The importance of attaining good health is growing in importance.  The reason is no longer just for improving the quality of life because soon just being allowed to stay alive may be the issue.  The combination of increasing health care costs and the increasing number of people over 65 years of age is going to bankrupt the Government's Healthcare Safety Net.  A recent post by Eric Sprott of Sprott Global Resource Investments explains how this will happen in the years immediately ahead.

If you are not healthy and the healthcare system and your relatives do not have the money to take care of you, the only alternative is to let you die a slow agonizing death or quickly pull the plug.  Below is the heart of Sprott's analysis relating to healthcare costs.  The link above and below goes to his entire article and I highly recommend it.  It applies not only to your physical health but your financial health as well.

The following is an excerpt from Ignoring The Obvious by: Eric Sprott & Etienne Bordeleau.

A significant part of these deficits is caused by current and future health care spending. The Deloitte Center for Health Solutions recently published a report entitled “The hidden costs of U.S. health care: Consumer discretionary health care spending”, in which they analyze the many components of health care spending and how those expenses are underreported in official numbers. Figure 4 shows their estimates for total health care spending by age group for 2010.

FIGURE 4: TOTAL HEALTH CARE COSTS BY AGE - 2010, $ BN

Source: The hidden costs of U.S. health care:
Consumer discretionary health care spending, Deloitte

FIGURE 5: U.S. POPULATION 65+ YEARS

Source: US Census Bureau 2012 National Population Projection

What is striking - but not that surprising - is the very large increase in health care costs faced by seniors. The report cites that “Seniors and Baby Boomers account for 64 percent of health care costs, but comprise only 40 percent of the U.S. population.” For seniors, total health care costs represent, on average, approximately $30,000 per person per year. Other estimates by Carnegie Mellon University professor Paul Fischbeck (although a bit dated) show that these annual costs increase dramatically as people age, reaching as much as $45,000 for 80+ year olds.4 Considering that GDP per capita was about $46,800 in 2010 and the income inequality mentioned earlier, these are figures that would put most households in dire straits.

Also, structural trends will lead to an ever greater share of the nation’s income being dedicated to health care. Figure 5 above shows the evolution of the U.S. population for the 65+ age group, as forecasted by the U.S. Census Bureau. The U.S. will end up with a steadily increasing segment of its population (from 13% in 2010 to 20% in 2030) composed of persons aged 65 and over. This matters for two important reasons. First, this means a smaller workforce contributing to GDP growth and paying taxes to support government programs. Second, and this is related to the first point, this trend will put tremendous pressure on social security and health care spending in the country, thus leading to structurally higher deficits.

These facts are by themselves troubling, but coupled with the population trends described in Figure 5, they become alarming. To illustrate the impact of overall population aging on total health care costs, we use the per capita numbers implied by the Deloitte study and apply them to the U.S. Census Bureau projections for all age groups. While we believe that those numbers fundamentally underrepresent health care inflation, we inflate per capita costs for each age group using the average “medical care” component of the U.S. Department of Labor Consumer Price Index. Finally we assume a 4% nominal GDP growth, which some might argue is overly optimistic when taking into account the smaller workforce we discussed earlier. In any case, Figure 6 shows the results of our simulation.

Only with the change in the composition of the U.S. population, total health care costs are forecasted to go from 22% of GDP in 2010 to over 30% in 2040. These are huge numbers! To put them in perspective, in 2011 total U.S. GDP was $14,500 Billion, so an increase from 22% to 30% of GDP would represent a $1.2 Trillion increase in health care spending in that year. If we increase the health care inflation rate by only 100bps, we calculate that by 2040, the share of GDP attributed to health care will jump to 40%.

 

FIGURE 6: HEALTH CARE SPENDING AS A % OF GDP

Source: US Census Bureau 2012 National Population Projections, U.S. Department of Commerce: Bureau of Economic Analysis, U.S. Department of Labor: Bureau of Labor Statistics & The hidden costs of U.S. health care: Consumer discretionary health care spending, Deloitte

 

According to the Deloitte study, about 60% of those costs are borne directly by households and the remaining 40% by the public sector (30% to Medicare and Medicaid). This means that households, of which the majority is either poor or in the declining middle class, will face an even larger squeeze in their discretionary spending.

From Ignoring The Obvious by: Eric Sprott & Etienne Bordeleau.

Ted Slanker

Saturday, January 26, 2013