Americans pay more for healthcare than people in other countries, but do we get our money's worth? Healthcare spending accounts for 17.9% of GDP and its on pace to increase to nearly 20% by 2025.
In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes and contributor Todd Campbell discuss the current state of healthcare in our country and why the sector could be ripe for disruption.
A full transcript follows the video.
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This video was recorded on Jan. 31, 2018.
Kristine Harjes: Last night, President Trump delivered his State of the Union address, so we're kicking off today's show with a discussion of the weather, first, as usual, but after that, we're going to turn to a State of the Union for U.S. healthcare. Todd, catch us up. Where do we stand?
Todd Campbell: I was thinking about how to frame the discussion, how to get us kick-started. And one of the things that jumped to mind in trying to figure out, what's the state of the union when it comes to healthcare in 2018, is, maybe take a look through a consumers' lens at the situation. And that made me think of a book by a guy named Phil Barden, he wrote a book called Decoded: The Science Behind Why We Buy. And in that book, he said that we base our decisions on the perceived value that we get from purchasing something. He defined that as the outcome that we get minus the cost to get that outcome. If you'll bear with me for a second, Kristine, I have a slightly imperfect analogy that maybe will help us frame the conversation.
Harjes: OK, let's hear it.
Campbell: Last week, my very high-mileage Volvo broke down. And I'm not going to buy a new car. I want to keep this car. So I was faced with three choices: I could go to the dealer and pay a premium price and get a premium part that theoretically would last me forever, or I could go to my local independent shop and I could get a fair price for a quality product; or, I could go the cut-rate route and have somebody throw in a used part that could last a day or three years. Now, I chose option No. 2 because, for my situation, that was my best perceived value, the outcome minus the cost associated with it. And I started thinking, how do you extrapolate that out to the current situation of healthcare in 2018 in the United States? And I couldn't help but wonder if we're paying a dealership premium, but not quite getting a dealership quality premium part for it.
Harjes: At least if you look at it relative to the rest of the world, that kind of seems like it's the case. The United States pays so much on healthcare costs, more than any other developed nation. Our spend on healthcare is 17.9% of our GDP, according to the CMS [Centers for Medicare and Medicaid Services]. But when you compare that to other developed countries around the world, that's usually around 10% of GDP, so we're almost double relative to the size of our economy. Meanwhile, the quality, as you alluded to, Todd -- that's a really important part of this because many people would be happy to pay an exorbitant amount for the best quality -- we don't really have the greatest quality of care. With an average lifespan of 80 years, the United States is ranked 43rd in the world on that metric. And on many other measures as well, we don't quite stack up in terms of outcomes.
Campbell: By and large, we pay more per person for our healthcare than other developed nations. And when you look at the fact -- you try to figure out, how do you rate the quality of healthcare? For me, the most important thing would be that average lifespan stat. How long am I going to live in this country for the cost of the healthcare that I'm getting? And the fact that there are 42 other countries that are ahead of us, that says something. You could also look at infant mortality statistics. In the case of infant mortality, the U.S. does a very good job. Yet, despite doing a very good job, it still trails on that metric Canada, most of Scandinavia, most of Europe and Japan. So I think you look at it and say, we're obviously spending a lot of money, we're throwing a lot of money at healthcare, to the tune of, in 2016, $3.3 trillion -- as you mentioned, 17.9% of GDP. And I guess you could argue that you're not really getting what you would hope to get in 2018 for all of that money. And unfortunately, it doesn't look like there's any end in sight to that spending. If you look at what the CMS is saying, we're looking at much higher costs for our nation going forward.
Harjes: Absolutely, the trend definitely points to even higher costs. Over the last six years, premiums for employer-provided insurance, for example, have shot up 19%, but employee pay has only increased around 12%. By the same token, healthcare cost inflation continues to outpace general inflation as well as wage growth. I do, on one hand, understand that one component of that is a slightly higher value, particularly when you think about innovative drugs that are more complex and can make the quality of life better for a lot of patients. But drugs are only about 10% of healthcare costs. The vast majority of the rest of it has nothing to do with the actual drugs themselves. It's stuff like spending on hospitals and doctor services, and long-term care is a huge component. So, I do think, even though it's a very much widely talked about phenomenon, and it's largely attributed to the cost of drugs, there are so many other elements to this.
Campbell: Yeah. More than half of all of healthcare spending -- this $3.3 trillion-plus that we're paying out -- goes toward hospitalization, which I think is 32%. Another 20% goes to physician care. So, yes, you're right. While the headlines may point to drugs as being the big cost problem with healthcare in the United States in 2018, proportionally, it's not necessarily what's the big problem. I think we look at this and say, if we have baby boomers turning 65 at a pace of 10,000 per day, and we do have trends toward longer lifespans, then you're getting greater and greater demand into the system without a corresponding increase in supply, and that's putting pressure on costs, it's pressuring these costs higher. I think CMS thinks in 2018, healthcare spending is going to increase by nearly 6%, so an acceleration from last year. And it really begs the question, what can be done to move the needle and finally get the kind of quality that we would hope to get for the price that we're paying?
Harjes: Especially because a ton of the expenses are considered wasteful. There was one article in the Harvard Business Review that estimated that clinical waste, administrative complexity, excessive prices and fraud and abuse caused an estimated $1 trillion in wasteful spending in the U.S. healthcare system.
All this is to say, with higher costs and worse outcomes, this is a market that's ripe for major disruption.