Ten percent of Australia’s GDP is spent on health care, representing $241 B or $9,365 per person

Healthcare is big business

Australia spent an estimated $241.3 billion or ten percent of GDP on health goods and services in 2021-22, being an average of $9,365 per person. This was six percent more than in 2020-21, and higher than the average yearly growth rate over the decade to 2021-2022 which was 3.4 percent.

Governments funded $176 billion of the total health expenditure (73 percent), while non-government sources funded the remaining $65B (27 percent) in 2021-22. The Australian Government funded $106 billion with State and Territory Governments contributing $70 billion. The break-up of the non-government funding sources was $33.7 billion from individuals (51.5 percent), $17.5 billion (26.8 percent) from private health insurance providers, and $14.2 billion (21.7 percent) from other non-government sources.

According to the World Health Organisation, global spending on health reached a new high of US$9.8 trillion or 10.3 percent of global GDP in 2021. This record expenditure amount comes at the height of the COVID-19 pandemic. Interestingly, this expenditure remains grossly unequal; public spending on health in low-income countries, especially in countries where foreign health aid plays an essential supporting role, declined in 2021. Eleven percent of the world’s population in 2021 lived in countries that spent less than US$50 per person per year, compared to average per capita spending on health in high income countries of around US$4,000 per person. Low-income countries accounted for just 0.24 percent of global health expenditure, despite having an 8 percent share of the world’s population, giving new meaning to the World Health Organisation’s (WHO) concept of ‘Universal Health Coverage’. It is likely that with the climate crisis and emerging geopolitical risks, this situation is set to continue for the foreseeable future.

Factors driving healthcare expenditure

The underlying demand for health care services and products is robust and resilient because it is an unfortunate reality that people will continue to be diagnosed with illnesses and diseases. Everybody needs health care and in the developed world, the health care sector is growing significantly faster than the overall economy.

Societal & demographic changes are driving the demand for health care services and products. As Baby Boomers age in the western world, the population will have a higher proportion of people in the 65-80 age demographic which is likely to be accompanied by an increasing prevalence of co-morbidities, impacting patient care and length of stay.

Research and Development expenditure is constantly developing new treatments for previously incurable diseases and patient conditions, meaning that the range and nature of healthcare products is constantly expanding. Furthermore, advancements in diagnostic and screening techniques and pathology services are identifying illnesses earlier, enabling more patients who would otherwise go undiagnosed to be treated. Growth in demand for mental health care services is also driving health care expenditure. In addition, a growing middle-class in emerging economies is expanding the global market for medications and treatments provided by major health care providers.

Global pandemics also impact health care expenditure. Over the period 2019-20 to 2021-22, an estimated $45 billion was spent on COVID-19 specific response programs by the Australian Government Department of Health and Aged Care.

Health care stocks are showing healthy investment returns

Healthcare stocks have defensive characteristics given the inelastic demand for their products and services that are defensive in nature and largely immune from the ill effects of economic recession.

Also, health care providers are tightly regulated and subject to regulatory risk, but this is a barrier to entry that favours the incumbents, which is why big drug companies, and healthcare providers generally get bigger. However, being defensive in nature means that health care stocks generally underperform growth stocks in boom periods. Nevertheless, the S&P/ASX200 Health Care Index (XHJ) is up 41 percent over the last 5 years compared to the S&P/ASX200 Index which is up 26 percent over the same period.

The health care sector comprises four distinct areas:

• Drug manufacturers which focus on developing and manufacturing drugs that treat or prevent diseases. This includes biotech companies and pharmaceutical companies.
• Medical equipment companies that design and make equipment and devices used to care for patients. Devices may range from disposable gloves and personal protective equipment (PPE), to surgical, diagnostic, and acute care equipment.
• Payer solution providers such as health insurers and pharmacy benefit schemes.
• Health care providers that deliver healthcare services to patients. These include hospitals, physician practices, home health businesses and long-term care facilities.

Buoyed by favourable demographic trends across the world, combined with advances in health care procedures generally, the most likely prognosis for health care stocks is one of healthy returns for patient investors.