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In 2007, the U.S. spent $2.26 trillion on health care, or $7,439 per person.[1] Health care spending makes up about 16% of the US GDP.[2] 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. [3] 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. [4] Indeed, health analysts predict that by 2017, health care spending will be at 19.5% of United States GDP.[5]

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).

Companies Involved

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.

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.

Image:HealthCareDescription.jpg

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Health Care Facilities

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. [6]

Some health care facility companies like Health Care REIT (HCN) literally rent out hospitals and nursing homes, and are known as Health Care REITs.

The health care facility industry has slightly outperformed the S&P 500 in the past year, losing about 14%. [7] 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
DaVita (DVA) $382
Lincare Holdings (LNCR) $226


A list of health care facility companies can be found here: REIT - Healthcare and Hospitals.

Medical Equipment

Many treatment regimens require implants, or special devices. Companies like Medtronic invent devices that treat problems from spinal deformity to deafness. [8] 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. [9]

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)
Medtronic (MDT) $2,231
Baxter International (BAX) $1,707
Stryker (SYK) $987
Becton, Dickinson and Company (BDX) , $856
Luxottica Group, S.p.A. (LUX) $775
Edwards Lifesciences (EW) $113

A complete list of companies in the Medical Instruments industry can be found here: Scientific & Technical Instruments

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Market Share

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.

 The most recent census breaks down the origin of health care profits.
The most recent census breaks down the origin of health care profits.[10]

References

  1. National Health Expenditure Data
  2. National Health Expenditure Data
  3. Extensive Obesity Study
  4. Aging America Fact Sheet
  5. Health Spending Projections Through 2017
  6. Quest Diagnostics 10-k, pg. 2
  7. Health Care Facilities' Performance
  8. Medtronic 10-k pg. 2
  9. 2 Baxter 10-k pg. 2
  10. http://finance.google.com/finance?catid=64715132&hl=en


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