When you go to a doctor’s appointment, get an X-ray, or pick up a prescription, you’re engaging with the health care sector of the economy.
The health care sector is critical to the health and well-being of the almost 330 million people who live in the U.S. And access to good medical care has contributed to the increase in the average American’s life expectancy over the last several decades. But this sector is also essential to the economy, employing millions of people and making up almost one-fifth of the total economic output of the U.S.
What is the health care sector?
In 2019, Americans spent a total of $3.8 trillion on health care, or $11,582 per person, an increase of 4.6% from the previous year. Health care spending accounts for 17.7% of the Gross Domestic Product (GDP) of the U.S. One of the biggest employers in the country, this sector employed 20.5 million people, culminating in a payroll of more than $1 trillion.
The health care sector in the U.S. includes many different industries and businesses that work together to provide medical care to people:
- Companies that manufacture medical equipment— everything from scalpels to MRI machines—are part of this sector. The leading businesses in the medical equipment industry are Medtronic, with a revenue of $28.91 billion, Johnson & Johnson with $25.96 billion in revenue, and Abbott Laboratories with a revenue of $19.95 billion.
- The health care sector also includes pharmaceutical companies that make the prescription drugs needed to treat cancer, diabetes, depression, and more. Brand name pharmaceutical manufacturing is a $205 billion industry, led by AbbVie, Bristol-Myers Squibb, Johnson & Johnson, Merck & Co., Amgen, and Pfizer.
- There are hundreds of biotechnology companies in the U.S. that produce medicines, therapeutic treatments, and other medical products through the development of biological and chemical processes. Biotech firms are responsible for a great deal of the innovation in the health care industry, experimenting with new treatments for illnesses. Biotech companies such as Moderna, Novavax, and Gilead have been at the forefront of the development of vaccines and treatments against Covid-19. In the U.S., the biggest biotech companies by market capitalization are Moderna ($66 billion), Vertex Pharmaceuticals ($56.4 billion), and Regeneron Pharmaceuticals ($55 billion).
- Health care facilities and professionals are critical to the health care sector. There are more than 6,000 hospitals throughout the U.S. and consumers spend more than $1.2 billion on those facilities annually.
Regulation in the health care sector
Health insurers are also important to the health care sector in the U.S. The health insurance industry is a $1.1 trillion market, growing 5.1% on average per year between 2016 and 2021. Health insurance is intended to protect you from incurring massive, unplanned costs from your medical treatment.
About half of Americans receive health care coverage from private insurers through their employer, according to a 2019 survey from Kaiser Family Foundation. (More than one-third self-purchase government insurance, and the remainder are uninsured. See graphic below.) The largest providers of medical insurance in the U.S. are UnitedHealth, Anthem, and Humana. For those people who don’t receive health care coverage through work, the 2010 Affordable Care Act was created to help make coverage more affordable and accessible.
*Source: Kaiser Family Foundation, 2019
Both state and federal agencies, including the Food and Drug Administration (FDA), the Centers for Disease Control and Prevention (CDC), the Department of Health and Human Services (HHS), and the Centers for Medicare & Medicaid Services (CMS), regulate the industry to help maintain fair costs and good care for patients.
Since the late nineteenth century, there has been a push to create a public option for medical insurance subsidized by the federal government. Proponents of this movement support universal health care, which would aim to provide the same coverage to all Americans at the same cost. In recent years, politicians such as Senators Elizabeth Warren and Bernie Sanders have thrown their weight behind the movement for Medicare for All, which aims to expand the public option to include all Americans. Opponents of the movement have argued that Medicare for All could further complicate the health care system in the U.S., and prevent people from getting the care they are used to receiving.
Investing in the health care sector
You might decide to invest in the health care sector for a number of reasons. Health care is a necessity for everyone, and the demand for things like equipment and prescription drugs is consistent. Additionally, the health care sector is the second-largest one in the S&P 500. Adding health care investments to your portfolio can help you diversify.
Health care stocks tend to be defensive, meaning that they deliver consistent results regardless of how the economy is performing, since people always need health care. For example, as of April, 2020, the health care sector fell only 18% from February 19, 2020 as a result of the pandemic, while the rest of the S&P 500 dropped 27%.
Still, all investing involves risk, and this sector is no exception. Because the health care industry is heavily regulated by the government, any changes to policy related to health care can affect the performance of those stocks.1 Additionally, biotech stocks can be volatile, and therefore risky for investors.
When investing, remember to follow the Stash Way® by investing small amounts of money regularly in a diversified portfolio. Diversifying your portfolio with investments across several different sectors can help protect you from taking on too much risk. With Stash, you can invest in single stocks of health care companies like Abbvie, UnitedHealth, Moderna, and more.2 You can also invest in ETFs that include health care companies.