Breaking the cost curve

Executive summary

In 2019, health care spending in the United States topped US$3.8 trillion dollars—nearly 18% of the gross domestic product (GDP)—as projected by the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary. Prior to the COVID-19 pandemic, the agency had projected health spending would continue to grow at a rate of 5.3% a year, reaching nearly US$6.2 trillion by 2028.If those increases were to continue unabated over the next 20 years, health spending could reach a staggering US$11.8 trillion by 2040. Although the pandemic caused people to defer care throughout much of 2020, a rebound and then continuation of the trends beyond 2021 would drive health care spending to historic levels in the coming years.

While Deloitte’s projection runs counter to historic trends, we believe the US health care system has already entered the first stage of the Future of Health—a dramatic transformation that we expect will take place over the next 20 years. This future will likely be driven by new business models, scientific and technological breakthroughs, consumers armed with highly personalized data, and regulations that encourage change. We see this as an unstoppable transformation, meaning that it will happen regardless of policy or the actions of individual stakeholders.

Has change already arrived?

It has been two years since Deloitte published Forces of change: The Future of Health, which provides our perspective on how the business of health will transform by 2040. Since that publication, we have experienced COVID-19, a global crisis that has not only accelerated the changes we outlined in our vision, but also identified where our ecosystem still requires significant progress. Rather than focusing on clinical care and symptomatic diagnoses in 2040, the enterprises making up this new health system will likely be hyper-focused on early engagement with consumers. We expect this will drive new business models that integrate data and support overall well-being. COVID-19, for example, is highlighting some of the weaknesses in the health system, pushing capacity to the brink, and testing the very definition of wellness. It has also revealed how vulnerable the health care industry is to change and its need for structural and technological transformation.

A team of Deloitte actuaries analyzed the financial implications of this Future-of-Health vision. The team started with the most recent NHEA categories, as well as spending on wearables, fitness apps, DNA testing, genetic services, weightloss/nutrition/diet, alternative therapies (e.g., acupuncture), and other mental health–related services (e.g., meditation, couple’s therapy). That information was then used to model the impact of the six key areas—data sharing, interoperability, equitable access, empowered consumers, behavior change, and scientific breakthrough—that we expect will collectively transform the existing health system from treatment-based reactionary care to prevention and well-being. In our recent research paper, Six keys to measuring health care disruption, we discuss the activities already underway in each of these areas. The financial impact of each area will likely differ based on timing, intensity, and the expenditure category. Based on these trends, the team projected the shift from current businesses to newer archetypes—roles, functions, and businesses that will drive the Future of Health. (See appendix for detailed methodology.) Here are the six areas that we expect will have a profound impact on the health sector over the next 20 years:

1. Data sharing: Data sharing is already underway and will likely continue to advance. In the years ahead, always-on sensors—embedded in everything from our shoes and clothes to our bathroom mirrors and toothbrushes—could continuously gather detailed information about our health. (Imagine a toothbrush that uses biomarkers to identify heart disease years before symptoms develop.) As we collect more health data from a far deeper pool of consumers, we will likely learn more about the nature of illness, how to detect it, treat it, or avoid it. Our research indicates that 46% of consumers are willing to share their medical information with health plans and clinicians, and 20% have used technology to measure and share medication data with their doctors. Example: The Apple Health records feature is now open to all US health care organizations with compatible EHRs.² This feature will allow more than 100 million iPhone® consumers to link their health data from several sources and share it with their care teams.

2. Interoperable data:On March 9, 2020, the US Department of Health and Human Services (HHS) finalized its interoperability rules, which HHS Secretary Alex Azar called “the start of a new chapter in how patients experience American health care.” The new rules took effect on January 1, 2021. Through interoperability, the disconnected components of health care (e.g., hospitals, clinicians, pharmaceutical companies, device manufacturers, researchers, and health plans) could be replaced by a system where data is securely shared among stakeholders to create a multifaceted and highly personalized picture of every consumer’s well-being. Example: Real-world evidence (RWE) based on interoperable data could lead to more personalized and effective treatments for cancer and other high-cost diseases.

3.Equitable access:Consumers who aren’t able to access the health system when needed might wind up with more serious (and costlier) health conditions. Urgent care facilities, retail clinics, and a growing acceptance of virtual care are making it easier for patients to meet with care providers in person or via electronic device. Traditional barriers to health care access, like geography and lack of resources, could be significantly reduced. Consumers might also have access to tools that help them achieve their wellness and health goals. Stay-at-home mandates and risks (real and perceived) related to seeking in-person care have increased demand and adoption of virtual care, especially among vulnerable populations. Example: Deloitte’s COVID-19 survey as of April 2020 showed that 26% Medicare Advantage members used telehealth or virtual health through the first four months of 2020, compared to just 13% for all of 2019.³

4. Empowered consumers: We expect clinicians will work closely with each other, supported by health plans, to coordinate care for consumers. But highly personalized health information can allow consumers to take a more active role in their well-being. Ownership of their health data can increase people’s sense of responsibility for their well-being. Example: In 2020, more than 40% of surveyed consumers used devices and technologies to measure fitness and health improvement goals, compared to just 17% in 2013, according to the Deloitte Center for Health Solutions’ Health Care Consumer Surveys.⁴

5. Behavior change: In 2019, 600 Deloitte employees (from 40 states) began a 36-week randomized clinical trial to determine if a wearable activity-tracker—combined with goalsetting, competition, and gamification—would increase physical activity among overweight and obese adults. We learned that data science and behavioral economics—if applied correctly—can lead to positive behavior changes. Example: Mango Health is a patient-adherence platform that uses gamification and rewards to improve drug adherence, especially among those under chronic care with proven clinical results.⁵

6. Scientific breakthrough: The pandemic forced some researchers to rely more on digital technology for clinical trials. We have seen an unprecedented level of collaboration among pharmaceutical companies to develop a COVID-19 vaccine and rapidly bring it to market. Some regulatory processes have been streamlined to make it easier to get diagnostic tests and therapies to market more quickly. During the next 20 years, we expect new preventive and curative advances will emerge at an exponential pace. We expect biopharmaceutical companies will continue to develop new ways to prevent, treat, and possibly cure a range of diseases through vaccines and advancements in cell and gene therapies. At the same time, actionable health insights—driven by radically interoperable data and smart artificial intelligence—could help clinicians and consumers identify illness much early than we do today. Example: Biopharmaceutical companies Pfizer Inc. and Moderna Inc. developed their COVID-19 vaccines using messenger RNA (mRNA)—a technology that had never been used before to develop a commercialized vaccine. Both companies, based on the clinical trials, reported efficacy rates above 90%. This was significantly higher than the Food and Drug Administration’s (FDA) requirements of at least 50% efficacy.⁶

We assume these six developments will help shift the spending from areas of waste to investments that improve individuals’ long-term well-being, helping to curb growth in health spending (figure 1).

Future reality #1: A growing well-being dividend could reach US$3.5 trillion by 2040

According to CMS NHEA data, US health care spending as a percentage of the GDP has increased nearly every year for nearly 60 years—from 5% in 1960 to 18% in 2019. CMS has projected that health spending will continue to grow at an average rate of 5.3% a year between now and 2028. If this trend was to continue, health spending in the United States would reach nearly US$12 trillion (approximately 26% of the GDP) by 2040.

Contrast this with the future we anticipate: Our models show that by 2040, health spending will make up 18.4% of the GDP (about US$8.3 trillion), driven by a significant decrease in spending devoted to treatment, and much higher spending on activities and enterprises that sustain well-being (figure 2).

The difference between CMS’s projection and Deloitte’s model is about US$3.5 trillion. We refer to this decrease in spending as a well-being dividend. Rather than bending the cost curve, we see a cost curve that can be broken and rebuilt.

Future reality #2: A shift in spending from care and treatment to health and well-being

This US$3.5 trillion well-being dividend comes from the six developments we expect will trigger a fundamental shift from diagnosis and treatment to well-being and prevention. The US health care system has historically focused on the treatment of diseases. For every US$100 spent on health care, about US$80 is typically spent diagnosing and treating patients after they become sick.

In the future, well-being spending is likely to encompass not only the treatment of physical and mental illness, but also investments in data and algorithms that help generate health and well-being insights. This might include things that consumers use to stay healthy, such as app-based algorithms that illustrate the impacts of eating healthy. It might also include enterprises that address the drivers of health (often referred to as social determinants) and can help address disparities in health outcomes, like housing, community, adequate food, and other enterprises that contribute to well-being.

Our models show that spending in these well-being–focused areas will eclipse treatment-related expenses by 2033. By 2040, we expect spending on well-being to account for nearly two-thirds of the total health spending—or 11.3% of the GDP—and spending on treatments and diagnostics to make up the rest (7.1% of GDP). (see figure 3).

Future reality #3: A new health economy will drive 85% of revenue

We expect empowered consumers to reward organizations that help keep them healthy. This will likely spawn new archetypes around well-being and care delivery, data and platform, and care enablement.

Health care industry incumbents (e.g., health systems, clinicians, health plans, and life sciences companies) command about 85% of the revenue in the industry today. However, our model shows that a deceleration in health spending, driven by well-being and prevention instead of treatment and care, could significantly disrupt how these organizations conduct business. As a result, we expect a transformation of three major business models that control the current health care landscape:

1. The end of the general hospital: Care is already shifting away from hospital-based settings to lower acuity, less expensive, more convenient settings.⁸ Consumers will likely continue to drive providers to offer care in settings that are aligned with their preferences. Technological advances will likely redefine how care is delivered. Today, for example, an acute myocardial infarction would likely require a hospitalization. In the Future of Health, however, this event could be prevented altogether through the use of always-on sensors and continuous in-home monitoring. Patients who do need care will likely receive it in highly specialized settings that are tailored to service a specific need rather than being a “one-stop” for all disease states and specialties.

2.The slowdown of mass-produced therapies: Biopharmaceutical companies tend to focus on producing drugs that treat a large swath of the population. In the Future of Health, biopharma companies will likely see their business operations shift to focus on individuals rather than groups. As more health data is collected on individual consumers, we expect biopharma companies will be able to drill down and analyze patients, and their conditions, in new ways. The insights generated from this data can be used to develop treatments that are tailored specifically for the individual. Some companies are already using artificial intelligence for drug discovery in a more targeted way.⁹ This could lead to highly effective products that are customized for an individual’s genetic and behavioral needs. This change can impact biopharma’s entire value chain, from R&D all the way to how a drug is prescribed and used by an individual.

3.The change in how health care is financed: Health insurance is financed primarily by premium payments to private health insurers from employers, individuals, and government agencies. Health plans pool members’ health-related risks and redistribute that risk across many individuals. This allows the higher costs of the less healthy members to be offset by the relatively lower costs of the healthier members. However, as we see health-related technology advance in terms of prevention and wellness, some of today’s risks might not be around tomorrow. We expect we will be able to detect disease sooner, or potentially prevent disease all together through a series of proactive microinterventions. If this happens, consumers might want products tailored to their risk profile, as driven by their lifestyle and behaviors, as opposed to those designed for a broader population.

Business models that focus on wellbeing and care delivery, data and platforms, and care enablement, are already emerging. These new models are likely to proliferate quickly and would represent the bulk of health revenue in a future that rewards wellbeing and provides efficient and effective care when required (figure 4).

We anticipate that 10 new archetypes—new roles, functions, and business models focused on keeping consumers healthy—will emerge as winners in this future. Incumbents that can reinvent themselves will likely become enterprises in one or more of these archetypes. Organizations emerging as personalized virtual-health actors, data conveners, and science and insights engines could command about half of the revenue in the Future of Health (figure 5).

What does this future mean for all of us?

The health care system we know today is inefficient despite attempts to improve health outcomes and reduce costs. While we have seen some successes, their impact has been limited when compared to the overall spending trend. In the future, we expect the convergence of empowered consumers, interoperable data, and scientific discovery will lead to an unstoppable shift in our health care system. Here’s how we expect stakeholders to be affected:

Industry participants: Market trends indicate that the Future of Health is already here. With the anticipated exponential growth in innovation, we see clear winners and losers emerging. An organization’s ability to evolve its business model and make investments to meet the needs of empowered consumers will likely decide its future. Incumbents that invest in next-gen capabilities and technologies will likely experience growth while those that continue to invest in traditional infrastructure and talent could be left behind. Organizational leaders should rethink their capital investment strategies, examine the workforce needs of the future, and reframe regulatory requirements from a compliance function into potential market opportunities.

New entrants: New entrants could see opportunities to win market share by addressing the demands of empowered consumers. Organizations from the technology and retail sectors are redefining the fundamental notion of “health care” by delivering on convenience, affordability, and a differentiated experience of care. Regulatory policies that promote increased data sharing, transparency, and interoperability are lowering the barriers to entry and are creating opportunities to disintermediate traditional players. The ability to balance innovation with safety will likely be critical to a sustainable business model.

Government: The government is both an enabler and a beneficiary of this vision of the future. Government is the primary source of funds for health and social services, which support well-being and address the drivers of health. Policies supporting interoperability, data, and equitable access can help ensure the health care system reaches this future quickly. New and emerging regulatory policies can continue to empower consumers while protecting their privacy and security. Government and policy leaders should anticipate and respond to regulations and requirements that keep up with technological advancements and new consumer expectations.

Consumers: The Future of Health is driven by broad-based changes in how consumers view health and well-being. Consumers have the power to demand increased access to a personalized model of care that integrates clinical insights with behavioral science and social drivers of health. They can accelerate these changes by opting to share their data within open platforms that are enabled by interoperability. Consumers can also benefit from interconnected health communities where they have ownership of their health data and a shared responsibility and accountability for their well-being.

Appendix: Methodology

Deloitte’s health actuarial team built a model that projects the economic implications of the Future of Health vision on the consumers, businesses, and the government of the United States. We lay down the four key steps of our model:

1. Projecting health expenditures through 2040 based on historical trends, and government estimates

We gathered publicly available projections on national health care expenditure accounts (NHEA) through 2028 by the CMS Office of the Actuary. Additionally, spending was added to CMS projections to account for items that are not included in NHEA including wearables, fitness apps, DNA testing, genetic services, weightless/ nutrition/diet, alternative therapies (e.g., acupuncture), and other mental health–related services (e.g., meditation, couple’s therapy). This additional spending accounts for less than 5% of total health spending. The team used the average growth rate between 2019 and 2028 (5.3%) to project the expenditure through 2040.

2. Classifying the major spending categories into the current business archetypes

We classified the expenditures from the major categories of the NHEA accounts into what we consider as archetypes—businesses, functions—of today.

3. Assessing the impact of six developments on the current business archetypes and creation of new business archetypes

We then projected the economic impact of each of the six truths on removing expenditures from the current business archetypes. We also projected the resultant new business archetypes created by this shift of spending based on the six developments. Please note, we did not include spending on social determinants of health such as food stamps, transportation, social security due to the complexity in projecting the impact of these costs on health spending.

4. Projecting national health expenditures by 2040 based on the new business archetypes of the Future of Health

We projected expenditures (revenue potential) of the new archetypes. We added these expenditures, and the residue expenditure from the current business archetypes to arrive at the projected health spending in 2040, based on the Future of Health trends.