Introduction to the Health Care Industry
Health Expenditures and Services in the U.S.:
Health care costs continue to rise rapidly in the U.S. and throughout the developed world. Total U.S. health care expenditures were estimated to be $2.8 trillion in 2012, and are projected to soar to $3.5 trillion in 2016.
The health care market in the U.S. in 2012 included the major categories of hospital care (about $884.7 billion), physician, dental and clinical services ($735.4 billion), prescription drugs ($367.4 billion), along with nursing home and home health ($232.7 billion). Registered U.S. hospitals totaled 5,754 properties in 2010, according to an American Hospital Association survey, containing 941,995 beds serving 35.9 million admitted patients during the year.
Medicare, the U.S. federal government’s health care program for Americans 65 years or older, provided coverage to 50.7 million seniors in 2012. National expenditures on Medicare for fiscal 2012 were projected to be $590.8 billion, including premiums paid by beneficiaries. By 2030, the number of people covered by Medicare will balloon to about 78.0 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 $458.9 billion in 2012. 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 17.9% of Gross Domestic Product (GDP) in 2012, is projected to grow steadily unless significant reforms take place. 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, 15.7% of people in the U.S. (48.6 million) lacked health care coverage for the entire year of 2011. 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. A large number of the uninsured are illegal immigrants. A Kaiser Family Foundation study, “Medicaid and the Uninsured,” dated February 2007, estimated that one-fourth of the uninsured are eligible for public programs but are not enrolled. These are largely low-income children, and in some cases their parents.
In March 2010, President Obama signed the Patient Protection and Affordable Care Act, designed to strengthen insurance company regulation and provide medical coverage to more than 30 million uninsured Americans. The act calls for sweeping changes in the near term to be followed by even more comprehensive changes by 2014 or beyond. 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 that 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.
After 2014, a 3.8% unearned income tax will be 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. Large employers with more than 50 employees that do not offer health benefits would begin paying $2,000 per full time staff member if any of the workers receives a tax credit to buy coverage. Businesses with more than 200 employees will be required to enroll all staff automatically in health insurance plans. Also in 2014, the government will begin 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 OECD (Organization for Economic Cooperation & Development) covering more than 30 nations including the majority of the world’s most developed economies (but not Brazil, Russia, India or China), found stark contrasts between health costs in the United States and those of other nations. In 2010 (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 9.5% of GDP on health care. The highest figures were in America at 17.6% of GDP, The Netherlands at 12.0%, France at 11.6%, Germany at 11.6%, Denmark at 11.1% and both Canada and Switzerland at 11.4%.
Total health care expenditures around the world are difficult to determine, but $6 trillion would be a fair estimate for 2012. That would place health care at about 8.7% of global GDP, with expenditures per capita about $850. This $6 trillion breaks down to approximately $2.8 trillion in the U.S., $2.6 trillion in non-U.S. OECD nations and $0.6 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 $9,000 in 2012, while spending in the world’s remotest villages 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 estimated to be as high as $950 billion in 2012.
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, are hammering health consumers and payers of all types. Insurance providers continue to struggle to contain costs. Meanwhile, employers are hit hard by vast increases in the cost of providing coverage to employees and retirees. The Kaiser Family Foundation estimated that in 2012 an employer’s premium cost to cover a typical family was $15,745 per year (a 102% increase since 2002), with the typical worker paying 27% ($4,316) of that premium.
Many major employers are utilizing unique new programs in efforts to reduce employee illness, and thereby reduce 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 plan flexibility in choosing doctors and specialists at their will. At the same time, hospitals and health systems write off massive amounts of 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 and productivity were, regretfully, largely overlooked. Much of this occurred because employers plus federal and state governments paid such a large portion of the health care bill, to the extent that patients were generally not sensitive to health care costs.
A study released by the Milken Institute in 2007 found that during the year 2003 (the year on which the study focused), 109 million Americans suffered from one or more of the most common, chronic diseases, including cancer, diabetes, heart disease, pulmonary conditions, mental disorders, stroke or hypertension. This means that more than one-third of all Americans had these conditions to one degree or another. The study estimated one year’s cost of treatment of these conditions at $277 billion, but estimated lost economic productivity to be vastly higher at $1 trillion. In other words, lost work and lost output due to these illnesses reduced the nation’s GDP by about 10%. 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.
The American health care industry faces more challenges than ever, due to a number of significant factors:
· The net effect of the massive health care act passed in 2010 remains to be seen. Changes required of insurance firms, physicians and other care providers, along with burdens placed on state budgets (for increased Medicaid coverage), pharmaceutical companies and many types of providers of goods and services will be dramatic.
· 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 78.0 million in 2030.
· Likewise, costs for Medicaid, which is administered at the state level, have grown so rapidly that they are decimating state budgets and causing cuts in education and other vital state-provided services.
· The pharmaceuticals industry faces continued financial challenges. Pharmaceutical costs have created a large backlash among health consumers and payers. Patents for money-making, blockbuster drugs are expiring at a rapid rate, increasing competition from makers of generic drugs.
· We are now entering what will long be remembered as the beginning of the Biotech Era. Breakthroughs in research for drug therapies are occurring at a rapid pace, creating financial and ethical challenges along with opportunities. Personalized medicine is beginning to emerge, but it remains to be seen who will be the early beneficiaries and who will pay the costs.
· 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.
· While only a relatively modest amount of money is spent on preventive medicine and health education, about 70% of health care funds are spent on chronic disease.
Source: Plunkett Research, Ltd.
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