Effects of Healthcare Spending on the Global Economy

A summary of Niels Clemen Jensen's September 2021 Letter

Niels Clemen Jensen is out with his September letter and it covers healthcare spending.

I highly suggest giving all of Niels’ investment letters a read since there is so much to learn from them.

Niels and his team at Absolute Return Partners have identified 6 big mega trends that will have some of the biggest effects on the global economy and investment opportunities in the future.

One of Niels’ colleagues named Rishanth pointed out to Niels that healthcare spending will be affected by at least two of those megatrends that Niels and his team have identified so it deserves to be researched more in depth.

What follows is my summary of Niels’ remarks from his September 2021 letter on the effects that healthcare spending will have in the future.

A lot of people agree that there will be a big effect from the aging of society over the long-term but not the short to medium term. Niels disagrees. He says there will be a big effect from the aging of society in the next 1 to 3 years and that will have a big effect on healthcare spending.

Germany's, Japan's and Italy's working age populations according to Deutsche bank's research will shrink by about 10% and there won’t be enough people in the younger generations of these 3 countries to make up for the lost working hours. And many other countries in Eastern Europe weren't included in Deutsche Bank’s study but Niels says that these countries are worse off than Italy, Germany and Japan.

An aging population will lead to a huge increase in healthcare spending because lifespans are increasing and because according to a National Health Service estimate, an 80-year old man is 6-7x more expensive to the public healthcare system in the UK than somebody in their 30's.

The US spends more on healthcare than any other country. The average country that is part of the Organization for Economic Cooperation and Development (OECD) spends around 10% of their GDP on healthcare but the US spends at least 17%.

Americans have one of the lowest life expectancies in the OECD.

The reason that the US spends so much more on healthcare than other countries in the OECD is because the US has a private sector model based on insurance meanwhile Europe has a public sector model based on taxation.

Advanced medical technologies are more expensive and this will lead to higher healthcare spending in the future as well according to Niels.

The advancement of technology in healthcare is a great achievement but due to the high cost it may only help the rich.

For example, there has been great progress in treating cancer through the use of targeted treatments and immunotherapy with CAR T-cell therapy being the furthest in clinical development since it was just approved by the FDA in 2017 for adults with lymphomas and for children with acute lymphoblastic leukemia but these therapies are very expensive.

According to Deloitte, 42% of cancer patients in the US have exhausted their savings within 2 years of diagnosis and, after 4 years of therapy, 38% are insolvent.

The Centers for Medicare and Medicaid Services estimates that healthcare spending in the United States will increase at a rate of 5.5% per year over the next 5 years which would bring annual healthcare spending in the US to 20% of GDP by 2026.

National Health Services estimates that 55% of the UK's budget is spent on people over the age of 85 so an aging population combined with more healthcare spending can have negative consequences for countries that are heavily indebted which so many countries these days are but as long as interest rates are kept artificially low by central banks then this should keep the high debt under control according to Niels.

Also of note is that the majority of voters are elderly people so politicians will continue to give them what they want to get elected.

Niels says the big question that investors will have to deal with is, "Is the old-age tsunami an outstanding investment opportunity or will it slow down economic activity to a trickle and potentially even bankrupt entire countries, making the investment environment rather tricky?" and his response to this question is that it will probably be a little bit of both.

The old will continue to be a big majority of voters which will likely lead to higher healthcare spending making the healthcare sector a big investment opportunity and countries will likely continue to afford the extra debt provided that they are still willing to manipulate interest rates lower.