News headlines scream about healthcare costs eating the country.  The U.S. spends far more on healthcare per person or as a percentage of GDP than every other country on the planet.  This chart shows that the U.S. sticks out like a sore thumb.  Why is that?  I'm glad you asked.  I've long wondered what causes this phenomenon.

While healthcare costs are exploding, the average worker isn't seeing healthy wage gains, creating a squeeze on household spending.  Could rising healthcare costs and stagnant wages be related?  In my opinion, the short answer is yes.

 

Way back when--actually it was during World War II--the War Labor Board implemented wage controls to combat inflation caused by heavy wartime spending.  Employers started offering healthcare benefits to make up for the lack of wage increases.  Employees loved this.  Unions loved this. 

 

As with many temporary government actions, the benefits became a permanent feature of the employment landscape.  Medicare and Medicaid were born in 1965, putting more healthcare dollars into the marketplace, and further distancing individuals from the direct impact of medical costs. 

 

As the next chart vividly demonstrates, overall compensation--the blue line--has been growing but wages--the green line--have been stagnant. The difference is largely accounted for by non-wage benefits, primarily healthcare benefits.  Runaway healthcare spending has been eating the average worker's paycheck for decades.

Today, most individuals have their healthcare costs paid by employers or government.  In other words, someone else.  This has a twofold effect. 

 

First, it insulates consumers from the direct costs of healthcare spending.  Scrutiny applied to buying cars, dishwashers or shoes is largely absent in making healthcare spending decisions.  Only when consumers are forced to compare costs will we have a chance to rein in spending. 

 

Second, it has robbed the average worker of wage increases over decades, creating a feeling of middle class stagnation.  It's also created a steady supply of dollars to feed the healthcare beast, inflating spending to obscene levels.

 

Ok, fine you say, what's the solution?  Getting companies and governments out of the funding business would be a good start.  However, that's unlikely, at least in the short-term.  These programs have been entrenched for decades. 

 

A more radical proposal would be for employers to hand employees a check that represents the amount spent per employee each year, and let the employee use these funds to buy healthcare.  Since it would now be their money, employees might choose more carefully in buying coverage and making financially optimized decisions while still taking care of their family's health needs.

 

Our take on all this from an investment perspective: we approach healthcare with a view that cost containment must happen, and will happen.  Hospitals, doctors, drug and medical device companies, all will be under pressure to operate more efficiently.  Payments will be increasingly based on medical outcomes vs. the volume of procedures, length of hospital stays, number of drugs prescribed, etc.  This is already happening and will continue to become more prevalent.

 

Regardless of the approach taken, it's our view that healthcare costs simply must be brought under control for the good of the economy, employers and employees.