95% of profits at major healthcare companies go to shareholders, not services

NEW HAVEN, Conn. — As Americans grapple with rising healthcare costs, a revealing new study shows where much of that money is going — and it’s not necessarily toward better patient care or medical research. According to research just published in JAMA Internal Medicine, major healthcare companies listed on the S&P 500 have been directing massive amounts of their profits to shareholders, with these payouts more than tripling over the past two decades to reach $170.2 billion in 2022 alone.

To understand the scale of this financial shift, consider that healthcare represents 17% of America’s entire gross domestic product, with total U.S. healthcare spending reaching $5 trillion in 2023. Of this enormous sum, approximately 70% comes from taxpayer dollars through various channels, including tax breaks for employer-based health insurance and direct government funding via Medicare and Medicaid.

Behind the staggering medical bills and insurance premiums that many Americans face lies a financial system that includes substantial payouts to investors. “When shareholders expect greater payouts year in and year out, that has an impact on affordability,” notes lead author Dr. Victor Roy, in a statement. “One of the ways that [health care companies] make money is to keep prices high — or raise them.”

Between 2001 and 2022, 92 major healthcare companies distributed an astronomical $2.60 trillion to shareholders through two main mechanisms: direct dividend payments and share buybacks.

Dividends, of course, are profit-sharing checks sent directly to investors who own shares in these companies. Share buybacks, on the other hand, are more like a company reducing the number of slices in a pie; when a company buys back its own stock, each remaining slice becomes worth more, benefiting the shareholders who still hold shares. Both strategies effectively channel money to investors rather than reinvesting it in healthcare services or innovation.

Pharmaceutical companies led this trend, accounting for $1.2 trillion – nearly half of all payouts during the study period. Biotechnology firms followed with $394.4 billion in payouts, while managed healthcare companies (including insurance providers) distributed $376.7 billion. Medical equipment and supply manufacturers rounded out the top tier with $341.9 billion in shareholder payouts.

Perhaps most striking is how these payouts relate to company profits. Across the healthcare sector, companies allocated 95% of their net income to shareholder payouts. Some subsectors even distributed more money to shareholders than they earned in profits. Healthcare facilities, healthcare distributors, and pharmaceutical companies all had payout ratios exceeding 100% of their net income, meaning they spent more on shareholders than they actually earned, using either saved cash reserves or borrowed money to make up the difference.

This aggressive focus on shareholder returns emerges against a backdrop of increasing healthcare costs for American families. The situation becomes even more noteworthy when considering that approximately 70% of national healthcare spending comes from taxpayer dollars through government programs like Medicare, Medicaid, and public employee health benefits. In other words, American taxpayers are indirectly providing much of the money that these companies are distributing to shareholders.

The scale of these shareholder distributions has grown dramatically over time. In 2001, healthcare companies in the S&P 500 paid out $54 billion to shareholders. By 2022, that figure had soared to $170.2 billion – a 315% increase. Even more remarkable is the concentration of these payouts: just 19 companies, representing about one-fifth of the firms studied, accounted for more than 80% of all distributions to shareholders.

These financial patterns highlight a key frustration for patients and their families about America’s healthcare priorities. While investors and shareholders certainly play an important role — their investments help fund new drug development, medical innovations, and hospital expansions — the sheer magnitude of these payouts suggests that a significant portion of America’s healthcare spending may be enriching investors rather than improving patient care or making treatments more affordable.

The concentration of these massive payouts among just a handful of companies raises additional concerns. In the same way that a lack of competition in any market can lead to higher prices, having healthcare resources concentrated among a small number of large corporations might contribute to rising costs. When these companies prioritize shareholder returns over reinvestment in services or research, it could impact everything from drug prices to insurance premiums.

“Some might say, these are for-profit companies, so their goal is to make a profit,” says study senior author Dr. Cary Gross, a professor of medicine at Yale. “[But] healthcare is a right, not a privilege. You can choose when to buy a car. You can’t choose to have a heart attack. As costs of care keep rising, it’s crucial to ask where our health dollars are going.”