How is Tech Helping Out The Healthcare Industry?

This week's Industry Focus lineup is all about the interesting, often-overlooked intersections between industries. In today's healthcare edition, tech analyst Dylan Lewis joins Kristine Harjes to talk about two areas where their sectors meet -- wearables and cyber security.

Listen in to learn why insurers like Humana (HUM -1.45%) are giving plan participants free Fitbit (FIT) products and how firms like FireEye (MNDT) are helping healthcare companies keep data safe.

A full transcript follows the video.

This podcast was recorded on Feb. 10, 2016. 

Kristine Harjes: Tech and health collide on this healthcare episode of Industry Focus.

It is Wednesday, February 10th, 2016. Welcome to Industry ReFocus! It is Venn diagram week where we're overlapping industries, as I'm sure you've heard if you're a loyal listener of the show. So, for today's healthcare edition, I'm welcoming Dylan Lewis to the studio with me from the Friday Tech edition. Welcome to the show!

Dylan Lewis: Happy to be here. I have to say, I was pretty excited that we got paired up. We're very good friends, I figured it would be fun to do this show together.

Harjes: Yeah, it's going to be awesome.

Lewis: Lot to talk about in the healthcare and tech space.

Harjes: Yeah, there are so, so many ways we could have played this show out. But I'm excited to pursue the topics that we've chosen to investigate.

Lewis: And, plus, you get to actually have someone in studio with you for once.

Harjes: Which is different, yeah! Todd Campbell, our regular healthcare contributor, is usually on Skype. So, this is interesting, I can make gestures to you and all that. (laughs) 

Lewis: Yeah, pick up on some social cues here and there.

Harjes: Well, no, not my strong suit. (laughs) 

Lewis: Okay. (laughs) 

Harjes: So, first thing we want to talk about for this episode, maybe the obvious overlap between healthcare and tech, it's something we've talked about on the healthcare edition before, but I thought it would be awesome to get some more of the tech insight into it. This topic is, of course, wearables. So, what do you need to know to understand this space?

Lewis: A name that we talk about a ton on the tech show is consumer tech company, Fitbit. They're one of the leaders in the wearables space. By shipments, they are the market leader at the moment, just over 20% market share, and they have those fitness bands that you've probably seen people all over the office walking around with. Some of them are very minimalist, rubber bands with trackers inside. Some of them resemble more of a smartwatch, some of their higher-functionality products.

And for some of the healthcare listeners who may not be as familiar with them, their products range from $60 with the Zip, which tracks steps, distance, calories, active minutes, very basic stuff, up to around $250 for their Surge, which is all of the above plus GPS tracking, splits on runs, things like that, elevation, heart rate, some really advanced metrics there. And I think that general spectrum is pretty representative of what you would expect for the wearables space.

Harjes: So, looking at this from a healthcare perspective, the thing that comes to my mind as the huge opportunity is the data behind that, and how you could use that, kind of in the same way as, for example, some car insurers will give you a little device that tracks whether or not you're a good driver. Like, could you take a wearable device, use it to track whether you work out or say how much sleep you're getting, all these variables that you know play a big role in your general health, and then look at that from an insurer standpoint and get discounts or be able to better match up products? Are there companies that are working on this?

Lewis: Right now, a lot of data interaction we're seeing is with individuals. You're a Fitbit user, right?

Harjes: I was.

Lewis: (laughs) Was. So, you're part of the people who are having it collect dust in a drawer somewhere?

Harjes: Yeah, I'm one of the sheep.

Lewis: (laughs) Yeah, that's one of the problems with Fitbit. But, a lot of the data in direction right now is individuals. So, they're tracking what they're doing on a daily basis, maybe how they stack up against their friends, things like that. But, we're not really seeing large institutions make use of that data. And obviously, the immediate connection we have when we talk about people's health habits, things like that, is health insurance.

And the lead-in to this show was this quote from an interview that Fitbit CEO James Park did with Jim Cramer in December. Cramer had asked about the potential for health insurers to integrate these fitness trackers into their plans in some way or another. And Park said, "That is the holy grail of this category," meaning fitness wearables, "and it's going to happen. When it happens, that is going to be a huge inflection points for the business." So, this is obviously something that he's very interested in. We can get into this a little bit on the show, but I think insurers are particularly interested in having some more advanced health metrics on their planned participants. So, it could be one of those awesome cases where it's a win-win for consumers and businesses.

Harjes: Yeah. This, to me, screams opportunity, particularly as insurers have struggled under Obamacare to find profitability. When UnitedHealth Group (UNH 1.35%) reported that they took a huge loss on Obamacare plans, and mind you, this is the biggest health insurer out there. They estimated a $420 million loss on the Obamacare exchanges in 2015, mostly just because their actuaries must have messed up, where the pricing wasn't quite reflective of the actual needs of the population they were serving. So, you have to wonder, if you have better data, and a better understanding of the people that you're trying to serve, can you get a better price point, and this be able to meet those really tight margins that a lot of insurers are facing?

Lewis: And even if it's a minor behavioral tweak, these kind of programs can get people thinking a little bit more about running once a week or something like that, or just being a little bit more health-minded, and that will obviously trickle up to some of the insurers. So, first, talking about this, I thought it would be interesting to talk first about John Hancock and what they did on the life insurance side of things. Obviously a little bit different, a little more of a financials take. But in searching around and getting some background on this, they're one of the immediate insurers that popped up.

Harjes: It is remix week, after all.

Lewis: Yeah, so why not? You want to bring in oil, too? We can talk about them. (laughs) 

Harjes: Ooh, (laughs) we can try.

Lewis: So, John Hancock has their Vitality program, which is an employee health performance type business. They're based out of South Africa, I believe, and they work in promoting healthy initiative for employees and consumers. And so, basically, the way John Hancock's program works is, you sign up, you take this health review, they issue these goals based on your current level of activity and the various levels that they aspire for people to reach, and then they send you a free Fitbit. So, they track your fitness activity, you earn points for doing certain things, like going for a run.

Actually, getting a health checkup is another thing you can get points for. Then, those points can be redeemed for travel rewards, gift cards, discounts, things like that. And based on the levels you achieve, you can be eligible for premium discounts in future policy years, which is kind of cool. And by participating, you start out paying premiums at roughly a 9% discount, which is pretty cool. That will shift down, I think, by about 30 basis points for every year that you're active. So, it's a pretty awesome, I think, deal, for people who are in the life insurance game.

Harjes: Yeah, 9%, that's huge.

Lewis: Yeah, and I know Hancock was using it to stoke interest in life insurance. I think a lot of people are not participating as actively as they have in the past. So, that was the impetus there. But, looking a little more on the healthcare side, Humana (HUM -1.45%), one of the health insurers -- this is something you can speak a little bit more to -- has rolled out something similar, although it doesn't have all the rewards for participants that John Hancock's offering does.

Harjes: Yes, but they're also working with Vitality for something called Humana Vitality. Shocking name, I know. So, this is something that Humana is using in a lot of their different plans. Interestingly, not any of the government plans, so not the Humana Medicare members. But, it's included as a program with all of the commercial members' medical plans. So, if you sign up for the plan, then all of the sudden, so businesses can save up to 10% for having their staff reach a certain level of achievement with their different metrics that they're tracking. And it's kind of speculation whether or not that actually trickles down to employees savings, but you'd have to think that if you're an employer that wants to have their employees actively targeting, say, 10,000 steps a day, or whatever the different numbers are that they're looking at, you would probably incentivize them so that you then can receive that 10% discount. So, it kind of seems like a win-win.

Lewis: Yeah, that trickle down might manifest itself in a couple different ways. Like we were talking about before the show, it could be that there are employer programs in place where getting certain levels gets you gift cards, and the handle it that way. It could be that they choose to lower premiums or find better rates for people, and pass that subsidy down. So, a couple different ways to approach it. I think, one of the beauties of this, and something we alluded to earlier, is that it is a win-win. It seems like it's something that benefits both sides, aligns incentives. So, obviously, some of the pros here, if you're a user, you're saving money and you're encouraged to live a healthier life, which is pretty awesome. And for the insurers, you're getting way better data, your incentives for people being healthier, making better choices, perhaps not smoking or going to the gym more often, those incentives are aligned with what benefits the plan. So, theoretically, it should be good for the business. 

Harjes: I feel like there's a "but," coming.

Lewis: (laughs) There's definitely some buts. One last pro though, for insurers, it probably makes insurance, given that it can reduce costs, a little bit more appealing for people that are younger and healthier. It kind of gets rid of that attitude of "Oh man, I'm totally subsidizing the older, possibly out of shape or ill people that are also participating in this plan."

That said, some cons to deal with. For users, you're not really saving that much money if you're looking at John Hancock's side of things. So, it's not a perfect parallel, looking at life insurance and health insurance. Or, like we talked about before, auto insurance and the black boxes that look at the diagnostics on a dash. I think most life insurance premiums will probably wind up saving you somewhere around $80-90. You get a free Fitbit, which is pretty cool. So, figure, run that over the 2-3 years, maybe they issue a new one, the total value of this isn't overwhelming, and there's definitely a trade-off there where you're providing pretty detailed behavioral data about yourself to a major company. I'm sure there's agreements in place that they're not going to sell that data or do anything like that. But you're exposing yourself to more digital issues.

And, I guess, on the con side for some of the insurers, similarly, major cyber security issues. These insurers already have very robust personal information, Social Security numbers, residence, you probably know more than I do, but birthdays, things like that. And that's something that people are very accustomed to giving already, but this is kind of a different level of data. It's much more behavioral, pattern. It will know that you go to the gym every Tuesday from 6 to 8 and every Thursday from 7 to 10. You know?

Harjes: That's a long gym sesh.

Lewis: It's a very long gym sesh, but if you're only going twice a week ...

Harjes: Yeah, OK. (laughs) 

Lewis: (laughs) So, it's just a different type of comfort that consumers would have to have which providing information.

Harjes: Yeah, exactly. And right now, it is pretty voluntary whether you want to be a part of these programs and save a little bit of money. But then, the question becomes, if you do sign up for it, how exactly is your data going to be protected? This is something I want to talk about on the second half of the show.

But before we move on to that, I want to throw it out there for our listeners that we've got a great special offer going on to join The Motley Fool's Stock Advisor newsletter. This is our flagship stock picking newsletter. For all listeners of the show, you'll have a special access discount to Stock Advisor that works out to being $129 for a full two-year subscription. So, to take advantage of it, just go to Focus.Fool.com.

With that, let's hear a little about some cyber security.

Lewis: So, if I understand it, the healthcare field has run into some cyber security issues recently. I know, being in the tech and CG space a little bit more, you talk about names like Target or Sony, they've been huge, huge targets for cyber security, and have run into some major issues. There have been plenty of other names in the past. I think one healthcare provider recently made pretty big headlines for a cyber security issue?

Harjes: Yeah, this was in February of 2015, health insurer Anthem (ELV 1.11%) was hacked. And interestingly, it wasn't quite health-related information that was breached, it was names and email addresses and birthdays, Social Security numbers ... that's not good. But, it hit a lot, a lot of people. So, initially, when the news came out, they said that 40 million current customers were affected. They revised back to then say 80 million, because also, previous customers were going to be affected. So, this is kind of a huge deal.

And in the company's reaction to the event -- it was a very public thing -- you had representatives for the company say, "You know, we weren't doing anything that's not common practice for the industry, as far as encryption goes." So, when you look at the HIPAA standards for insurers and for the whole healthcare field, it turns out that they only recommend using encryption for data. Recommend, not requires. So, it's recommended to use if it's an important measure to mitigate risk. Which kind of seems like, duh! Of course it's an important measure! But it's actually just more of a guideline than a requirement. The only time you're required to have encryption is when you're moving the data. So, when it's just static and in one place, I guess it doesn't need to be encrypted.

Lewis: Huh.

Harjes: So, who knows if that's ever going to change, but there are some pretty outrageous fees for if you run into trouble with that. So, one would think that these companies do have a pretty big incentive to get their data encrypted. But it's a humongous task. I mean, I don't know a ton about the tech space, but it seems like there's a huge market for this.

Lewis: Yeah. The cyber security space is very nuanced, and we'll try to do just a broad brushstroke kind of look at things. There are a whole bunch of different elements that go into it. But, case in point with a company that's very relevant right now in cyber security is the company that responded to the issues that Anthem had. So, Mandiant, which is a division of FireEye, publicly traded company, was the one that was hired to investigate their issues. And so, this is very common for FireEye, they come in quite often for postmortems on cyber security problems. I believe they were also the ones that investigated a major attack on the healthcare industry, it was a hospital provider or operator?

Harjes: Community Health.

Lewis: Right. So, this is only part of FireEye's business. They also do active monitoring and securing. And some of the things they specialize in, and one of the reasons that I'm super bullish on the cyber security space in general is, it's very difficult to go more than a quarter without hearing about some major company or healthcare provider or whatever running into some sort of leak issue. It happens, these companies are becoming larger and larger targets because they're just a treasure trove of the very sensitive information they have, whether they're doing credit card processing or healthcare records, either way, it's very easy to take that kind of thing and steal someone's identity.

Harjes: So, with FireEye, I don't know a lot about the company, what exactly is their business? They come in after a big breach and say, "Hey, you screwed up in these four ways, fix it, do better."?

Lewis: Yeah, their post-mortem stuff is very much like digital forensics. It's like, "Hey, this is what happened, this is what went wrong, here were your vulnerabilities, and we're going to help you fix them." So, it's kind of diagnostic looking back. And that's a big part of their business consulting, and you'll see, almost any time there's a major breach, they'll get called. You'll see the press releases like, "Anthem experienced this, yadda yadda yadda." And then, down at the bottom, it's like, "They brought in FireEye for postmortem consulting and to diagnose what the issues were." So, that's part of their business. They also do ongoing monitoring. And I think that's where you're going to continue to see the market grow. 

Harjes: There's such a parallel there to the healthcare industry and preventive care.

Lewis: Yep, exactly. That's a perfect way to put it. Why expose yourself to these huge liabilities that these data breaches pose when you can pay someone on a subscription basis to make sure you're Fort Knox locked down, and don't run into any issues?

Harjes: And that's recurring revenue, too, so that's going to be to FireEye's advantage.

Lewis: Yeah. And that's something they're moving toward. A lot of their business now is not set up that way, but they're trying to build up that segment. So, on the monitoring side, they kind of specialize in day 0 attacks. Basically, these are vulnerabilities that are not previously known, so they can't be thwarted. That's the problem. So, they're doing it on a proactive basis, basically using test environments and virtual machines to try to find these vulnerabilities, and then patch them before they become issues that other people discover. So, it's beating the bad guys to being the bad guys. So, that's another thing they do. I think, one of the awesome things and one of the reasons that I'm personally shareholder is, they enjoy a unique certification that no other tech safety firms currently do. This is from a press release, and I think it underscores how strong they are and why it's so important to the business.

The U.S. Department of Homeland Security has certified FireEye's multi-vector virtual execution engine and dynamic threat intelligence cloud platform under the Safety Act. Certification is the highest level of liability protection available under the Safety Act. Customers of these certified FireEye technologies now have protection under the Safety Act from lawsuits or claims alleging failure of the technologies to prevent or mitigate an act of cyber terrorism. FireEye is the only cyber security company with products, technologies, or services certified under the Safety Act.

Harjes: Wow. So, they're blowing the competition out of the water, is what I'm hearing.

Lewis: Yeah. They are an industry leader for sure. They are a little bit more of an upstart than some of the more entrenched incumbents. Some other names to look at if you're looking for people who've been around a little bit longer, Check Point Software is a great place to start. They've been around a little longer, their cash flows are much more stable. FireEye is in an explosive growth phase, they look very expensive to people that might be a little bit more value-oriented. Something to keep in mind. Another name to look at in cyber security is Palo Alto Networks, Symantec, things like that.

Harjes: That seems like an industry that holds a lot of promise for maybe several players. 

Lewis: Yeah, I think there are several niches that a bunch of different people can operate in, because the reality is, there are so many different ways to come at a network. It's really tough to be the go-to for all of them.

Harjes: And, as always, we've got coverage on all of these companies on Fool.com, so be sure to check that out for more information from all of our great contributors, on both the tech side and the healthcare side, and all the other ones. Dylan, thanks so much for being here, this was a really fun show to do.

Lewis: Hopefully we'll get to do it again.

Harjes: Yeah! Folks, let us know, did you like remix week? Are there any middle-of-the-Venn-diagram sections that we missed that you'd like to see us cover? Shoot us an email, [email protected]. As always, people on this program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear on this program. Do your own research. Thanks so much for listening, and Fool on!