Underestimating AI in Healthcare

December 13, 2023

AI is changing the economics of healthcare.

Today, most healthcare companies are not set up to operate efficiently. Consider that publicly traded healthcare companies (excluding pharma) generate $2.6T in revenue and yet collectively turn only ~6.5% of that revenue into profit. Even more startling is the fact that over half of the hospitals in our country operated at a financial loss last year.

Why are these important businesses so inefficient?

Peek under the hood of many of them, and you’ll find highly-trained humans completing manual, repetitive, and sometimes duplicative administrative tasks without the help of practically any modern technology.

We have unfortunately put our healthcare system on an unsustainable trajectory. Healthcare is already one of the largest expenses in our national budget and the largest employer in our country.

AI offers a path to a more sustainable and equitable healthcare system. If these healthcare companies could hire always-on AI “workers” to alleviate the administrative burden at a fraction of the cost, we could enable our human healthcare professionals to meet the growing needs of more patients in a much more economically sustainable way.

Some quick “napkin” math can help us understand the magnitude of the opportunity. Consider again those publicly traded healthcare companies who collectively turn only $170B (~6.5%) of their $2.6T in revenue into operating profit. Imagine if these were able to achieve even a 15% increase in efficiency for having infinite access to low-cost AI “workers”. (Click through to our piece for more on our methodology here). That alone would drive $314B more in operating profit and ultimately $5.6T in incremental enterprise value, even assuming no improvement in valuation multiples or growth in top-line revenue. That could nearly triple the enterprise value of profitable public healthcare companies.

Healthcare involves a host of highly specialized tasks that are unforgiving to mistakes, and as such, it will require thoughtful deployment to weave AI carefully throughout our care delivery system. Yet the social and economic impact of getting it right is massive.

We at Andreessen Horowitz are looking forward to the coming wave of ambitious AI healthcare companies that will enable better care for more people with greater efficiency. If you are building this future, we can’t wait to meet you.

Link to full article: https://a16z.com/ai-healthcare-economics/