If the U.S. healthcare were an economy, it would be larger than the GDP of Italy. So what are some of the key drivers that can contract the size of our healthcare “GDP”? It sounds counter-intuitive. Nations strive to expand their GDP, but when it comes to healthcare, we have to reverse our thinking before it overwhelms us.
The formula behind calculating GDP is: C + G + I + NX; where C stands for private consumption or consumer spending, G is the sum of government spending, I is the sum of all the country’s investments/capital expenditures and NX is nation’s total net exports which, for our purposes, is inconsequential. Lets analyze each component.
As population grows, government and consumer spending on healthcare (C+G) go up accordingly, unless productivity exceeds the rate of increase. A good example of increased productivity is the rise in spending on eVisits and house calls which despite upping the number of patient/doctor encounters, they have actually reduced the total cost of physician visits. Spending on diagnostic/monitoring mobile apps as well as precision medicine will also do their part in increasing productivity and reducing costs. These technologies could summarily replace the more expensive options. But to accelerate the rate of their adoption, we need to expedite government approval and push for better reimbursement coverage.
The situation regarding prescription drug spending is more subtle. As scientific discoveries advance, new expensive drugs are developed to cure diseases. CMS cites that we spend 17% of our healthcare dollars on medication, but let us not ignore the fact that targeted therapies also mean faster recoveries, less spending on unnecessary care and shorter hospital stays. In a recent article, Marginal Revolution claimed that if we decrease the rate of cancer mortality by 10%, overtime, we can save trillions of $$ in the U.S. alone. So we welcome greater spending on medical research.
On the investment side (I), the good news is that there is abundance of capital for ideas that can bust the traditional ways of caring for patients. Rock Health notes that in the past few years we have invested $4-6 billion p.a. in digital health. These investments not only raise the productivity rate of our industry, they are rapidly shifting the fulcrum of power into the hands of consumers. When consumer is in charge, costs of doing business drops. We have seen this in other sectors and the budding signs are already in sight in ours. Just take a look at the robo-advisors industry.
Conversely, the picture for the enterprise market has not been that promising. We have invested tens of billion of dollars on EHR/RCM systems with small improvements in productivity. Digitizing the industry was a key imperative and yes EHR systems were appetizing starters. That being said, lack of standardization and complex IT infrastructure have to date impeded serious progress. But that is about to change as the government pushes for interoperability and standardization even under the Trump administration. The push will come slow but the market forces will surely quicken the pace. As a result, most B to B vendors should expect lower investment dollars coming from their client base except for meeting the government’s incentive programs.
Experts believe that demand for healthcare is somewhat inelastic. Surely, the sector has been out of sync with the rest of the economy. But we know that with consumer power comes more elasticity; resulting in lowering the unit cost of “care”. Its time to take out our pens and rewrite the economic theories for this industry. Lets add P for productivity rate and D for disruptive technologies to the formula.