Administration, the federal agency that runs the Medicare program.
Analysts warn that there is a race of sorts taking place in the industry. New and expensive medical technology, which is blamed for much of the skyrocketing cost of health care, also has the potential to reverse that trend.
“Ultimately,” said Jonathan W. Osgood, a health-care analyst at the Baltimore investment firm of Alex. Brown & Sons, “the answer to the health-care cost spiral is technology--technology that actually results in prevention (of illnesses), rather than just treatment. But will we be able to afford the advances in technology until it gets that far?”
Investors Optimistic
In the meantime, investors appear to be optimistic.
At a recent conference sponsored by Alex. Brown in Baltimore, dozens of companies in the health-care and biotechnology fields gathered to present to potential shareholders and other industry executives the science and products that are changing the face of health care. Participants described the mood of those attending as showing “a renewed interest” and “upbeat.”
Although the fate of just a handful of the companies was tied directly to the elderly, virtually everyone realized that the aging population would increase the markets for their products. And in turn, those executives can thank the growing markets for persuading others to invest in their companies.
Few companies attending the conference did not have at least one product that would be used predominantly by the elderly.
Synergen Inc. of Boulder, Colo., discussed its research into new drugs for arthritis and emphysema.
Diagnostic Tests Developed
Centocor Inc. of Malvern, Pa., is developing diagnostic tests for a range of cancers and for hardening of the arteries.
Privately held U.S. Bioscience in Blue Bell, Pa., a 2-year-old spinoff of U.S. Healthcare Inc., has developed a drug for the treatment of breast cancer, particularly prevalent in post-menopausal women.
Marion Laboratories Inc. discussed Cardizem, the largest-selling cardiovascular drug in the United States. Cardizem is used to treat angina and hypertension and is being evaluated for other cardiovascular problems.
And Athena Neurosciences Inc., a private company in South San Francisco, is developing diagnostic and therapeutic products for Alzheimer’s disease. “It’s a sobering thought that probably 10 to 15 people in this room today will succumb to this disease someday,” the company’s president and chief executive, John Groom, told the 100 or so people in the audience.
The nursing-home industry is perhaps the most striking example of both the potential growth and financial uncertainties facing the health field.
‘Elderly as an Untapped Market’
“At one time,” said Deborah Cloud, spokeswoman for the American Assn. of Homes for the Aging, a group representing not-for-profit nursing homes, “the nonprofits were about the only ones interested in care for older people, because it wasn’t perceived as a lucrative market for commercial businesses. Now, almost any commercial enterprise that sees the elderly as an untapped market are trying to tap them.”
There are about 1.5 million nursing-home beds in this country, according to the American Health Care Assn. (AHCA) in Washington. That figure is expected to more than double in the next few decades.
While that sort of demand, under normal circumstances, would mean unbridled expansion and profits, analysts said, the current financial position of the industry has been slipping for years.
In 1985, the industry peaked, with an average pretax income of 7.4% of revenues, according to an AHCA economist. The ratio slipped in 1987, when the industry lost an amount equal to 1.6% of total revenue. And last year was even worse, the group said, and stock prices sagged.
Still, the industry has total revenue of more than $40 billion each year, and that figure is expected to triple by the year 2000.
Coverage Shifted
Thanks to the Medicare Catastrophic Coverage Act that took effect this year, government reimbursements for nursing home care have increased substantially, as many elderly nursing home patients are now covered by Medicare rather than Medicaid, which principally targets the poor.
A recent report from Prudential-Bache Securities said: “With Medicare revenues reimbursed on a cost basis and running about double Medicaid payments--and about 20% to 25% higher than private fees--we see major revenue and income benefits to many in the industry.”
Among those poised to take advantage of the good news is Manor Care Inc. of Silver Spring, Md. The company, with 157 homes with 21,000 beds across the country, has added two dozen new facilities in the last two years.
Manor Care intends to open between eight to 10 new homes annually, representing 1,200 to 1,400 beds, in the next few years, said James A. MacCutcheon, the company’s chief financial officer.
“There is very little substitute for this service,” he said. “What is it that is going to keep people out of nursing homes? There really is not a whole lot. There is always going to be a need for skilled nursing care.”
Marriott Pushes Into Industry
Marriott Corp. apparently shares that view. The company began pushing into the long-term care industry in 1987 after extensive market research.
The company, through its Marriott Senior Living Services division, now manages more than 2,000 beds in nine facilities. Eight new projects are either under way or planned, including one community at Fort Belvoir, Va., for retired Army officers.
Brian C. Swinton, vice president of product development, sales and marketing for Marriott Senior Living unit, said the company recognized that the people filling Marriott’s large chain of hotels would eventually need lodging of another kind.
He said the company’s thinking went like this: “All of a sudden--wait a minute--what we really have to do is cater to the older population. That is a natural extension of what we do well.”
