What Is the Healthcare Sector?

The healthcare sector consists of businesses that provide medical services, manufacture medical equipment or drugs, provide medical insurance, or otherwise facilitate the provision of healthcare to patients.

Key Takeaways

  • The healthcare sector consists of all businesses involved in the provision and coordination of medical and related goods and services.
  • This sector enjoys some significant advantages in the U.S. but is also beset with a several factors that present potential economic problems.
  • The U.S. healthcare sector accounts for an outsized share of spending relative to health outcomes, which has led to uncertainties around politically driven reform of the industry.

Understanding the Healthcare Sector

The healthcare sector is one of the largest and most complex in the U.S. economy, accounting for close to a fifth of overall gross domestic product (GDP). The U.S. healthcare sector benefits from a strong system of medical research and development, in cooperation with the higher education system and the technology industry. The aging U.S. population and the advancing senescence of the Baby Boomer generation are driving ongoing strong demand in the healthcare sector.

Economically, healthcare markets are marked by a few distinct factors. Government intervention in healthcare markets and activities is pervasive, in part due to some of these economic factors. Demand for healthcare services is highly price inelastic. Consumers and producers face inherent uncertainties regarding needs, outcomes, and the costs of services. Patients, providers, and other industry players possess widely asymmetric information and principal-agent problems are ubiquitous. Major barriers to entry exist in the form of professional licensure, regulation, intellectual property protections, specialized expertise, research and development costs, and natural economies of scale. Consumption (or non-consumption) and production of medical services can involve significant externalities, particularly regarding infectious disease. Transactions costs are high in both the provision of care and the coordination of care. 

Industries Within the Healthcare Sector

The healthcare sector contains a diverse array of industries, with activities ranging from research to manufacturing to facilities management.

Drugs

Drug manufacturers can further be broken down into biotechnology firms, major pharmaceuticals firms, and makers of generic drugs. The biotech industry consists of companies that engage in research and development to create new drugs, devices, and treatment methods. Many of these companies are small and lack dependable sources of revenue. Their market value may depend entirely on the expectation that a drug or treatment will gain regulatory approval, and FDA decisions or rulings in patent cases can lead to sharp, double-digit swings in share prices. Examples of (larger) biotech firms include Gilead Sciences Inc. and Celgene Corp.

Major pharmaceuticals firms also engage in research and development, but tend to focus more on manufacturing and marketing an existing portfolio of drugs than the typical biotech firm. These companies tend to have more dependable streams of revenue and a more diversified "pipeline" of drugs in the research and development stages, making them less dependent on make-or-break drug trials and their shares less volatile. Examples of major pharmaceutical firms include Novartis AG and GlaxoSmithKline PLC.

Some pharmaceutical firms specialize in generic drugs, which are identical to name-brand drugs but no longer enjoy patent protection. As a result, there is often competition to manufacture identical drugs, leading to lower prices and thinner profit margins. An example of a generic drugs firm is Teva Pharmaceutical Industries Ltd.

Medical Equipment

Medical equipment makers range from firms that manufacture standard, familiar products—scalpels, forceps, bandages, and gloves—to those that conduct cutting-edge research and produce expensive, hi-tech equipment, such as MRI machines and surgical robots. Medtronic PLC is an example of a medical equipment maker.

Managed Healthcare

Managed healthcare companies provide health insurance policies. The "Big Five" firms that dominate the industry are UnitedHealth Group Inc., Anthem Inc., Aetna Inc., Humana Inc., and Cigna Corp.

Healthcare Facilities

Health care facilities firms operate hospitals, clinics, labs, psychiatric facilities, and nursing homes. Examples include Laboratory Corp. of America Holdings, which operates facilities that perform blood tests and other analysis, and HCA Healthcare Inc., which operates hospitals and other healthcare facilities in the U.S. and U.K.

Healthcare in the U.S. and the OECD

According to the OECD, some of the highest-quality care in the world can be found in the U.S., but in terms of some measures of health the U.S. lags other wealthy, developed countries. Life expectancy is 78.6 years, according to the OECD, below the OECD average of 79.3 (the OECD's 35 members are mostly rich, industrialized countries in Europe and North America).

Despite these subpar results, the U.S. spends far more than any other country on healthcare, measured per head of population: $10,586, 2½ times the OECD average of $3,992. This situation has led to a number of national reform efforts, including the Affordable Care Act. Investors in the healthcare sector face considerable political risk as a result of uncertainties around the push-and-pull between politics and industry interests.