Five thoughts on the future of America’s health care economy

Macro Strategist Juhi Dhawan shares key insights from her ongoing research on health care spending and the economic implications of changes that may lie ahead.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed.

With the US elections just under a year away, health care is polling ahead of the economy as the number one issue people want addressed. But of course health care and the economy are inextricably linked. The US spends nearly 18% of GDP on health care, almost double that of many other developed nations. What’s more, 13% of employment is in the health care sector, including roughly 20% of jobs added since the global financial crisis.

At the heart of the health care debate is spending, including issues of affordability and accessibility. Here, I share some key insights from my ongoing research on health care spending and the economic implications of potential changes ahead.

1. Evolution is more likely than revolution. The US health care system remains anomalous in its reliance on private insurance at almost 57% in terms of enrollment. Most developed countries have a single-payer, government-dominated system. But while there is talk of “Medicare for all,” the Democratic Party as a whole is not behind it, nor is the public. Instead, I think efforts to reform health care to expand coverage and contain costs are more likely. For example, a plan that offers basic coverage to a greater number of uninsured and allows opt-ins to Medicare at an earlier age, while allowing private insurance to offer beefed-up coverage, could find broader support in Congress.

2. Pressure on health care prices will depend on the health of the economy. Policymakers have increasingly focused on health care prices. Whether something gets done via regulation depends not only on who wins the election but also, importantly, on the economy. If the US enters a recession soon, political pressure to squeeze prices will rise appreciably, creating different winners and losers within the health care space than if the expansion still looks durable past 2020.

Health care prices also matter broadly for the economy, since health care is the single biggest component of the core PCE (Personal Consumption Expenditures) measure of inflation that the Fed favors as its target. The Affordable Care Act (ACA) included a multiyear freeze/cut on many regulated health care prices that helped keep health care inflation (and core inflation) to the lowest levels in 50 years (Figure 1). Only recently have we begun to see prices lift modestly. Any new price-related policies and regulations enacted post the 2020 election could have broad implications for inflation and, by extension, the Fed’s interest-rate policy.

FIGURE 1

five-thoughts-on-the-future-of-americas-health-care-economy_fig1

3. Even if a single-payer system is rejected, continued downward pressure on costs is likely. Greater cost transparency and focus on cutting excesses has yielded benefits, as evidenced by the declining growth in health care spending by government, businesses, and households in recent years. Hospital, physician, and prescription drug spending have all moderated. The only area of upward pressure on spending has come from the ACA, which reduced the number of uninsured and thus increased the quantity of health care used (dark blue line in Figure 1).

With the focus on costs, health care producers are likely to remain on a path of consolidation (e.g., reducing the number of hospitals). In addition, as the government’s share of health care expenditures continues to grow (Figure 2), downward pressure on prices paid by government programs (e.g., Medicaid, Medicare, ACA Health Care Marketplace) will force the cost structure of the entire health care system lower.

FIGURE 2

five-thoughts-on-the-future-of-americas-health-care-economy_fig2

4. Technological innovation will be critical. Technology that can help cut administrative and other costs (by scaling time of specialists, for instance) would be a “win” that helps preserve margins, increase health care productivity, and keep share of spending from rising too fast. Experts argue that some of this is already occurring but has yet to show up in national statistics. In this vein, statistical agencies are working to gauge whether their calculations are adequately capturing improvements in health care quality/outcomes.

5. Despite moderating spending, health care is still on track to be the biggest driver of higher government deficits in coming years. The Congressional Budget Office estimates that Medicare expenditures will rise from 3.7% of GDP in 2018 to 5.9% by 2038. A recession or the 2020 election results (or the 2024 results) could lead to meaningful Medicare and Medicaid reform. But it seems more likely that health care will remain a political battleground for years to come.

Bottom line

Health care is about quality of life, social policy, and consumer choice, but also has enormous implications for inflation, interest rates, jobs, and deficits. Finding the balance between all of these issues will be a long, evolutionary process, and one that will require tough choices as the population ages and health care consumption naturally rises.

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