Why Your Medical Bill Is So High

**Andrew Sheets** (0:00)
Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

**Mark Schmidt** (0:06)
And I'm Mark Schmidt, Head of Municipal Strategy at Morgan Stanley.

**Andrew Sheets** (0:09)
And today on the program, a discussion into one of the biggest mysteries in one of the biggest sectors of the economy.
We're talking about health care costs.
It's Friday, July 17th at 2 p.m. in London.

**Mark Schmidt** (0:22)
And 9 a.m. in New York.

**Andrew Sheets** (0:25)
So we're talking today about health care, which represents roughly a fifth of the US economy, the bulk of job creation over the last several years. And in my view, honestly, one of the biggest inflation paradoxes that we see in the market. On the one hand, the high cost of health care is taken as a given, and it's something that many Americans still struggle with financially. But if you look at the official inflation data in the US., health care costs have been lower than normal, and that's been true now for a number of years. So what's going on? How do we tie this together? And Mark, you just wrote a report that tries to do exactly that. So what did you hope to accomplish with this report?

**Mark Schmidt** (1:05)
You're absolutely right. It's hard to underline enough just how large health care is to the US economy overall.
Americans spend nearly $6 trillion on health care. That's more than the GDP of the entire country of Germany. And if we think about prices, Americans pay more.
A knee replacement, for example, costs $25,000 in the United States. That same procedure costs just $6,000 in France. Common heart treatments that would cost $3,000 in Germany or $10,000 in Australia cost $34,000 in the US.
It also matters for everyone's local community. Health care jobs have been growing twice as fast as the rate of job growth in the economy overall. And those are good jobs. They pay above average wages. For many Americans these days, the most secure path to the middle class is a career in health care. Now, this may seem a little bit arcane, but it probably hits close to your portfolio as well. Earlier in the year, when we took a look at how equity separately managed accounts invest, they typically have a core overweight to health care. And even though American prices may seem like an American issue, many of the largest and most profitable health care companies in the world are actually headquartered in Europe. So whether you're sitting in New York or sitting in London, the price of American health care probably matters to you. But as you noted, Andrew, it does feel like a paradox. Because although Americans cite health care costs as one of their top concerns, and although health care spending is growing at 6% a year or more, the official inflation data says that health care prices are in check. And at one point earlier in the year, health care inflation, according to official data, even dipped below 3%.
It just didn't make a lot of sense. And that's why we got together with our colleagues across equities, fixed income research, public policy and economics to dig into what was actually going on.

**Andrew Sheets** (3:00)
So Mark, let's dig right into that. I mean, it seems like a perfect encapsulation of the so-called Main Street versus Wall Street perception of the economy. So what's going on? How does one kind of square those two numbers?

**Mark Schmidt** (3:14)
The easiest way to understand it is that you can't walk through a grocery store and figure out the price of a new replacement. And that's true both for you and me. It's also true for the government. They have to survey hospitals and health insurance companies. The trouble is that the prices that health insurance companies pay hospitals, well, those are trade secrets. So at any given point in time, even for the best government economists, it's not entirely clear what the price trends are.
And that's why when you look at the official data, healthcare inflation typically has relatively lumpy jumps in the series. You could see several months of 0.1 or 0.2 percent official growth in healthcare inflation.
Or as earlier this week, you could see certain categories jump to 0.4 or even 0.8.

**Andrew Sheets** (4:00)
Another element, Mark, that you talked about in the report, is that people are also consuming more healthcare. So talk a little bit about that, how that factors into this dynamic. And again, is that just going to be the new normal as the population ages? And we tend to spend more on health care as we get older.