by Alexander Perepechko
Published on May 8, 2017
In a previous paper, I explored Kondratiev waves. These waves (sometimes called K-waves or cycles) show that economic and social development is primarily determined by long periodic cycles characterized by technological innovations in specific economic/industrial areas (Kondratieff, 2014) (Figure 28). A cycle lasts about 40-60 years. These long cycles fulfill a mostly strategic role: leaders who identify the current Kondratiev wave early are able to take the lead in economic and social development and benefit the most from its impetus.
I found that the recent information technology (IT) long wave – the 5th Kondratiev cycle – has faded, although not ended yet. IT was and still is a source of power for the 5th cycle. While the 5th wave is on the decline, the 6th Kondratiev wave has started. Psychosocial health (or health care) is the growth vehicle of the new K-wave. The health care can be defined as health in a holistic sense – physical, biological, psychological, and mental health (Nefiodow & Nefiodow, 2015: 47, 57).
I also conjectured that America is losing its lead in the development of the psychosocial health sector to Europe, Japan, and China. Does this mean that American elites pay little attention to health care as the new engine of economic growth?
Indeed many politicians and media in America are highly skilled in the art of manufacturing and presenting biased information about health care. This unfortunate fact must not prevent us from an effort to find some truth about the matter. When reforms pertaining to health legislation stall, independent social science expertise in this area is in urgent need.
Compared to the rest of the world, how is the health industry doing in America?
In terms of the 6th Kondratiev cycle, the health care sector in the United States has obviously set itself apart in its dynamics from other established industry sectors: it is one of the fastest-growing industries. An aging population, rising incidence of chronic diseases, and increased access to health care are among main causes of this growth.
According to OECD Health Statistics (2017), health care spending as a share of the nation’s GDP equaled 16.6% in 2014 and increased to 17.2% in 2016. These numbers are significantly higher in the United States than in other developed countries (figure 48). The average spending level among all high-income countries (including the US) was 11.5% of GDP in 2016 (Schneider et al., 2017).
Among other things, figure 48 (see also figure 28) reflects the fact that in the late 1970s-early 1980s important technological advancements in health care brought about the beginning of the 6th Kondratiev wave in America. The growing gap between the United States and other countries in health care spending as a share of the GDP can be partially attributed to the technological revolution in medicine in America and global leadership of this country in medical research.
Figure 48. Health care spending as a percentage of GDP, 1980-2014 (Sources: OECD Health Statistics, 2017, Schneider et al., 2017).
Recent projections from the Bureau of Labor Statistics of the U.S. Department of Labor (2017) show that health care occupations (23.2%) and technical occupations (15.2%) will be among the fastest growing occupational groups during 2016–2026. These two occupational groups account for 14 of the 30 fastest growing occupations from 2016 to 2026 and will contribute about one-fifth of all new jobs by 2026. Factors such as the aging baby-boom population, longer life expectancies, and growing rates of chronic conditions will drive continued demand for health care services.
There are many ways to collect data, to create databases, and to present and analyze statistical data. In the case of the health industry in America, one might find two quite different statistical “pictures”: 1) positive and optimistic and 2) critical and reform oriented. Analysis of the reasons behind these differences is beyond the scope of this essay. Instead I will present examples of each vision with comments and illustrations.
A positive and optimistic vision of the health industry in America is typical for researchers working for corporate organizations and, to some extent, government agencies. The latter are often involved in planning, forecasting, and trend evaluation in health care. A large proportion of health care scholars are employed in the corporate and government research and development (R&D).
Apparently, to create breakthrough advances in the health care industry, good scientists and lots of capital for research is needed. According to Research!America, an alliance supporting health research and discovery (U.S. Investments, 2016), total investment in health R&D spending was $158.7 billion in 2015. At current growth rates, the health industry will pass computing and electronics in 2018 to become the largest overall industry investing in R&D (figure 49).
Figure 49. By 2018, health care in the United States will spend more on R&D than any other industry (Source: Jaruzelski, Staack, & Shinozaki, 2016).
Research!America (see U.S. Investments, 2016) reports that in 2015 the health care private sector invested $102.7 billion, which accounts for 64.7% of all R&D expenditure (Figure 50). Federal agencies invested $35.9 billion (22.62%). Research institutions (including universities) invested more than $12.5 billion (5.45%), foundations – $4.7 billion (2.95%), and voluntary health associations, professional societies and local and state governments – close to $3 billion (1.8%).
Figure 50. The health R&D expenditure in the United States, 2015 (Source: U.S. Investments, 2016: 3).
Although health care R&D investment is growing, it is only about 5% of total health care spending in America ($3.2 trillion in 2016). From 2013 to 2015 investments in health R&D grew by 13.3% (table 8) (U.S. Investments, 2016). While private sector investments accounted for the majority of R&D spending in 2015, growth in this sector was half of what it was from 2013 to 2014. Growth in the federal government sector – the second largest investor in health R&D – decreased from 5.4% in 2013-2014 to only 1.4% in 2014-2015. Growth in research institutions and other sources was not sufficient to compensate for the slowdown in private and federal government sector growth.
Table 8. Estimated health research & development expenditures in the United States (in millions of dollars)
| R&D segment | 2013 ($mln) | 2014 ($mln) | 2015 ($mln) | 2013-2014 change (%) | 2014-2015 change (%) |
| Industry (U.S. operations) | 89666 | 98097 | 102679 | 9.4 | 4.7 |
| Federal government | 33634 | 35435 | 35924 | 5.4 | 1.4 |
| Other sources | 16807 | 18260 | 20113 | 8.7 | 10.2 |
| Total U.S. health R&D spending | 140107 | 151792 | 158716 | 8.3 | 4.6 |
Source: Generated by William N. Hait for U.S. Investments, 2016.
About 56% of all health care companies have headquarters in North America (Jaruzelski, Staack, & Shinozaki, 2016). Table 9 shows the powerful presence of the psychosocial health cycle among the top R&D spenders and suggests severe competition of this new sector with the established industry sectors of computing and electronics (5th Kondratiev wave) and automotive sector (4th Kondratiev wave) for leadership. In the health industry, the top 7 R&D spenders spent $62.3 billion on R&D in 2016. Among these 7 companies 4 are American: Johnson & Johnson, Pfizer, Merck, and Bristol-Myers Squibb (table 9). Together these 4 American companies spent $29.3 billion on R&D in 2016.
Table 9. The top 20 R&D spenders
| Rank
2016 |
Rank
2015 |
Company | Headquarters | Industry | Kondratiev cycle (K-wave) | R&D* spending,
2016 ($bn) |
R&D spending,
change from 2015 (%) |
R&D spending,
% of revenue |
| 1 | 1 | Volkswagen** | Germany | Automotive | Petrochemicals, cars (4th wave) | 13.2 | 2.7 | 5.6 |
| 2 | 2 | Samsung** | South Korea | Computing and electronics | IT (5th wave) | 12.7 | -3.0 | 7.2 |
| 3 | 7 | Amazon | United States | Software and Internet | IT (5th wave) | 12.5 | 35.2 | 11.7 |
| 4 | 6 | Alphabet | United States | Software and internet | IT (5th wave) | 12.3 | 24.9 | 16.4 |
| 5 | 3 | Intel Co** | United States | Computing and electronics | IT (5th wave) | 12.1 | 5.1 | 21.9 |
| 6 | 4 | Microsoft** | United States | Software and Internet | IT (5th wave) | 12 | 5.8 | 12.9 |
| 7 | 5 | Roche** | Switzerland | Health care | Psychosocial health (6th wave) | 10 | -3.2 | 19.9 |
| 8 | 9 | Novartis** | Switzerland | Health care | Psychosocial health (6th wave) | 9.5 | -1.6 | 19.2 |
| 9 | 10 | Johnson & Johnson** | United States | Health care | Psychosocial health (6th wave) | 9 | 6.5 | 12.9 |
| 10 | 8 | Toyota** | Japan | Automotive | Petrochemicals, cars (4th wave) | 8.8 | 5.1 | 3.7 |
| 11 | 18 | Apple | United States | Computing and electronics | IT (5th wave) | 8.1 | 33.5 | 3.5 |
| 12 | 11 | Pfizer** | United States | Health care | Psychosocial health (6th wave) | 7.7 | -8.4 | 15.7 |
| 13 | 13 | General Motors | United States | Automotive | Petrochemicals, cars (4th wave) | 7.5 | 1.4 | 4.9 |
| 14 | 14 | Merck | United States | Health care | Psychosocial health (6th wave) | 6.7 | -6.6 | 17 |
| 15 | 15 | Ford | United States | Automotive | Petrochemicals, cars (4th wave) | 6.7 | 0 | 4.5 |
| 16 | 12 | Daimler | Germany | Automotive | Petrochemicals, cars (4th wave) | 6.6 | 4.5 | 4 |
| 17 | 17 | Cisco | United States | Computing and electronics | IT (5th wave) | 6.2 | -1.4 | 12.6 |
| 18 | 20 | AstraZeneca | United Kingdom | Health care | Psychosocial health (6th wave) | 6 | 7.5 | 24.3 |
| 19 | 32 | Bristol-Myers Squibb | United States | Health care | Psychosocial health (6th wave) | 5.9 | 30.6 | 35.7 |
| 20 | 22 | Oracle | United States | Software and Internet | IT (5th wave) | 5.8 | 4.8 | 15.6 |
| — | — | Top 20 total | — | — | — | 179.4 | 6.3 | 8.7 |
*R&D spending data is based on the most recent full-year numbers reported prior to July 1. **Company has been among the top 20 R&D spenders every year since 2005.
Source: Based on Jaruzelski, Staack, & Shinozaki, 2016.
Although some rankings shifted, the 2016 list of the 20 biggest R&D spenders includes many of the same names as in 2015. Johnson & Johnson and Pfizer are among 9 companies that have been among the top 20 R&D spenders every year since 2005. Of the 2 entrants to the top 20 since 2005, one is the US company Bristol-Myers Squibb.
Among industry investors, American pharmaceutical companies spent the most on R&D in 2015 at $72.1 billion – 6.9% more than in 2014. Biotechnology companies also increased their R&D investments by 7.5%, to $6.1 billion. Medical technology investments decreased 4.5% – from $18.2 billion in 2014 to $17.4 billion in 2015 (Jayanthi, 2016).
Unlike corporate and government researchers in the health industry, academic scholars time and again sound the alarm about the health care in the United States. For example, Moses and colleagues (2015) compared trends in U.S. and international research funding, productivity, and disease burden by source and industry type from 1994 to 2012. According to this research growth in scientific investment in the health industry in the United States is declining. Total American R&D funding increased 6% per year in 1994-2004 but the rate of growth declined to 0.7% per year in 2004-2012, reaching $117 billion (4.5%) of total health care expenditures in 2012. The period 2007-2012 saw a decrease (except for temporary increases brought about by federal stimulus spending in 2009 and 2010) in research funding when adjusted for inflation. Overall, from 2004 to 2012 health care R&D funding declined in real terms by 13%. The proportion of R&D funding provided by the private sector increased from 46% in 1994 to 58% in 2012. Industry favors medical devices, bioengineered drugs, and late-stage clinical trials, particularly for cancer, HIV/AIDS and rare diseases.
Leaders in China, Japan, South Korea, India, and Singapore quickly identified the strategic role of the 6th Kondratiev wave. In recent years, in Asia the investment in health R&D has increased by 9.4% per year (Moses et al, 2015). If this trend continues, the U.S. will be left behind by China as the global leader in health R&D in several years. China has already surpassed the United States in terms of the global share of patents for medical technologies and is closing the gap in published biomedical research articles…
Globalization has facilitated the diffusion of the technological revolution in health care from America to other countries and has engendered competitors. U.S. health R&D spending declined from 57% of the global total in 2004 to 44% in 2014 (Moses et al, 2015). The U.S. share of life science patents declined from 57% of the global total in 1981 to 51% in 2011.
Although the United States spends approximately twice as much as other high-income countries on health care, the U.S. performs less well on many population health outcomes. While health coverage has risen to 90% of the U.S. population since enactment of the Affordable Care Act, every other high-income country has achieved coverage for at least 99% of its population. Rates of infant mortality in America are higher than in other developed countries. Life expectancy in the U.S. is nearly three years less than the average life expectancy in other high-income countries.
Many politicians attribute this spending disparity to overuse of health services and underinvestment in social services in the U.S. However, Papanicolas, Woskie, and Jha (2018) found that compared to other high-income countries, the U.S. has similar levels of spending for social services (both public and private spending) and similar levels of health care use. The health care spending gap with other countries appears to be driven by the high prices the U.S. pays for health care services — particularly doctors, pharmaceuticals, and administration.
The average salary for a general practitioner in the U.S. is $218,173, nearly double the average salary across all high-income countries. Specialists and nurses in the U.S. also earn significantly more than elsewhere. The U.S. annually spends $1,443 per person on pharmaceuticals, compared to the average of $749 in other high-income countries.
In the U.S., 8% of total national health expenditures are on activities related to planning, regulating, and managing health systems and services, compared to an average of 3% among all high-income countries. At the same time, falling levels of R&D funding in the health services in the United States are in need of remedy. Health services research receives only 0.3% of total health care expenditures in the US ($5.0 billion) and health care services are ranked 19th among 22 industries in investment in innovation (Moses et al, 2015).
Here we can summarize the points of our investigation.
Health care is the growth vehicle of the new Kondratiev wave. The growing gap between the United States and other developed countries in health care spending is partially explained by the technological revolution in medicine in America and global leadership of the United States in medical research. Health care occupations are among key contributors to new jobs and the health industry is the largest US industry by R&D.
2. Private sector investments account for almost 2/3 of health R&D spending in the United States and over 1/2 of health care companies worldwide are headquartered in North America. Among industry investments, American pharmaceutical companies spent the most on R&D. U.S. health care companies make up a majority of the top R&D spenders worldwide.
3. This encouraging picture is undermined by several alarming trends and features.
a) During the last decade, the rate of growth of scientific investment in the health industry in the United States declined to just above 0% per year. At the same time, the investment in health R&D in China, Japan, and some other countries increased by almost 10% per year. As a result, the United States is losing its leading position in such areas as patents for medical technologies and published biomedical research articles.
b) Like any rapidly progressing industry health care demonstrates greater instability (see Ross, 2016) compared to older industries. The dynamics and structure of health research expenditure in the private sector (the major investor) fluctuate as a result of market forces. The development of health care research in the federal government sector (the second largest investor) depends on changes in politics.
c) Health care spending in the United States is higher than in other developed countries because of the high prices Americans pay for health care services — particularly doctors, pharmaceuticals, and administration.
The outlook for future years is highly uncertain. Health care remains a top issue for voters (Kirzinger et al, 2018). More than half of voters view health care as a top priority, far outpacing any other single issue. Definitely, the fragmentation and polarization of the population and the absence of a comprehensive health care approach among federal policymakers are among the causes of the problem.
There is little evidence that efforts to reform U.S. health care delivery have had a meaningful influence on controlling health care spending and costs. A more concerted effort to reduce prices and administrative costs is likely needed. If we want to encourage sustainable innovation in therapeutics that ultimately benefits patients, then we must look at product value through the lens of patient outcomes, versus merely debating drug pricing (Hendricks-Sturrup, 2017; Sullivan, 2018). However important these steps, they are still tactical moves toward a bigger solution.
Any big solution requires big decisions. Like all big decisions in the United States, the current situation of health care comes up against the wall: politics as usual no longer delivers (see Monbiot, 2017: 22). Moreover, since the health care sector in the United States is one of the fastest-growing industries, political, legislative and regulatory authorities are unable to cope with the speed of change, given fluctuations in development and with structural dynamics in the 6th Kondratiev wave. Incapable of adapting agile governance principles (see Schwab, 2017: 67-71) – where regulators find ways to adapt continuously to a fast changing environment – the political elite in the United States slowly but surely is losing power. From this point of view, the election of Donald Trump, who brought about two dozen billionaires to high positions in the federal government, reflects intense inter-elite rivalry: power is shifting from a sluggish and inert political class (especially the establishment!) to an energetic and predatory business elite. In addition, federal authorities are constrained in what they can do because of political obstacles caused by rival transnational, regional, local and even individual power centers.
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