In 2007, the U.S. spent $2.26 trillion on health care, or $7,439 per person. Health care spending makes up about 16% of the US GDP. This gives the U.S. the dubious honor of being the number one health care spender in the world.
And as the average American gets older and fatter, there's no end in sight for the health care boom. About one third of American adults are obese, and studies predict that 41% of American adults could be obese by 2015.  Meanwhile, the number of Americans age 55 and older will almost double between now and 2030 – from 60 million today (21 percent of the total US population) to 107.6 million (31 percent of the population) – as the Aging Baby Boomers reach retirement age.  Indeed, health analysts predict that by 2017, health care spending will be at 19.5% of United States GDP.
The health care industry can be broken down into three main segments: Biotechnology and Drugs, Health Care Facilities (Hospitals and Health Care REITs), and Medical Equipment (Medical Appliances & Equipment, Medical Instruments & Supplies).
All companies which generate revenues by alleviating sickness can be classified as health care companies. In aggregate, the health care industry has outperformed the S&P 500 for the past year, even though it still lost money on average. After all, people still need treatment in recessions. The most successful companies of 2007 are listed in the table at right:
While the table highlights who the big players are, net income may be inadequate as a way to compare health care companies. Helping sick people requires everything from facility providers to researchers to develop new drugs. It is difficult to compare the value of a research facility to an old folks home, so understanding the health care industry means breaking it down into segments. These are pictured in the following table, and then described in the paragraphs below.
The Biotechnology industry is highly regulated, and new drugs and genetic research can only make money with government approval and copyright protection. Research companies take years to develop new treatment techniques, and once a health solution is developed, the company must set an acceptable price. The price of the treatment in the United States is shaped by the willingness of the government or private payer health care programs (like health insurance) to pay. Due to controversy surrounding pharmaceutical companies in the past decade, insurance companies and the government are increasingly unwilling to subsidize new treatments. Biotechnology and drug sales are further complicated when dealing with foreign countries, who have differing ability to pay and very different medical systems.
To make the sales process smoother, biotech companies hire sales teams. Domestic pharmaceutical companies market to health care providers including physicians and private clinics, dialysis centers, hospitals, pharmacies, and other relevant medical establishments. When a pharmaceutical company wants to sell its treatments abroad, it will often sell to a foreign wholesale drug distributor and occasionally foreign hospitals. 
A lot of the blockbuster drugs of the early 2000's are nearing the end of their patent protection, leading to generic competition and huge revenue losses for their developers. Also, "lame duck" election years are difficult for these companies as investors are uncertain as to the level of government intervention to expect from the next administration. A crackdown on medical costs can seriously hamper the profit margins for research driven pharmaceutical companies.
That said, drug companies, especially large ones with diverse pipelines and big R&D budgets, have been extremely successful investments over the past 50 years. Drug development is an expensive and time consuming task (it averages $800 million and 10 years to bring a drug to market), limiting new competitors. Also, since many of these firms pay significant dividends, the cyclical nature of their stock prices due to patent expirations lead to large share accumulations when those dividends are reinvested. Watch out for the small producers with just one or two successful products. When these drugs go off-patent, replacing them with limited R&D resources is a tough chore.
The following table outlines the five most successful biotechnology and drug companies of 2007.
|Most Profitable Biotechnology and Drug Companies||2007 Net Income (millions)||'|
|Sanofi-Aventis SA (SNY)||$8,288|
|Teva Pharmaceutical Industries (TEVA)||$1,952|
|Novo Nordisk A/S (NVO)||$1,799|
In the past year, the Biotechnology and Drugs industry significantly outperformed the S&P 500  . A listing of publicly traded biotech/drug companies can be found here: Biotechnology and Drug Manufacturers - Other.
Companies like Pfizer (PFE) which primarily focus on drug manufacturing and distribution differ slightly from companies which develop both biotechnology and drugs. While not a fixed rule, companies which focus exclusively on drug development tend to target symptoms (arthritis pain) or temporary sickness (flu). Companies like Novo Nordisk A/S (NVO) which develop biotechnology often seek to cure more long lasting diseases and lasting conditions.
On whole, the major drug companies have outperformed the S&P 500, losing 11% in the past year. 
The top performing Drug Manufacturers - Major (which produce and market drugs exclusively) are as follows.
|Most Profitable Major Drug Companies||2007 Net Income (millions)||'|
|JOHNSON & JOHNSON (JNJ)||$10,576|
|Novartis AG (NVS)||$6,518|
A complete list of these Major Drug companies can be found here: Drug Manufacturers - Major
Health Care Facilities include Hospital operators and Health Care REITs that own medical properties. Companies in this sector own treatment facilities, or provide them with physicians, consultants, and other relevant medical personnel. These companies provide all kinds of care, from psychiatric to radiation oncology (cancer treatment).
Patients have many options in terms of choosing Health Care facilities, so hospitals and nursing homes differentiate themselves by hiring hiring the best technicians, doctors, nurses and consultants, and buying the best diagnostic machinery possible. Because of the many skills required to run effective care facilities, many types of companies exist within the Health Care facility business. For example, hospital operators like Universal Health Services (UHS) operate many hospitals and employ a large number of doctors. Nonetheless, it may contract to Quest Diagnostics (DGX) for its specific expertise in diagnosing cancer patients, including running complex lab tests on blood, urine, or hair samples. This practice is quite common, and Quest Diagnostics alone serves half of the hospitals in the United States. 
The health care facility industry has slightly outperformed the S&P 500 in the past year, losing about 14%.  The five most successful health care facility companies of 2007 are listed in the following table:
|Most Profitable Health Care Facilities Companies||2007 Net Income (millions)||'|
|Fresenius Medical Care (FMS)||$717|
|Quest Diagnostics (DGX)||$554|
|Laboratory Corporation of America Holdings (LH)||$477|
|Lincare Holdings (LNCR)||$226|
Many treatment regimens require implants, or special devices. Companies like Medtronic invent devices that treat problems from spinal deformity to deafness.  Companies like Baxter develop life-support devices, like kidney dialysis machines. Medical equipment companies invent and frequently manufacture the high tech equipment which hospitals and nursing homes use every day to save lives. 
Medical equipment companies function as a mix between research/development companies and industrial manufacturers. It is critical that medical equipment is reliable, easy to fix, and delivered on time. The superior resources of medical equipment giants allow them to develop treatment technology, or even buy patents allowing them to offer new products. Medical equipment is an interesting field, but the potential for economic moats vary based on what kind of equipment we're dealing with. The best moat potential comes from equipment providers that are proprietary and require skill to use. For example, a doctor who specializes in hip replacement surgery is well trained on the equipment of a specific provider (say, Zimmer (ZMH)), and is reluctant to put forth the time and effort to learn a competing product, unless it provides very significant advantages. It is more difficult for providers of every day medical products such as syringes, hospital beds, or the like to have the same kind of competitive advantages.
The medical equipment and supply industry was the only part of health-care that did well this past year. The average stock in this industry yielded 2.14%, whereas the S&P has lost over 17%. The following companies were the most profitable medical equipment corporations in 2007.
|Most Profitable Medical Equipment Companies||2007 Net Income (millions)|
|Baxter International (BAX)||$1,707|
|Becton, Dickinson and Company (BDX) ,||$856|
|Luxottica Group, S.p.A. (LUX)||$775|
A complete list of companies in the Medical Instruments industry can be found here: Scientific & Technical Instruments
UnitedHealth Group (UNH), AFLAC (AFL), WellPoint Health Networks (WLP), Aetna (AET), and CIGNA Corporation (CI) are the five largest publicly traded health insurance companies. Individuals and businesses may approach these companies to insure themselves or their employees against physical injury, or illness.
The profitability of a health insurance company depends largely on its ability to correctly price health risk. If a company prices its policies too low, its premiums will not be able to cover its claims. That means that they are not getting enough money to pay the medical bills for people who bought insurance, and who have become ill or hurt while covered. If the company prices its premiums too high, people may simply decide to go without health insurance.  As of June 2008, it was estimated that 42% of American adults were uninsured or under-insured  Smaller insurance pools mean less ability to cover loss.
Difficulties can easily multiply for health insurers with a shrinking pool of 'insureds' (people who buy insurance). Raising rates can deal with losses temporarily, but will lead to an even smaller pool in the long term. This has been happening to the private health insurance business. As a growing number of employers have stopped funding employee health insurance, health insurance premiums have increased to compensate for the smaller pool. Premium increases alienate private customers, who then often go uninsured.
Private health insurance companies took a loss of over 30% between July 2007 and July 2008 due to the catch-22 problem of shrinking health insurance pools. A growing number of politicians name skyrocketing health care premiums as a front-running concern. If the American public views health care as spiraling out of control, there is a chance that the government will socialize health care, effectively killing all health insurance business.
A large percentage of the United States is approaching retirement and old age, so health care spending is due to increase because the elderly require more medication and care to deal with the complications of aging. Also, obesity has become a sizable problem in the United States, causing widespread health problems. Complications of a poor diet and complacency would increase the number of Americans needing treatment for diabetes, back and heart problems, and hypertension.
It is important to remember that some major boons for the health care industry are double edged swords for the nation's economy. When people get sick, they need more medication, but their sick days also cost the labor force money. Each year obesity-related conditions cost billions dollars and cause an estimated 300,000 premature deaths in the US.  Obesity and old age can make the labor force less productive, and this could hurt the medical business in the long term if it slows the nation's economic growth.
As human cloning and genetic engineering move from science fiction into scientific reality, large societal groups strongly and even violently disapprove. For example, religious conservatives may view genetic alteration as immoral, and lobby the government to ban it. Stem cell research , for instance, is already facing such opposition.
As drugs combat more complex illnesses, they also have more unpredictable side effects. Fiascoes surrounding harmful drugs like Ephedrine and Vioxx have made the government investigate drugs more closely before permitting their release. This lowers the profitability of most drugs for companies, as they must wait longer before they are approved and released.
Additionally, most of the world outside of the United States views health care as a human right. This is a growing viewpoint on the American left. Presidential Candidate Barack Obama would like to use government funding to cover all Americans (there are currently as many as 47 million uninsured Americans). 
Among industrialized nations, the United States health care system is one of the worst at stopping preventable death- a major negative indicator.  The high cost of American health care has led many Americans to begin traveling to countries like India to receive treatment.  . As the world industrializes, the ability of the United States to maintain technological superiority diminishes. More Asian and Indian people are developing patents to compete with United States technology. This heightens the pressure on major U.S. medical companies to develop new blockbuster products.
The health care industry is composed of many smaller directly competitive markets. Because major drug companies do not directly compete with genetics research companies, retirement homes, or dentists, it would be improper to delineate companies as 'holding' a percentage of all health care business. It is helpful, however, to understand from what market segments the health care industry gains its profits.