Future estimates of healthcare expenditure are equally as impressive. Having grown on average at 4.8% per annum between 2005 and 2015, growth is expected to rise to an annual rate of 5.4% between now and 2026. In many ways this is not really a surprise when you take a look at the underlying drivers:
- an aging global population
- expanded coverage of medication
- the rising costs of production and servicing
The cost per capita was estimated at $10,348 each year in a 2016 report by CMS, with the cost for those aged over 45 rising significantly beyond this.
Who’s going to pay for it all?
Absorbing the costs of innovation has seen the costs of healthcare increase above the rate of inflation for the last 30 years. This has become an increasing challenge for the economy in countries offering both private and public models of healthcare. Warren Buffet idiosyncratically framed the issue by observing recently that “the ballooning cost of healthcare acts as a hungry tapeworm on the American economy”.
The rising cost of new treatments means that innovation is likely to be constrained by funding. More expensive treatments combined with an ageing population means that the healthcare sector is facing major challenges from both the demand and the supply side.
This is a moral as well as practical dilemma. How does one allocate limited resources? Should the ability to pay really be the qualifying criteria for life-changing – potentially life-saving – treatments? In the UK, as 2018 marks the 70th anniversary of its formation, the very existence of the NHS is under threat as it faces unprecedented pressure to deliver on its promises to the population cost effectively.
Is there a role for investors?
Healthcare represents a wide range of disciplines, all of which are experiencing rapid innovation. With government funding continuously under pressure, the investor’s role is crucial and goes way beyond the idea of just making money. It’s about feeding innovation and participating in the opportunity to transform our way of life.
Whenever new technologies impact an industry or sector, we typically expect productivity to increase over time and lead to lower levels of human involvement and a lower need for physical infrastructure. But with healthcare this doesn’t appear to be the most likely outcome, at least not in the foreseeable future.