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Analysis: Spending on health care leaves rest of economy in the dust

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While Delaware’s economy has been modest, Delaware’s health care industry has been on a tear. Over the past 10 years (2006-2016) as private sector earnings in Delaware increased 8.4 percent, Delaware’s health care industry’s earnings rose 64.2 percent (U.S. Department of Commerce).

Earnings in nursing care increased 98 percent, as hospital earnings soared 85 percent, and ambulatory care (e.g., offices of private physicians) went up 38 percent.

Health care has become Delaware’s keystone growth industry. Why? And will it continue? There are four basic explanations for the surge in Delaware’s health care industry.

First, economists have long recognized that the demand for health care is relatively insensitive to changes in price. While you might be willing to put off cosmetic surgery, you will move forward to treat cancer regardless of price.

Second, the full cost of health care rarely falls upon the consumer. Health care is dominated by third-party payers such as private insurance companies, Medicare and Medicaid. This leads consumers to often be indifferent to the prices charged for various health care services.

In 2016 Delaware health care industry earnings were $4.3 billion. Total Medicare and Medicaid payments to Delaware households were $4.1 billion ($2.2 billion in Medicare and $1.9 billion for Medicaid). It is obvious that government provided health care insurance is the major health care industry driver.

Third, the baby boomer population age 55 and over is soaring. The majority of health care expenditures are concentrated on children younger than 5 and on persons older than 55. The rise in expenditures is exponential as people pass age 75. The baby boomers guarantee growth in health care demand for two more decades.

Finally, there is a lack of competition in the supply of health care. While it takes a great deal of education to become a primary-care physician, the relatively diverse supply drove earnings up by 38 percent. For hospitals, on the other hand, there is less competition and entry is controlled by government boards dominated by current Delaware hospitals. Thus, hospital earnings grew 10 times faster than the rest of the private sector.

Businesses are paying attention to health care. It is a major concern with regard to attracting and retaining quality employees.

And, it is a business cost wild card. Delaware, with two health insurance carriers, ranks 30th in health care outcomes. This is unacceptable to business.

Government budgets, and eventually taxpayers, are facing a major crunch in public health care insurance.
Medicare is already spending down its asset base. In Delaware Medicaid is the single largest line item in the state budget (over $750 million) and is out stripping the tax base. Over the most recent decade, Delaware state spending on Medicaid rose at twice the rate of General Fund revenue.

John E. Stapleford is president of ECON First, which provides web-based marketing strategies based upon economic analysis and web presence research.

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