The healthcare sector consists of businesses that provide medical services, manufacture medical equipment or drugs, provide medical insurance, or otherwise facilitate the provision of healthcare to patients.
Key Takeaways
- The healthcare sector encompasses all businesses involved in the provision and coordination of medical and related goods and services.
- While it enjoys significant advantages in the U.S., the sector also faces economic challenges that could impact its future growth.
- A substantial share of U.S. spending is dedicated to this sector, leading to ongoing debates about healthcare reform.
Understanding the Healthcare Sector
The healthcare sector is one of the largest and most complex facets of the U.S. economy, representing 18% of GDP in 2020. It benefits from robust medical research and development systems, with strong collaboration between higher education institutions and the tech industry. The aging U.S. population, notably the Baby Boomer generation, is driving sustained demand in healthcare.
Economically, the healthcare market is unique with several distinct factors. Government intervention is pervasive, in part because of economic complexities. The demand for healthcare services is highly price inelastic. Uncertainties abound for both consumers and producers regarding needs, outcomes, and costs of services. Additionally, patients and providers often have asymmetric information, and principal-agent problems are common.
Major barriers to entry include professional licensure, regulation, intellectual property protections, specialized expertise, R&D costs, and natural economies of scale. Within the sector, the need for working and investment capital varies significantly among pharmaceutical companies, large facilities, and those providing insurance and medical supplies. Medical services also involve significant externalities, especially concerning infectious diseases, and transaction costs are high in both the provision and coordination of care.
Diversity Within the Healthcare Sector
The healthcare sector includes a wide range of industries, from research to manufacturing to facilities management.
Drugs
Drug manufacturers can be divided into biotechnology firms, major pharmaceutical companies, and makers of generic drugs. The biotechnology industry focuses on research and development to create new drugs, devices, and treatments. These firms are often small and depend on regulatory approval for revenue. Examples of larger biotech firms include Novo Nordisk, Regeneron, Alexion, Vertex, Gilead Sciences Inc., and Celgene Corp.
Major pharmaceutical firms engage in extensive R&D but also emphasize manufacturing and marketing an existing portfolio of drugs. These companies often have more stable revenue streams and diversified pipelines. Examples include Johnson and Johnson, Roche, Pfizer, Eli Lilly, Novartis AG, GlaxoSmithKline, and AstraZeneca.
Some firms specialize in generic drugs, which are identical to name-brand drugs but without patent protection. This results in lower prices and thinner profit margins due to competition. Teva Pharmaceutical Industries Ltd. is one such company.
Medical Equipment
Medical equipment manufacturers create everything from standard items like scalpels and bandages to high-tech equipment like MRI machines and surgical robots. A prominent example is Medtronic PLC.
Managed Healthcare
Managed healthcare companies provide health insurance policies. The
Related Terms: GDP in healthcare, price inelastic healthcare, asymmetric information healthcare, principal-agent problem in healthcare, barriers to entry in healthcare.
References
- Statista. “U.S. national health expenditure as percent of GDP from 1960 to 2020”.
- Georgetown Health Policy Institute. “Medicaid Managed Care: 2020 Results for the Big Five”.
- OECD. “Life Expectancy at Birth”.
- OECD. “Health”.
- OECD. “Health Spending”.
