Health Care Is the Biggest Sector of the Economy, and Growing

At $4.5 trillion, health care accounts for 10 percent of the world economy, representing the largest sector of both the American and world economies, and it’s poised to become even bigger, according to Michael Milken, chairman of the Milken Institute and of FasterCures/The Center for Accelerating Medical Solutions. In the next 20 years, the senior citizen population in the United States will grow from 12 to 18 percent. The cost of health care for those over 65 is four times the cost for those under 65, he pointed out. “Therefore, an aging population not just in the U.S. but in the developed world would point to, as a percentage, an acceleration of past economic trends,” Milken said.

Milken was among panelists who spoke about the economics of health and disease at the inaugural conference for The Becker Center on Chicago Price Theory, Founded by Richard O. Ryan April 8 at Hyde Park Center. Health care is not as great an economic force in the underdeveloped world, noted Emily Oster, Becker Fellow for the Becker Center on Chicago Price Theory . In sub-Sahara Africa, HIV rates are high because the rate of transmission is higher than in the U.S., due to other untreated sexually transmitted diseases, Oster said. “It’s not that people are behaving in this really different way,” she said. “They’re facing a different set of circumstances. There isn’t the kind of health infrastructure that we have here. If you have an STD in the U.S., you get it treated. In Africa, that’s not always an option.”

To help solve inefficiencies in health care financing, economists can do three things, said Robert Topel , Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics. First, they can demonstrate the importance of each issue, in particular by emphasizing the value of the speed of getting technologies to market, Topel said. “Second, they can provide analysis on the structure of incentives that would help us to harvest value in more cost-effective ways,” he said. “Lastly, they can demonstrate where the potential gains are the largest.”

Andrew von Eschenberg, acting commissioner of the U.S. Food and Drug Administration, predicted a massive revolution in thinking about health care in the next 10 years, thanks to advances in science, in particular genetics. “Over the past 10 to 20 years, we’ve crossed a threshold where we went from a very macroscopic and microscopic perspective of disease and of health to what is really now a molecular perspective,” von Eschenberg said.

Personalized medicine is the beginning of this revolution, but medicine will eventually become predictive, preemptive and participatory, he said. “The economic implications of each component are enormous and only beginning to be understood,” von Eschenberg said. “Personalization moves us into an era where we can get the right patient the right intervention at the right time.”

But there are competing economic forces in health care—one focused on expenditures and improvements in research, the other focused on paying for health care, in particular the recent “explosion of quantity” in care, said Kevin Murphy, founding member of the Initiative and George J. Stigler Distinguished Service Professor of Economics.

The biggest issue in research hinges not on the cost of research, but the cost of applying the resulting treatments, he said. “There is an incredible complement between getting the delivery system right and doing research. Research is an incredible boon if we can make sure that we can implement technologies correctly. It’s not an easy task. It’s hard to ration care, even with the price system in place. The two sides in this debate really have to get together and say, ‘Look, if we make progress on one, it makes the other side much more valuable.’”

Milken pointed out that projections in medical expenses may not be accurate because future advances may render some projected costs moot. In the early 1950s, the medical industry predicted the cost of polio care would be $100 billion by 2000, Milken said. “It involved care in iron lungs and other facilities. The cost turned out to be about $100 million, so it was off by 99.9 percent. Technology drove it into a shock. There was not a lot of care and not a lot of services.”

As for the future of health care economics, von Eschenberg predicted food and nutrition will play key roles over the next 10 years. “It’s probably the most significant drug we put in our mouths everyday as a biological response modifier. But we haven’t been able to understand nutrition the way we will in the next 10 years using new technology.”

Milken predicted the projected increases in health care costs will continue to shift from private companies, as seen at General Motors. “I think General Motors has shown all of us that a company is not a country,” he said. “Not only can you not guarantee lifetime employment, but you can’t guarantee payment at little to no cost of medical costs in perpetuity.”

Instead, those costs will move onto the laps of workers and government, Milken said. “It’s going to shift and it’s already begun to shift more responsibility to the employee,” he said. “The question instead really lies in government and state issues and, are they going to absorb the continued cost increases, due to the demand?”

Medicaid costs are projected to account for 10 percent of the U.S. economy by 2050, Milken said. “It’s just hard to believe the government’s going to let that happen,” he said. “The question is, what is going to give the government the incentive to address it? Maybe proper accounting roles showing liabilities on a balance sheet such as those that for-profit corporations have to do now.”

—Phil Rockrohr