One of the most common laments I hear about the healthcare industry surrounds its share of the U.S. economy. Healthcare first hit 10% of U.S. GDP in the early 1980s, surpassed 15% in the early aughts, and was inevitably going to hit 20% some time in the 2010s. And then, in an unexpected twist of events, growth as a share of GDP remained flat for the better part of a decade before skyrocketing to just shy of 20% in 2020, only to revert to the prior decade's share in the following two years.
What to make of these trends? As usual, there's a lot more and less to this than meets the eye. The complaint that one tends to hear is this: healthcare is heading toward one-fifth of the U.S. economy, which is proof that it's too expensive and we spend too much on it! How healthcare's share of GDP makes that case is unclear, but anyone can understand the sentiment. It's the sense that healthcare "eats up" our national wealth. But another way of looking at it is this:
Healthcare is a growth industry, delivering on new therapies that would have been unthinkable a generation ago (cancer mortality rates have plunged in recent decades, for example), and providing jobs and economic activity on a scale unmatched on Earth. These are points worth debating, and indeed this is the underlying debate surrounding nearly all politics of healthcare. But today, I'm not going to focus on that. Because what interests us at Union isn't the share of GDP, but the shape of its trend line.
It only takes a cursory glance at the chart in today's Slide of the Week to notice that healthcare's jumps in GDP share tend to happen in fits and starts. There's no steady trajectory upward. We see big increases in GDP share, followed by periods of relative stability. How do we explain such erratic behavior, and what can we make about what that means for healthcare spending over the next few years?
Explaining the trend line is quite complicated, but essentially it's driven by two factors: (1) changes in the underlying economics and market dynamics of the industry itself, and (2) other industries' impact on GDP. Much of the flatness of the past decade's trend line can be explained by growth in sectors such as tech and energy. But that doesn't explain all of it. For example (and yes, I realize I am egregiously oversimplifying here):
The creation of Medicare and Medicaid in the 1960s pushed up spending as more people gained coverage; the DRG system implemented in the early 1980s created new volume-based incentives for growth and per-case efficiency. The 1990s saw the advent of gatekeeping strategies designed to limit utilization, followed by a backlash in the early 2000s coinciding with new technologies in diagnostics and surgeries. And in the 2010s, we saw Medicare price caps following the ACA's passage, slow recovery in demand following the 2008 GFC, and a huge wave of branded drugs going generic. But looking at what caused these fits and starts has us increasingly convinced that we're on the cusp of a new spike in healthcare's GDP growth.
In our soon-to-be released State of Healthcare 2024 (members can find the 2023 written report here and the slides here), we delve in to the factors poised to increase healthcare spending in the coming years: a pandemic-fueled rebasing of wages (link for members only) an aging population that will need more chronic care, big jumps in chronic-care drug costs, an explosion of specialty drug innovation, continuing consolidation which nearly always drives up prices, increased competition for primary care from non-traditional players, and an AI arms race that will almost certainly drive up short-term expenditures (even if it has the potential for long-term cost control). Nearly everything on this list will drive up spending, but without a constant (and hitherto overlooked) focus on value, much of that spending could be deployed against profitless growth. We'll be talking about that a lot more in future posts.
Members will have access to the entire State of Healthcare, and if you'd like to learn more about becoming one, or having one of us come deliver the State of Healthcare to you, click here. In the meantime, we'll be discussing many of these topics in our Board Briefing series. We've just listed the next roster of topics for the Briefing, so don't forget to register.