Health and medical services - Industry Overview

Before reading this chapter, please see "How to Get the Most Out of this Book" on page 1. It will clarify questions you may have concerning data collection procedures, forecasting methodology, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see chapters 44 (Drugs), and 45 (Medical and Dental Instruments and Supplies).

The providers of health and medical services include public and private health-care institutions such as hospitals, offices and clinics of physicians and other health-care professionals, nursing homes, other specialized facilities, and managed-care establishments. The health and medical services industry is made up of thousands of independent medical practices and partnerships, several large public and not-for-profit private hospitals, and a rising number of for-profit hospitals and managed-care and other health and medical service establishments.

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Health Care Expenditures

U.S. health care (SIC 80) outlays, accounting for approximately 13 percent of the Gross National Product, totaled $738 billion in 1991, up about 11 percent from $666 billion in 1990. Private sector health-care expenditures made up about 58 percent of the total, while the public sector accounted for the remainder. Medicare and Medicaid make up the principal public source of these expenditures.

Expenditures for hospital care totaled an estimated $282 billion in 1991, up more than 10 percent from $256 billion in 1990. This represented 38 percent of total health-care spending. Physicians' services, the second largest item, rose 11 percent to about $140 billion, while expenditures for nursing-home care, the third largest sector, gained 12 percent to an estimated $59 billion. Home health care, one of the fastest growing areas, is projected to show a year-to-year increase of approximately 26 percent from 1990, with expenditures totaling an estimated $9 billion in 1991. Expenditures for dental care, other professional services, and other health services are projected to come to $86 billion in 1991.

Employment

Employment in the health-care industry has gone up steadily, from 7 million in 1988 to more than 9 million by July 1991, an average annual growth rate of 8 percent. These numbers are exclusive of employment in the health insurance, medical equipment and supplies, and pharmaceutical industries.

Employment has grown fastest in offices of physicians and surgeons - by 200,000 between 1988 and 1990. Hospital employment, the largest source of jobs in the health-care sector, increased by 409,000 between 1988 and 1990. Private hospitals accounted for most of this increase. Nursing and personal care facilities also are important sources of jobs for skilled nursing personnel and medical technologists, among others.

Cost Factors

Many factors have contributed to the rising cost of health care, including so-called defensive medicine; increasing reliance on sophisticated and expensive equipment; innovative treatment of such illnesses as heart disease, end-stage renal disease, AIDS, and cancer; and an aging population, which adds to Medicare and Medicaid expenditures.

Another factor behind the rising cost of health care has been the rise in malpractice suits. One major insurance company reports that claims increased from 11.3 per 100 doctors in 1981 to a peak of 17.8 in 1985. Since then, however, the rate has dropped. According to the American Medical Association (AMA), 8 malpractice claims per 100 physicians were paid in 1989, the last year for which data are available. This is a reduction of nearly one-third from the peak rates of the mid-1980s.

Malpractice premiums for self-employed physicians rose at an average annual rate of about 18 percent between 1982 to 1988, to an average of $15,900. Since then, as the rate of malpractice claims has dropped, several major insurers have reduced premiums. Nevertheless, the AMA estimates that malpractice premiums totaled almost $6 billion in 1990.

The increase in medical malpractice suits and claims has brought with it a greater reliance on defensive medicine, such as duplicate tests and diagnostic procedures; the use of consultants; more hospitalization; and extensive documentation. The AMA estimates defensive medicine alone adds $15 billion to the nation's health-care costs.

The increase in the number and size of malpractice awards has led some states to cap awards, particularly for pain and suffering. In addition, the insurance industry has joined forces with the medical community in pushing for reforms of the tort system. As a result, both the number of malpractice claims and the rate of increase in malpractice premiums have been reduced.

Psychiatric Care

A National Medical Enterprises Inc. report shows that the number of private psychiatric hospitals rose from 220 in 1984 to 403 in 1989, an 83 percent increase. During the same period, the number of psychiatric units in general hospitals increased from 1,259 to 1,858, a 47 percent increase, while state and county psychiatric hospitals decreased 23 percent, from 277 to 212. Department of Veterans Affairs medical centers, residential centers for emotionally disturbed children, and multi-service mental health organizations all remained stable.

The American Psychiatric Association estimates that the United States spent $50 billion on hospital-based psychiatric care in 1989. This includes, $16 billion for substance-abuse services. Private insurance paid about 67 percent for inpatient psychiatric care, Medicare and Medicaid accounted for 17 percent, and the remaining 16 percent was paid by others. During the past decade, psychiatric hospitals had an average annual occupancy rate of 85 percent. Although about 10 million Americans are being treated for psychiatric and substance-abuse problems, another 40 million are in need of treatment, according to some estimates. Among the reasons that demand for psychiatric care services is increasing are that treatment is becoming more effective, insurance coverage for mental illnesses is becoming more prevalent, and society is becoming more accepting of psychiatric and substance-abuse services. In addition, many states now require insurance companies to cover psychiatric care.

Medicare Spending

Medicare is the Federal health program for patients who are at least 65 years old or disabled. More than 35 million persons are enrolled in Medicare, of whom 32 million are elderly and 3 million disabled. Medicare spending rose from $100 billion in 1989 to $108 billion in 1990, an increase of 8 percent. At the same time, the number of beneficiaries increased by only 2 percent. Hospital insurance under Medicare is funded primarily by Social Security payroll taxes. Medicare consists of two basic programs, Hospital Insurance (HI), and Supplementary Medical Insurance (SMI). HI pays for hospital care, skilled nursing. home health care, and hospices. HI outlays totaled an estimated $65 billion in 1990, an increase of more than 6 percent over 1989. SMI outlays grew from $39 billion in 1989 to $43 billion in 1990, an 10 percent increase. SMI pays for doctors, hospital outpatient and laboratory services, end-stage renal disease treatment, and durable medical equipment. Enrollees pay about 25 percent of SMI costs; the rest comes from general revenues.

Profit Margins

There is no uniform way of reporting the industry's profitability. Fragmentary information indicates that nearly 9 of 10 hospitals, the dominant group of health-care providers, do not operate for a profit. Information on other health-care providers, including physicians and dentists, nursing homes, and managed-care organizations is sparse. This lack of information is compounded by the current wave of mergers among private hospitals and other health-care organizations.

According to one estimate, profit margins of all for-profit hospitals declined during the first four years of the Prospective Payment System (PPS). Under PPS, fees for services rendered are replaced with a scale of fixed payments based on the patient's illness. According to the Prospective Payment Assessment Commission (ProPAC), profit margins dropped from 7.3 percent in 1984, the first year of PPS, to 3.5 percent by 1988. Since then, margins have barely changed, reaching an estimated 3.8 percent by 1990. In the aggregate, however, hospital margins are considerably higher now than at any time during the 1970's.

Home Health Care

One way of containing health-care costs that is catching on fast is by providing care in a patient's home. More than 5 million people in the United States require home care services. At-home care is less expensive than institutionalization and may often be less traumatic.

During 1990, there were about 11,000 home health service providers in the United States, of which 5,700 were Medicare-certified, and more than 1,780 hospitals provided home health care services. Since the start of the Prospective Payments System, hospital-based home health services providers have increased significantly, from 1,167 in 1984 to 1,784 in 1989.

Expenditures for home-care services totaled an estimated $7 billion in 1990, exclusive of home health-care products. Medicare expenditures for home care amounted to about $4 billion, an increase of 24 percent from 1989. Although still a small portion of all U.S. health-care expenditures, spending on home health care has been growing at an annual rate of about 20 percent for the past few years. This rapid growth reflects the increasing number of older Americans; the lower average cost of home care ($750 per month for routine skilled nursing care at home compared with $2,000 in an institution); active insurance industry support for home care; and Medicare promotion of home health care as an alternative to institutionalization.

Other programs to help reduce Medicare costs seek to shift a greater proportion of health care to outpatient services and to discourage hospitals from making unnecessary capital outlays.

Under Medicare, the length of hospital stays is decreasing. For instance, between 1964 and 1988, inpatient days decreased by almost 14 percent, while outpatient days grew by almost 35 percent. This increase is reflected in the number of elderly people making more outpatient visits and greater use of nursing homes, home-care services, and emergency health-care centers.

Health-Care Reform

Alternative approaches for controlling costs of health care have been proposed as part of a package of health care reforms. Among the reforms most frequently advocated are universal health insurance and restructuring Medicaid.

The Administration has proposed legislation that aims at, among other things, an improved health-care delivery system and greater access to affordable quality health care through reduced liability costs and improved quality of care.

In 1991, several proposals for expanding health insurance were being discussed in Congress, prompted by various congressional and other Government studies critical of the health-care system.

For instance, the U.S. Bipartisan Commission on Comprehensive Health Care for All Americans (Pepper Commission) recommended a plan for extending health-care insurance coverage to the 37 million uninsured persons, including the aged, the unemployed, the employed poor, and employees of small businesses. Other recommendations included overhauling the private insurance system and restructuring Medicaid.

INTERNATIONAL HEALTH CARE MARKET

The international climate seems favorable for U.S. health-care companies to invest abroad. The prospects in Western Europe, Mexico, Japan, Kuwait, the Soviet Union, Poland, and Hungary are particularly promising. The governments of these nations have made health care a centerpiece of their social policy and are providing steady annual budget increases for health care. Many of these countries also are striving to modernize both the public and private health sectors and offer market opportunities for a wider range of services and medical equipment. Others are calling for decentralization of the health-care industry. In both Western Europe and Japan, demographic factors, including aging populations, increased longevity, and relatively higher incomes, are creating growing demand for health-care services. For example, some U.S. firms have already obtained contracts from Kuwait to provide emergency health-care services there, and additional contracts may be awarded in the future.

The best opportunities are in the areas of primary care, home care, and nursing home services. In addition, opportunities in hospital management, ancillary services, private health insurance, and drug rehabilitation programs appear promising.

In some foreign markets, U.S. firms face trade and regulatory barriers. For example, although Japan allows foreign firms to provide home care and nursing home services, foreigners are not allowed to own health-care facilities or to manage hospitals. Such issues are being addressed in the Uruguay Round and the services negotiations of the prospective North American Free Trade Agreement.

Outlook for 1992

Health-care expenditures in 1992 should rise to about $817 billion, a record 14 percent of GNP. Outlays for hospital care will rise by 11 percent, to $313 billion. Expenditures for physicians services will amount to an estimated $155 billion, an 11 percent increase over 1991, while spending for nursing homes and home care will approach $77 billion, a 13 percent rise.

Long-Term Prospects

Many of the proposed national health-care reforms could lead to more efficient and effective services and procedures, expanded insurance coverage, wider availability of services, and more alternative health-care resources.

Signs of greater diversity are already evident. Managed care such as private health maintenance organizations (HMOs) and home health care now occupy an important place in the market and will undoubtedly play major roles in the future. Other alternatives to institutional care, such as private specialized health care providers for substance abuse or psychiatric disorders, among others, also will be important.

Additional References

Rising Health Care Costs, Causes, Implications and Strategies, CBO Report April 1991, U.S. Government Printing Office, Washington, DC 20402. Telephone: (202) 783-3238. U.S. Health Care Spending: Trends, Contributing Factors, and Proposals for Reform, Statement of Charles A. Bowsher, Comptroller General of the United States, before the Committee on Ways and Means, House of Representatives, GAO, April 17, 1991. Telephone: (202) 275-6241). The Psychiatric Care Industry and Psychiatric Institute of America by National Medical Enterprises, Inc., 2700 Colorado Ave. Santa Monica, CA 90404. Telephone: (213) 315-8000. Health Care Financing Review, Passim, U.S. Government Printing Office, Washington, DC 20402. Telephone: (202) 783-3238. Medicare Prospective Payment and the American Health Care System, Report to the Congress, June 1991, Prospective Payment Assessment Commission, 300 7th St., SW, Washington, DC 20024. Telephone: (202) 453-3936. Health Systems Review, Federation of American Health System Review, Inc., 1405 N. Pierce, Suite 308, Little Rock, AK 72207. Telephone: (501) 661-9555.

COPYRIGHT 1992 U.S. Department of Commerce
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