Why does the U.S spend so much on healthcare (Part 4)

Why does the U.S spend so much on healthcare (Part 4)

As we try to transition to another subject in healthcare (blockchain and healthcare), the media continues to confirm our previous comments that nearly every general, economic and business media, talks about healthcare costs daily.

On August 1, 2018, the Wall Street Journal did an entire page (A6) titled, “Why Americans Spend So Much on Health Care.”  I could not ignore that headline, or the amazing information presented by the Wall Street Journal.

The biggest point made by the Wall Street Journal article is primarily focused on the comparison of the cost of care in the United States (U.S.) versus other nations collectively as part of the Organization for Economic Cooperation (OEC).

We have noted previously the discrepancy for total healthcare expenditures at the macro level in the U.S. is approximately 18% of Gross Domestic Product (GDP), and the OEC is collectively just over 10% of GDP (normalized GDP numbers).  Looking back to 1971 the difference between the U.S. and OEC was nominal.  The facts are that in 1970 total healthcare expenditures for the OEC was just under 5% of total GDP, while the U.S. was just 6% of GDP.  After 1971, the spread begins to expand until the 1990s.  For about 10 years, the U.S. percentage of GDP remained relatively constant; this is primarily due to the emergence of health maintenance organizations (HMO).  The HMO became very popular after their beginnings in the mid-1980s, and by the 1990s many employers were switching members from traditional indemnity health insurance plans to HMO plans.  During this period, healthcare expenditures in the United States remained relatively flat at about 12% of GDP.

The 1980s into the 1990s were relatively explosive years for U.S. economic development, where the national GDP was growing at a very fast rate.  I recall this period quite vividly having entered healthcare in 1990 and watching as annual healthcare spending surpassed $1 trillion* (USD).  Healthcare’s cost, relative to GDP, was relatively obscured to a fast-growing national economy and GDP.

Between 2000 and 2007, consumers demanded better care and employers began adapting to a new emerging model, the Preferred Provider Organization model (PPO), and models that used tiered benefits, co-pays and pharmacy costs.  Between 2000 and 2007, we all witnessed unprecedented mergers and consolidations of healthcare systems that allowed providers and hospitals more pricing capacity.  Also, historically relevant, is the adoption of the Medicare Part D program in 2006 by President George W. Bush – the first significant increase in Medicare benefits since it was created in 1965.  At this point, U.S. national healthcare expenditures increased to 16% of GDP.

During the financial crisis (2009-2013), healthcare expenditures flatlined again for a few years with annual variance of plus or minus 1% from the 16% of GDP.  We know now that the flatline was directly related to individuals either not accessing healthcare or delaying healthcare, which we know had a detrimental effect on the health and wellness of individual Americans.  During this period, the creation of the Affordable Care Act of 2010 (ACA), also referred to as “Obamacare” occurred.  At the time, the Obama Administration took credit for stalling healthcare cost increases, which today seems more related to the fact that the Administration did not realize that Americans were delaying care because they could not afford it.  It was not the magic of the ACA; in fact, we have argued in these blogs that the ACA not only has no impact on the cost of care but is actually going to increase the cost of care in the future.  We now have the evidence.

With the economy recovering, we now see the resuming escalation of healthcare costs. While the ACA allowed more access to Americans, at least in the short term, a recovering economy and increasing employment allow more Americans to afford insurance, and more importantly afford the deductibles and co-payments that they likely were not able to afford during the Great Recession.  Now empowered by the ACA in healthcare coverage, healthcare costs have again begun to increase materially.  The stall during recession and escalation during normal times is now recognized as a normal trend for healthcare as we look back over the past 50 years.  Additionally, we believe the cost curve will become even more vertical in the coming decades.

Healthcare projections are now forecast to be over 20% GDP of annual U.S. expenditures by 2025.  We strongly believe that those numbers are low, and it will be considerably higher.  We believe that, because as baby boomers continue to retire and leave the workforce, healthcare costs will escalate to an historic rate of increase.

The sad news is that for all the money the United States spends in healthcare, we trail most EOC countries in key metrics.  Per capita, in the U.S., we have lower life expectancy, higher infant mortality (aside from abortions), higher rates of diabetes and coronary heart disease, and higher respiratory ailments.  According to the Wall Street Journal, the U.S. has one positive category and that is we have a lower cancer death rate per hundred thousand residents.  Theoretically, that is because in the U.S. we may have more access to expensive cancer drugs, some costing as much as $10,000 a month, to treat and in some cases cure cancer.

During the past 30 years, we have witnessed another sad trend, beyond higher cost of healthcare expenditures, we have seen a 250% increase in the cost of health insurance and out-of-pocket healthcare expenditures to the consumer.  As of 2015, consumers spent an average of 8% of their total net income on healthcare; that is up nearly 200% from 1985.

During the last six years, there has been a major concentration of hospitals, providers and ancillary services into integrated delivery systems (which will be the subject of a future blog), allowing for more price pressure on employers, consumers and healthcare insurance companies.  We know that when there is less competition, prices are higher; it is a foundation of supply and demand economics.

One fascinating item the Wall Street Journal chose to highlight relating to reduction of competition is Magnetic Resonance Imaging (MRI).  They reported that MRIs cost more than 20% to payers and consumers where there is a “highly concentrated” delivery system in comparison to areas where such concentration does not exist or is less prevalent.

Also, during the past 30 years we have witnessed both pharmaceutical prices and rebates increase.  The problem is that the prices have escalated higher and more rapidly from drug manufacturers than their corresponding “drug rebates,” leaving the net price substantially higher in the end.

In summary, the Wall Street Journal reminds us of what we have mentioned in previous blogs – the U.S. healthcare industry employs more Americans than any other industry, yet prescription drug prices have risen 61%, hospital prices are up 60%, and physician care is trailing with only a 23% rise, since 2000.

Finally, healthcare represented only 4% of the revenue in comparison to all S&P 500 companies combined back in 1984.  Today, that number is at an all-time high of 16%, with a rate of change that is nearly vertical, predicting substantial continued escalation.

The take away is, whether we want to hear it or not, everyone – every company, every government – is in the healthcare business, whether they like it or not.  This impacts all ages and all regions of the United States.  The cost curve is increasing upward, and it will get progressively more painful for individuals, industries and government to afford healthcare if we do not arrest the trends.

The solutions are simple; the implementations are very difficult.

As a society we must change how we pay providers, we must change who pays for care, and we must embrace and adopt technology (like nearly every other industry has already done) for the financial and wellness interest of U.S.  We can improve quality and reduce cost.  It is the only way forward.  It cannot be done any other way.  The technology needed to make a real difference is mature, and well beyond any experimental phase.  We have the viable technology for not only tracking care, but also helping to provide care, diagnose diseases, pay for care, and remove the silos of information that were laid with the foundation of the U.S. healthcare system.  It has been one patch after another.  One President taking one path, another taking a different path.  The system will not work that way.  Can anyone imagine if healthcare consumes not 1/5 of the GDP of the U.S., but one day consumes 1/3?  At the current rate, it is entirely possible.

We must break down the walls of protectionism, address the lack of price transparency, and put more control in the hands of consumers.  This is going to happen; however, the question is:  does it happen now or sometime in the future?  Do we address these issues now, or do we wait until things get much worse?  They are destined to become worse without managing the change we can see must be made – changes that nearly every other industry have already made in technology and communication.

Our perspective is that not only do we have the technology and access to new systems and processes, we have technology-savvy consumers from 8 to 88 years old.  We firmly believe we are on the cusp of a healthcare transformation era – after all, it has been almost 50 years since we put the first man on the moon – we have the technology and wisdom to put healthcare on a “healthier” track!

*U.S. National Healthcare Expenditures in 2016 were $3.6 trillion (USD)


Sources used in this series of blogs: