Is Healthcare Still A Growth Industry in the US?
From my perspective…
An occasional blog on leadership, business strategy and healthcare industry insights
For decades, healthcare was a reliable growth engine of the US economy. Stretching back to at least the mid-1960s, healthcare consistently grew at a rate above that of the GDP. Then, the Great Recession of 2008 hit. And, despite the official end of the recession in 2009, the industry continued to stagnate through at least 2014. What happened? What are the underlying causes and why hasn’t the industry been able to recover? Have we found a “new normal”, in which healthcare growth will not appreciably surpass growth in the overall economy? Or, will the industry return to its long-standing position as a growth engine for the economy?
To examine these questions, lets consider a few of the significant factors that have historically influenced growth in healthcare spending: changes in the availability of health insurance; aging of the population; and annual changes in economic growth. Then, lets introduce two relatively new factors that are impacting healthcare: Population Health and Consumerism. We will conclude by considering the combined impact of each of these five forces on expectations of future healthcare spending growth.
· Changes in the availability of health insurance
While intuitive, it remains underappreciated that changes in the availability of health insurance have driven the most significant and sustained growth periods in healthcare spending during the past 50 years. First, passage of amendments to the Social Security Act in 1965, creating Medicare and Medicaid, led to a tripling of healthcare’s share of the US economy. From 1966 to 1980, healthcare spending grew at more than a 12% annual compound rate. Next, explosive growth in employer-sponsored coverage in the 1970s & 80s – an unintended consequence of the ill-fated wage-price controls and other inflation-fighting programs enacted under the Nixon and Ford Administrations, was a key driver in the sustained double-digit annual growth rates experienced through at least 1990.
It stands to reason then, should the Affordable Care Act achieve its stated goal of providing health insurance to the 44 million Americans lacking coverage, it will create a significant tailwind encouraging relatively higher growth in health spending.
· Aging of the population
The baby boomer generation is marching headlong into senior citizenship. For the next twenty years, nearly 3 million boomers will reach retirement age each year. From 2010 to 2030, the percentage of the US population 65 years and older will rise from 13% to 23%. Given that, in 2010, seniors consumed 36% of all healthcare spending, what shall we expect when this age cohort represents 23% of the population? Stated another way, given that seniors consume 2-3x as much healthcare as younger citizens, how much will the aging boomers drive increased demand for healthcare services over the next 20 years?
· Annual changes in economic growth
Healthcare spending growth is highly correlated with changes in overall economic measures. In other words, health spending essentially tracks the overall economy (albeit with certain time-lags, discussed below). Researchers at the Kaiser Family Foundation and the Altarum Institute’s Center for Sustainable Health Spending released a study in which annual changes in health spending during the period 1965-2011 could largely be explained by two economic variables: changes in annual inflation and in GDP growth. Here is perhaps the most interesting finding from this research – it takes 6 years for year-over-year changes in GDP to fully play out in changes in healthcare spending growth. So, given the rather tepid economic recovery to-date, it can be argued from these findings that we are still years away from a full healthcare spending recovery from the 2008 recession.
· Population Health
Proponents of the “new normal” concept of permanently lower healthcare spending growth rates appropriately point to the adoption of Population Health and value-based care models across the industry. Under these models, reimbursement shifts from fee-for-service to per-capita or payment for value or outcomes. In theory, this drives greater efficiency and accountability and reduces unnecessary or inappropriate care. Some of the strongest evidence of this impact comes from research conducted Kaufman, Hall & Associates. In looking at inpatient use rates by state and by age cohort over the period 2006-2011, Kaufman, Hall reported significantly greater reductions in use rates in states such as Minnesota with the most aggressive and mature value-based care programs. Further, they found that efforts under the Medicare program to encourage more cost-effective care models, served to reduce inpatient use rates among the elderly by more than 8% during this period – a reduction almost double that experienced in other age cohorts.
Saving the best-for-last, an emerging healthcare consumerism model may indeed have the most profound impact on healthcare spending growth for the foreseeable future. Fueled by high deductible health plans (HDHPs) and increasing price transparency, healthcare is moving rapidly toward a “retail” model. In a single benefit year, the percentage of employers offering HDHPs increased from 17% to 44% from 2013 to 2014. The Rand Corporation found that families enrolled in HDHPs spent 14% less on healthcare than their counterparts enrolled in traditional plans. In economic terms, healthcare demonstrates high price elasticity of demand – once consumers have a direct stake in the cost of care. What this portends is a huge shift in comparison-shopping, more consumer-directed decisions about where, when and how to access care and, the emergence of consumer-friendly and retail-oriented models of healthcare.
So, what does it all mean? Will full implementation of the Affordable Care Act along with the increasingly grey-haired baby boomer generation; result in a return to the double-digit annual growth rates in healthcare spending last seen in 1990? Or, does the emergence of Population Health and healthcare consumerism underpin a “new normal” of low single digit annual growth? And what impact will the improving US economy have on healthcare spending (of course, after its full 6-year “gestation” period)? Of course, no one can be certain. However, we might expect that the relative strength of these 5 factors discussed here will have a moderating effect overall on healthcare spending growth rates – certainly not as high as those experienced from 1965-2000, nor as limited as seen in the six years since the 2008 recession (<4% per year). Instead, it is more likely that we could see annual growth rates closer to those experienced from 1991-2007, that is, in the 5-8% range. Or, about 1-3% above GDP growth. Time will tell.
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