Introduction to the Health Care Industry
Health Expenditures and Services in the U.S.:
Health care costs continue to rise in the U.S. and throughout the developed world. Total U.S. health care expenditures were estimated to be $3.09 trillion in 2014, and are projected to soar to $3.57 trillion in 2017.
The health care market in the U.S. in 2014 included the major categories of hospital care ($959.9 billion), physician and clinical services ($618.5 billion), dental services ($122.4 billion) and prescription drugs ($290.7 billion), along with nursing home and home health care ($248.5 billion). Registered U.S. hospitals totaled 5,723 properties in 2012, according to an American Hospital Association survey, containing 920,829 beds serving 36.1 million admitted patients during the year (the latest data available).
Medicare, the U.S. federal government’s health care program for Americans 65 years or older, provided coverage to an estimated 54.0 million seniors in 2014. National expenditures on Medicare for fiscal 2014 were projected to be $615.9 billion, including premiums paid by beneficiaries. By 2030, the number of people covered by Medicare will balloon to about 81.4 million due to the massive number of Baby Boomers entering retirement age.
Medicaid is the federal government’s health care program for low-income and disabled persons (including children), as well as certain groups of seniors in nursing homes. National expenditures on Medicaid totaled an estimated $508.0 billion in 2014. The majority of that expense is paid for by the federal government. However, the states pick up a significant share of the cost, which is a massive burden on state budgets.
Health spending in the U.S., at about 18% of Gross Domestic Product (GDP) in 2014, is projected to grow steadily. Health care spending in America accounts for a larger share of GDP than in any other country by a wide margin. Despite the incredible investment America continues to make in health care, 13.4% of people in the U.S. (42.0 million) lacked health care coverage for the entire year of 2013 (down from 48.0 million the previous year). For some, insurance was unavailable or unaffordable. In other cases, a lack of insurance was due to a personal decision not to pay for it. According to the Kaiser Family Foundation, 19.7% of America’s uninsured are non-U.S. citizens, both lawful and illegal residents.
In March 2010, President Obama signed the Patient Protection and Affordable Care Act (ACA), designed to strengthen insurance company regulation and provide medical coverage to more than 30 million currently uninsured Americans. The act calls for sweeping changes. Provisions taking effect within the first six months of signing included coverage for adult children up to age 26 on their parents’ policies; making it unlawful for insurers to place lifetime caps on payouts or deny coverage should a policy holder become ill; and new policies are required to pay the full cost of selected preventive care and exempt such care from deductibles. Effective in 2010, small businesses with fewer than 25 employees and average annual wages of less than $50,000 became eligible for tax credits to cover up to 35% of staff insurance premiums.
Online health care insurance “exchanges” began enabling consumers to shop for health coverage. A 3.8% unearned income tax is levied on individuals earning more than $200,000 per year and families earning more than $250,000 per year, to fund the programs in the act. Employers with more than 50 employees that do not offer health benefits will pay a $2,000 fine per full time staff member if any of the workers receives a tax credit to buy coverage. This fine was originally scheduled to begin in 2014, but in mid-2013 the Obama Administration delayed it until 2015. Businesses with more than 200 employees will be required to enroll all staff automatically in health insurance plans. Also in 2014, the government began fining citizens who choose not to carry health insurance. The fine will start at $95 per year or 1% of annual income (whichever is greater), and rise to $695 per year or 2.5% of income by 2016.
Health Expenditures Globally and in OECD Developed Nations:
A comprehensive study published by the Organization for Economic Cooperation & Development (OECD) covering more than 30 nations including the majority of the world’s most developed economies (but excluding Brazil, Russia, India or China), found stark contrasts between health costs in the United States and those of other nations. In 2012 (the latest complete data available), the average of a list that includes, for example, the UK, France, Germany, Mexico, Canada, South Korea, Japan, Australia and the U.S., spent 9.3% of GDP on health care, unchanged from the previous year. The highest figures in this study were in America at 16.9% of GDP, The Netherlands at 11.9%, France at 11.6%, Switzerland at 11.4%, Germany at 11.3%, Austria at 11.1%, Denmark at 11.0% and Canada at 10.9%.
Total health care expenditures around the world are difficult to determine, but $6.5 trillion would be a fair estimate for 2014. That would place health care at about 8.2% of global GDP, with expenditures per capita about $903. This $6.5 trillion breaks down to approximately $3.0 trillion in the U.S., $2.7 trillion in non-U.S. OECD nations and $0.8 trillion elsewhere around the world. Outside the U.S. and the rest of the OECD, that would allow roughly $90 per capita per year. Clearly, there is vast disparity in the availability and cost of care among nations, as there is with personal income and GDP. Health care spending per capita in the U.S. was equal to about $9,500 in 2014, while spending in the world’s remotest villages, such as those suffering from an outbreak of the Ebola disease in late 2014, was next to nothing. The trend over the near future is for the modest amount now spent on health care in emerging nations to rise dramatically, while OECD nations like America struggle to contain their own mountainous costs. Globally, the total prescription drug market was over $1 trillion in 2014.
Health Care Costs in the U.S.
Particularly in the U.S., continuous increases in the cost of health care, growing at rates far exceeding the rate of inflation in general, have been inflicting financial pain on health consumers and payers of all types. Employers, including government, are hit hard by vast increases in the cost of providing coverage to employees and retirees.
Many major employers are utilizing unique new programs in efforts to reduce employee illness, and thereby cut costs. For example, the use of preventive care programs is growing, as is the use of employee education aimed at better managing the effects of diseases such as diabetes. Some very large employers are even hiring in-house physicians and nurses to provide primary and preventive care in the workplace.
Patients and insurance companies are also dealing with sticker shock over the nation’s prescription drug costs. Other factors edging costs upward include expensive new medical technologies and patients’ demands for greater flexibility in choosing doctors and specialists at their own discretion. At the same time, hospitals and health systems write off massive amounts of potential revenues to bad debt, which increases costs for bill-paying patients.
In the wake of the tremendous growth of all aspects of the health care industry from the end of World War II onward, efficiency, competition, price transparency and productivity were, regretfully, largely overlooked. Much of this occurred because employers plus federal and state governments pay such a large portion of the health care bill, to the extent that patients were generally not sensitive to health care costs.
As of 2012, according to the U.S. Centers for Disease Control, 117 million Americans (nearly one-half of all adults) suffered from one or more of the most common chronic diseases, such as cancer, diabetes, heart disease, pulmonary conditions, stroke or hypertension. In addition to the massive cost of health care for these patients, the lost time at work and lost economic output due to these illnesses substantially reduced the nation’s GDP. These burdens could be vastly reduced through better consumer health practices and better preventive medicine. For example, obesity, lack of exercise and cigarette smoking are immense contributors to these diseases. The Centers for Disease Control and Prevention reported that medical costs for obesity-related diseases rose as high as $147 billion in 2008, compared to $74 billion in 1998. That number could easily have grown to $200 billion today.
The American health care industry faces more challenges than ever, due to a number of significant factors:
· The net effect of the health care act passed in 2010 remains to be seen. However, one of the most dramatic results to date is consolidation within the hospital industry, with mergers creating massive organizations that in many cases have dominant market share in major cities. A similar effect has been a migration of physicians leaving private practice or small clinics in order to join giant physician practice groups or the staffs of hospitals. Physicians are concerned about their ability to meet increased regulatory scrutiny, successfully deploy electronic health records and earn the incomes that they desire. Many older physicians state that they will simply retire earlier than they had planned.
· The U.S. population is aging rapidly. At the same time, the life expectancy of seniors is extending. Senior citizens will place a significant strain on the health care system in coming years. America’s 75 million surviving Baby Boomers began turning 65 in 2011.
· The future obligations of Medicare and Medicaid are enough to cause vast problems for federal and state budgets for decades to come. The number of seniors covered by Medicare will continue to grow at an exceedingly high rate, from 47.4 million people in 2010 to 81.4 million in 2030.
· Likewise, costs for Medicaid, which is administered at the state level, have grown so rapidly that they are competing fiercely for budget dollars that might otherwise go to education and other vital state-provided services.
· The pharmaceuticals industry faces continued financial challenges. High pharmaceutical costs have created a large backlash among health consumers and payers. Patents for money-making, blockbuster drugs are expiring, increasing competition from makers of generic drugs. As a result, pharmaceutical makers are slashing staff and reducing research and development while acquiring small, innovative biotech companies.
· We are now in what will long be remembered as the beginning of the Biotech Era. Breakthroughs in research for targeted drug therapies are occurring at a rapid pace, and highly advanced, genetically-engineered drugs are entering the market.
· Due to rising costs, employers large and small are straining under the financial burden of health care coverage expenses for current employees and retirees.
· Physicians, hospitals, medical device makers and pharmaceutical manufacturers face daunting pressure from litigation and claims regarding malpractice. Lawsuit reform legislation has recently been enacted in many states with very promising results.
· Few Americans focus on leading healthy lifestyles that would prevent disease and cut both the amount and the cost of medical care. Obesity-related illnesses are adding an immense amount to the nation’s health care costs. Large numbers of people smoke cigarettes and/or do not exercise regularly.
· The three biggest causes of death in the U.S. are heart disease, cancer and stroke. Nearly one-fourth of America’s annual health expenditures go for treatment of these three killers.
· Only a relatively modest amount of money is spent on preventive medicine and health education. The vast majority of health care funds are spent on the treatment of chronic diseases as well as end-of-life care for dying patients.
Source: Plunkett Research, Ltd.
Video Introduction to Health Care Industry