Expect Growth in Healthcare Sector

Health Expenditures and Services in the U.S.:

As healthcare costs continue to increase worldwide, particularly in the U.S., expect sector M&A consolidations pressured by government policy controls over the next 18-months. Total U.S. healthcare expenditures are $2.39 trillion expected to increase to $2.72 trillion by 2010, with annual increases averaging about 7% for the next 10-years.

In 2008, the healthcare market in the U.S. was made up of hospital care (about $747.1 billion), physician and clinical services ($501.7 billion), prescription drugs ($247.0 billion), nursing home and home health ($198.5 billion), dental care ($102.4 billion) and other items totaling $597.6 billion. Registered hospitals totaled 5,747 properties in 2008, containing 947,417 beds serving 37 million admitted patients.

Federal spending on Medicaid and Medicare accounted for over 21.9% of all federal government expenditures as of 2008. Medicare, the U.S. federal government's healthcare program for Americans 65 years or older, provides coverage to 44.8 million seniors (up from 43.3 million last year). By 2030, the number of people covered will balloon to about 78.0 million due to the massive number of Baby Boomers entering retirement age. Federal Medicare expenditures, excluding patients' premiums, totaled $432.6 billion in 2007 and grew to $457.5 billion in 2008.

Medicaid is the U.S. federal government's health care program for certain groups of seniors in nursing homes as well as low-income and disabled persons. The federal government incurred Medicaid expenditures totaling $190.6 billion in 2007 and increasing to $203.8 billion in 2008.

State governments incur large expenses for Medicaid benefits as well. According to the Kaiser Family Foundation, total state and federal spending on Medicaid during 2007 was $315.2 billion. The cost in California alone was $34.2 billion.

Health spending in the U.S., at about 16.5% of Gross Domestic Product (GDP) in 2008, will grow to about 19.6% of GDP by 2016 unless drastic reforms take place. Health care spending in America accounts for a larger share of GDP than in any other major industrialized country. Despite the incredible investment America continues to make in health care, 14.5% of Americans (45 million people) lacked health care coverage for the entire year of 2008. A significant number of the uninsured, about 9 million, were in households with annual incomes above $75,000.

Health Expenditures Globally and in OECD Developed Nations:

A comprehensive study published by the OECD (Organization for Economic Cooperation & Development), covering 33 nations with the world's most developed economies, found stark contrasts between health costs in the United States and those of other modern nations. In 2006 (the latest data available), the average of 33 OECD nations, including France, Germany, Mexico, South Korea, Australia, etc., including the U.S., spent 8.9% of GDP on health care. The highest figures were in the U.S. with 15.3% of GDP, Switzerland 11.3% and France 11.1%. Health expenditures per capita for these 33 nations in 2006, on a purchasing power-adjusted basis (PPP), averaged $2,824.

Globally, the total prescription drug market was in the $560 billion range in 2008. Total health care expenditures around the world are difficult to determine, but $4.5 trillion would be a fair estimate for 2007. That would place health care at about 8% of global GDP, with health care expenditures per capita at about $800. This $4.5 trillion figure breaks down to approximately $2.2 trillion in the U.S., $2.0 trillion in non-U.S. OECD nations, and $0.3 trillion elsewhere around the world. (Outside the U.S. and the rest of the OECD, that would allow $50 per capita per year in lesser-developed nations.) Clearly, there is vast disparity in the availability and cost of health care among nations, as there is with personal income and GDP.

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. Managed care 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. This increase is more than double the rate of general inflation. For 2008, employer-provided health care insurance coverage for a typical family cost an average of $12,680 for the year and $4,704 for single coverage for the year. Employees were required to pay $3,354 of that cost for families and $721 for single coverage in 2008, on average, with employers picking up the balance.

Many major employers are utilizing unique new programs in efforts to reduce employee illness, and thereby reduce costs. For example, the use of preventative care programs is growing, as is the use of employee education programs aimed at better managing the effects of diseases such as diabetes.

Smart employers are showing their employees how to use the Internet to obtain better information about diseases and prevention. Insurance providers are jumping on the Internet bandwagon as well. Some employers are even hiring in-house physicians and nurses to provide primary 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 record amounts of revenues to bad debt, which increases costs for bill-paying patients.

Physicians are caught between the desire to provide quality care and the desire for cost control on the part of payers, including HMOs, Medicare and Medicaid. The cost versus care debate has spawned an energetic movement to improve the quality of health care in the U.S., much of it centered on patients' rights, disease management, preventative health care and patient education.

Case Study: Medical Diagnostic Sector

The commercial medical and diagnostic laboratory industry in the US consists of about 5,000 companies with combined annual revenue of $3 billion. Major companies include Quest Diagnostics (DGX) and Laboratory Corporation (LH) in the medical lab segment, and Alliance Imaging (AIQ) and RadNet (RDNT) in the imaging segment. The industry is fairly fragmented: the 50 largest companies hold just over 40 percent of the market. Medical labs account for about two-thirds of industry revenue; imaging centers account for one-third.

Competitive Landscape

Demand is linked to the number of people receiving medical treatment. The profitability of individual companies depends on efficient operations and good marketing. For example, there are large economies of scale in the operation of medical labs, which can receive samples from a wide geographical area. Small medical labs can compete effectively by providing specialized analyses, or by serving geographical regions with few medical facilities. Imaging centers don't have similar economies of scale because they must be located close to patients, so small firms can compete effectively with large ones in a particular area. The industry is fairly labor-intensive: annual revenue per worker is $140,000.

Products, Operations and Technology

Medical labs (often called "clinical labs") receive specimens of body fluids (most often blood) or tissues collected from patients, and perform a wide variety of tests to determine the presence and amount of various bio-chemicals to help doctors diagnose and treat medical conditions. Laboratory Corporation offers about 4,000 different tests.

A study released by the Milliken Institute found that 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 have these conditions to one degree or another. The study estimated that 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 is reducing the nation's GDP by about 10%. These burdens could be vastly reduced through better consumer practices and better preventative medicine. For example, obesity, lack of exercise and cigarette smoking are immense contributors to these diseases. The U.S. Surgeon General estimates that obesity alone results in 300,000 American deaths and $117 billion in health care costs each year.

Conclusion

The healthcare sector in the U.S. over the next 18-months should be transformed with budget pressures driving political policy and cost effective medical solutions. The healthcare sector as a whole will see growth of 7% or more annually for the next 10-years particularly within the medical diagnostic lab sector, digital medical records technologies and medical imaging markets. At the time of writing this article, the author held no significant direct positions in the companies listed.

Comments

[YoYoMama:]

"For 2008, employer-provided health care insurance coverage for a typical family cost an average of $12,680 for the year and $4,704 for single coverage for the year. Employees were required to pay $3,354 of that cost for families and $721 for single coverage in 2008, on average, with employers picking up the balance."

For my family, we have personal family insurance (self-employed). We pay approx. $7,000 in insurance premiums a year (which is a bargain for a family of five), and we still have a $5,000 deductible. We have a special-needs son is basically uninsurable. We must outsource all his prescriptions and care outside of our insurance policy, which adds an additional $3,000+ a year in health care costs, just for my son alone.

In exchange for this $10,000 a year expenditure, we get practically no health coverage. Our policy would only kick in with a dire emergency. And we get no dental. That someone in a large group would pay only $3,400 or so is nothing compared to what we have to go through.

The reason we are self-employed is so that both parents can stay at home and be there for our special needs son. So it's nice to say - just get an outside job. But our son would suffer if we did.

For people like us - can someone explain to me HOW health care reform is NOT a good thing? How NOT being on a government health care policy is BAD for us?

I'm asking this, mind you, as a conservative Republican who otherwise believes in the free market. But let's face it, there is also an ugly side to this free market - and health care wise, we are on the bad end of it.

This is a BIG issue for me, so much that I run a website to help others in my situation obtain health insurance and limit their health care costs. There IS a crisis, and I hope to goodness something gets done.

May 15 09:59 AM