The medical sector is often said to be the most recession-proof industry.

It has a lot going for it. People want to be healthy (demand), and they generally don’t bear the full burden of paying for it (supply). That means the intersection of demand and supply is typically very high.

Yet, aspects of medical spending surprised me.

Source: Bureau of Economic Analysis

How do recessions affect real spending? They suppress it, but not until long after they’re over, making the medical sector a relatively safe haven during an economic storm. After the 1990 and 2001 recessions, medical spending didn’t start to decline until a year or more after the recessions ended.

The first surprise was how long the declines lasted. In both cases, spending dropped for two years. The recoveries were surprising, too. In the 1990s, spending rose sharply, surpassing the previous peak, which was reached in 1992. More recently, spending stayed largely steady from 2003-08. And it’s never approached even half the growth rate it had during the previous expansion.

The second surprise was nominal spending. During the expansion of 1993-2001, actual spending rose, even though prices declined. In the expansion of 2003-08, actual spending has steadily declined, despite higher prices, which should boost actual spending. That’s unusual, but it’s a typical recession pattern. Still, 6% nominal growth isn’t bad. It just isn’t great.

Personal spending on doctors and hospitals as expressed in terms of year-over-year growth rates:

Source: Bureau of Economic Analysis

Some parts of medical spending are more sensitive to economic conditions and business cycles. Spending for doctor visits declines sooner and more significantly, because health insurance is usually tied to employment. With unemployment already up more than 1% in this recession, 1.4 million households — or roughly 3.6 million people — have lost their health care in the last year. And with wages down almost 4% for those who still have jobs, co-pays can also discourage regular doctors visits.

Population year-over-year growth rates:

Source: Bureau of Economic Analysis and Census Bureau

The lack of growth in medical spending during 2003-2008 has nothing to do with prices. In both expansion periods, medical prices were nearly identical: an average of 3.0% vs. 3.4%. But as Chart 3 shows, the growth rate (and number) of very old people surged between 2004-07. Those over the age of 85 consume medical care at exponentially higher rates than the rest of the population, so their numbers are moving the needle. In 1990, they were only 1% of the population; now, they account for 1.9%.

The six-year slowdown in total (nominal) medical spending in the second chart is unsettling. I’m still bullish on medicine, but less so than before. A Democratic administration might spend more on Medicare/Medicaid, so this could change. 

In our weekly “Ask the Economist” feature, our resident Economist, Mike Donnelly, will be tackling your questions about the economy. If you’ve got a question — and no topic is too big or small — you’d like him to field, e-mail us at economist@pbp.com or leave your queries in the comments section.

Tags: Growth rates, Health insurance, Spending