Episode Details

Our analysts Andrew Sheets and Mark Schmidt unpack why U.S. healthcare feels so expensive and the potential impacts of rising hospital costs.

Read more insights from Morgan Stanley.

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

Mark Schmidt: And I'm Mark Schmidt, Head of Municipal Strategy at Morgan Stanley. 

Andrew Sheets: 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 healthcare costs. 

It's Friday, July 17th at 2pm in London. 

Mark Schmidt: At 9am in New York. 

Andrew Sheets: So, we're talking today about healthcare, which represents roughly a fifth of the U.S. 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 healthcare 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 U.S., healthcare 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: You're absolutely right. It's hard to underline enough just how large healthcare is to the U.S. economy overall. Americans spend nearly $6 trillion on healthcare. 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 U.S. 

It also matters for everyone's local community. Healthcare 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 healthcare. 

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 healthcare. And even though American prices may seem like an American issue, many of the largest and most profitable healthcare 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 healthcare probably matters to you. 

But as you noted, Andrew, it does feel like a paradox because although Americans cite healthcare costs as one of their top concerns, and although healthcare spending is growing at 6 percent a year or more, the official inflation data says that healthcare prices are in check. And at one point earlier in the year, healthcare inflation, according to official data, even dipped below 3 percent. 

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: 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: The easiest