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Sector Profiles

Healthcare and Pharmaceuticals Industry


Major Industry Trends

Health care and pharmaceuticals are two distinct industries, but they are interdependent and subject to similar trends, which is why they are covered together in this profile. Both are benefiting from aging populations in many advanced economies, and in some developing countries, such as China. In addition, important medical discoveries, including the decoding of the human genome, are fueling scientific advances and facilitating the development of new drugs and treatments.

The Impact of Austerity on Health Care Budgets

Governments in many developed countries are being forced to hike taxes and to contain or even cut public spending to curb large deficits and growing debt mountains. This is particularly true in many peripheral Eurozone countries. In Greece, for example, total health spending accounted for 9.1% of GDP in 2011, down from 10.6% in 2009, according to OECD health data 2013, which was published in June 2013. The financial and economic crisis initially led to a rapid increase in the health spending-to-GDP ratio as the Greek economy slumped, despite which health spending was maintained. However, a subsequent cut in public spending has seen the health share of GDP fall, says the OECD.

Health spending in Greece increased at a rapid rate of, on average, 5.7% per year in real terms between 2000 and 2009, but it then fell by 11% in both 2010 and 2011. These cuts were driven by a sharp reduction in public spending on health as part of government-wide efforts to reduce the large budgetary deficit. Most of the reductions in public spending have been achieved through cuts in wages and reductions in the number of health workers, as well as price reductions for pharmaceuticals. As in many other countries hard-hit by the recession, investment plans have also been put on hold, the OECD said.

After falling sharply in 2010, health spending remained flat across OECD countries in 2011 as the economic crisis continued to bite, particularly in those European countries hardest hit by the crisis, according to OECD health data 2013 (which is the source for the remainder of this section on the impact of austerity). While health spending grew on average by close to 5% year on year from 2000 to 2009, this has since been followed by a sluggish growth of around 0.5% in 2010 and 2011. Current expenditure on health (i.e. excluding capital expenditure) grew by 0.7% in both years. Preliminary figures for some countries suggest a continuation of this trend in 2012.

The drop has been primarily driven by a collapse in the growth of government health spending since 2009—recording close to zero growth in 2010 and 2011 on average, the OECD said. Private health spending also slowed down in many countries in both years as household incomes remained flat or reduced, although the reduction was more limited.

Ireland, Iceland, and Spain experienced two consecutive years of negative growth in health spending. Some countries, such as Estonia and the Czech Republic, saw severe falls in spending in 2010 followed by a modest rebound in 2011. Other countries, including Portugal and Italy, may have delayed cuts in 2010 but then reduced public health spending in 2011. In Portugal, public spending dropped by 8% in 2011 after remaining stable between 2009 and 2010. Only two OECD countries—Israel and Japan—have seen an acceleration in health spending since 2009 compared with the period before.

Away from Europe, health spending growth also slowed in 2010 and 2011, notably in Canada (3.0 % in 2010 and 0.8% in 2011 in real terms) and the United States (2.5% in 2010 and 1.8% in 2011, also in real terms). In the United States the share of health spending to GDP remained at 17.7% between 2009 and 2011, after years of steady increases. It is not clear yet whether the recent slowdown reflects mainly cyclical factors—and may therefore not have a lasting effect when economic growth picks up—or whether it reflects more structural changes, such as a slower diffusion of new technologies and pharmaceuticals, or changes in provider payments resulting in greater efficiency.

Reductions in public spending on health in many OECD countries have typically been made across the board. Pharmaceutical spending has been a prime target, with spending falling slightly in 2010 followed by deeper cuts in 2011. Many countries have increased cost sharing for pharmaceuticals, have reduced prices and coverage, and have promoted the use of generic drugs. In 2011, Portugal, Greece, and Spain reduced spending on prescription pharmaceuticals by 20%, 13%, and 8% respectively. In Spain, the share of generic drugs (in the total volume of consumption) more than doubled between 2006 and 2011.

Health spending as a share of GDP is highest in the United States (which spent 17.7% of its GDP on health in 2011), followed by the Netherlands (11.9%), France (11.6%), and Germany (11.3%). The public sector is the main source of health funding in all OECD countries except Chile, Mexico, and the United States. In Greece, 65% of health spending was funded by public sources in 2011, which is much lower than the OECD average of 72%.

The United States spent US$8,508 per capita on health in 2011, two-and-a-half times more than the OECD average of US$3,339 (adjusted for purchasing power parity). Following the United States were Norway and Switzerland, which spent over US$5,600 per capita. Americans spent more than twice as much as relatively rich European countries such as France and Sweden.

Total health spending in the United States increased in real terms by 4.4% per year on average between 2000 and 2009, but this growth rate more than halved, to 2.1%, between 2009 and 2011.

In most countries, health spending is largely financed out of taxes or social security contributions, with private insurance or “out-of-pocket” payments playing a significant but secondary role. The United States, together with Mexico and Chile, are the only OECD countries where less than 50% of health spending is publicly financed. The public share of health expenditure in the United States was 47.8% in 2011, much lower than the OECD average of 72.2%.

However, the overall level of health spending in the United States is so high that public (i.e. government) spending on health per capita is still greater than in all other OECD countries except Norway and the Netherlands. Public spending on health in the United States has been growing more rapidly than private spending since 1990, largely due to expansions in coverage.

Despite the relatively high level of health expenditure in the United States, there are fewer physicians per capita than in most other OECD countries. In 2011, the United States had 2.5 practicing physicians per 1,000 population, below the OECD average of 3.2. On the other hand, there were 11.1 nurses per 1,000 population in the United States in 2011, a higher ratio than the average of 8.7 across OECD countries.

The number of hospital beds in the United States was 3.1 per 1,000 population in 2010 (latest year available), lower than the OECD average of 4.8 beds. As in most OECD countries, the number of hospital beds per capita has fallen over the past 25 years in the United States. This decline has coincided with a reduction in the average length of stay in hospitals and an increase in day surgeries.

In the United States, the number of computed tomography (CT) scanners and magnetic resonance imaging (MRI) units is much greater than in most other OECD countries. There were 40.9 CT scanners per million population in 2011, a number that is almost double the OECD average of 23.2. And there were 31.5 MRIs per million population in 2010, nearly two-and-a-half times the OECD average of 13.3.

Health Status and Risk Factors

Most OECD countries have enjoyed large gains in life expectancy over the past decades. In the United States, life expectancy at birth increased by almost nine years between 1960 and 2011, but this is less than the increase of over 15 years in Japan and over 11 years on average in OECD countries, according to OECD health data 2013. As a result, whereas life expectancy in the United States used to be 1.5 years above the OECD average in 1960, in 2011, at 78.7 years, it was almost 1.5 years below the OECD average of 80.1 years. Switzerland, Japan, Italy, and Spain are the OECD countries with the highest life expectancies, exceeding 82 years.

The proportion of smokers among the adult population has shown a marked decline over recent decades across most OECD countries. In the United States, the proportion of adults who smoke daily has been cut by more than half over the past 30 years, from 33.5% in 1980 to 14.8% in 2011. This is the lowest rate among OECD countries after Sweden and Iceland.

At the same time, obesity rates have increased in recent decades in all OECD countries, although there are notable differences. In the United States, the obesity rate among adults—based on actual measures of height and weight—was 36.5% in 2011, up from 15% in 1978 (OECD health data 2013). This is the highest rate among OECD countries. The average for the 15 OECD countries with measured data was 22.8% in 2011. Obesity’s growing prevalence foreshadows increases in the occurrence of health problems (such as diabetes and cardiovascular diseases) and higher health care costs in the future.

Aging Populations

Aging populations are driving demand for health care services and pharmaceutical products around the globe. Older people tend to require more health care and are subject to higher levels of chronic illness than younger people. According to the US government agency the Centers for Disease Control and Prevention: “The current growth in the number and proportion of older adults in the United States is unprecedented in our nation’s history. By 2050, it is anticipated that Americans aged 65 or older will number nearly 89 million people, or more than double the number of older adults in the United States in 2010.”

The agency says that the rapid aging of the US population is being driven by two realities: Americans are living longer lives than in previous decades and, due to the post-World War II baby boom, there are proportionately more older adults than in previous generations. The agency adds that the aging of the population has wide-ranging implications for almost every facet of American society but that its influence will have its most profound effects on the nation’s public health, social services, and health care systems.

It explains that heart disease and cancer pose their greatest risks as people age, as do other chronic diseases and conditions, such as stroke, chronic lower-respiratory tract diseases, Alzheimer’s disease, and diabetes. Influenza and pneumonia also continue to contribute to deaths among older adults, despite the availability of effective vaccines.

The United Kingdom is also grappling with the effects of an aging population. In July 2013 the Office for Budget Responsibility (OBR) said that the country’s aging population and strained health care system mean that an extra £19 billion of spending cuts or tax raises are needed to combat an “unsustainable” pressure on public finances. The agency warned that the pensions and health care burden of an aging population would wipe out much of Chancellor George Osborne’s spending cuts, leaving a £65 billion hole in UK finances. It said that the move to a single-tier state pension had slightly eased the pressure on public sector debt but that health care would be the biggest spending pressure over the next 50 years. “It is clear,” the OBR report stated, that “longer term spending pressures, if unaddressed, would put the public finances on an unsustainable path.”

Scientific and Technological Advances

Enormous progress has been made over the past decade in developing drugs that treat previously incurable illnesses. In January 2014 The Guardian, a UK newspaper, predicted various possible scientific advances that could affect health care in 2014:

  • IVF success rates: After 20 years of stagnation these should improve thanks to new techniques with time-lapse imaging that can distinguish healthy embryos from those with abnormalities that are unlikely to result in a successful pregnancy.

  • Better screening for ovarian cancer: Ovarian cancer kills 4,300 women a year in the United Kingdom, but better screening will allow cancers to be detected up to two years earlier than they are now.

  • New insights into dementia: A new treatment stopped the disease in its tracks, restored some normal behaviors, and prevented memory loss in mice.

  • Open-access surgery: Here the idea is that every part of the body can be accessed through a natural orifice, such as the mouth, vagina, or urethra. Natural orifice translumenal endoscopic surgery (or Notes) tries to reach organs that are usually reached by cutting through skin via one of these natural body openings. This should lead to less invasive forms of surgery that may improve patient outcomes.

  • “Ninja” polymers to fight drug-resistant bacteria and fungi: In an attempt to conquer antibiotic-resistant bacteria like MRSA, researchers at IBM have developed tiny nano-molecules made from recycled plastic that penetrate the outer wall of bacteria and fungi and destroy them.

  • Fecal infusion: The introduction of someone else’s healthy fecal microbiota, referred to as fecal microbiota transplantation (FMT), into a patient’s intestine can help to cure diarrhea caused by antibiotics because it is a rich broth of biologically active living organisms.

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Market Analysis

<B>Health Care Spending

The total global expenditure for health amounted to around US$6.5 trillion in 2010, according to the World Health Organization, and health expenditure as a percentage of GDP has been increasing among all major economies.

Spending on health care varies widely from country to country, as do outcomes. Nor is there necessarily a correlation between the amount of money spent and the effectiveness of the health care system. The United States spends more on health care than any other country, in both relative and absolute terms, yet its health care system scores poorly in terms of its overall performance, according to the Commonwealth Fund, a private US foundation that supports independent research on health care issues. The Fund produced a report on the performance of the US health system in 2008 (“National scorecard on US health system performance, 2008”). The scorecard aimed to measure and monitor health care outcomes, quality, access, efficiency, and equity in the United States. It ranked the country last out of 19 on a measure of mortality amenable to medical care. In June 2010, the Commonwealth Fund Commission published an update which found that the US health care system ranks last or next to last on five dimensions of a high-performance health system: quality, access, efficiency, equity, and healthy lives.

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Further reading on the Healthcare and Pharmaceuticals industry

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