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.
·
Consumerism
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.
Follow Health
Industry Advisor LLC
No comments:
Post a Comment