Unsustainably large sectors of the economy are likely to contract during a major economic upheaval (as we anticipate may happen!). It’s fairly widely discussed that financials have overgrown their healthy natural bounds (40% of S&P 500 profits is a bit large for a sector that just reallocates capital?). A similar complaint seems reasonable for the health care sector, where it appears that a large proportion of the spending (late in one’s life) just goes to keep unproductive retirees from dying until the last affordable moment. Health Care is also an overgrown sector, we find from the ‘net, apparently from the HHS Medicare/Medicaid Summaries from 2003:
“Health spending in the United States has grown rapidly over the past few decades. From $27 billion in 1960, it grew to $888 billion in 1993, increasing at an average rate of more than 11 percent annually. This strong growth boosted health care’s role in the overall economy, with health expenditures rising from 5.1 percent to 13.4 percent of the gross domestic product (GDP) between 1960 and 1993.
Between 1993 and 1999, however, strong growth trends in health care spending subsided. Over this period health spending rose at a 5-percent average annual rate to reach $1.2 trillion in 1999. The share of GDP going to health care stabilized, with the 1999 share measured at 13.2 percent. This stabilization reflected the nexus of several factors: the movement of most workers insured for health care through employer-sponsored plans to lower-cost managed care; low general and medical-specific inflation; excess capacity among some health service providers, which boosted competition and drove down prices; and GDP growth that matched slow health spending growth.
In 2000 and 2001, growth picked up again, increasing 7.4 percent and 8.7 percent, respectively, to $1.4 trillion in 2001. Health spending as a share of GDP increased sharply from 13.3 percent in 2000 to 14.4 percent in 2001, as strong growth in health spending outpaced economy-wide growth. For the 283 million people residing in the United States, the average expenditure for health care in 2001 was $5,035 per person.”
Another useful dataset is at a Kaiser Family Foundation link. Health care at 15.2% of GDP in 2003 vs. 7.0% of GDP in 1970, 8.8% in 1980, and 11.9% in 1990. And we can be reasonably confident that health care costs have outstripped inflation and GDP growth since 2003 as well.
Now, as a citizen and a taxpayer, I want to see the health care sector become more productive and efficient. As an investor, though, “productive” and “efficient” (from the consumer perspective) tend to suggest “reduced profits” (from the shareholder perspective). I think this is good, because it will free up resources to do better things… or at least free up resources to actually provide decent care to the millions of retiring boomers.
But it looks to me as though the “health care growth to take care of retiring boomers” trend may have played out. I don’t think this sector (as a whole) is a sustainable-gains sort of investment. Although I will be keeping my eyes open for companies leading the way to “productive” and “efficient” healthcare!
