Whether or not I’ve convinced you of the existence of a healthcare
bubble, I’m going to use my last segment along with history and
my own speculation about consequences, triggers, preparedness and responses.
As I indicated earlier, the financial crisis of 2007 and the related housing
bubble burst had a great impact on me. This illuminated the tremendous
interconnection and complexity that exists among all markets. Some have
said it was the worst financial crisis since the Great Depression (I had
grandparents that shared stories about those times that I still remember).
I’m not sure the lesson of 2007 will have the lasting impact the
Depression had on those who experienced it firsthand.
Something very ironic occurred after I started working on this series of
blogs. Elisabeth Rosenthal wrote an article, “The $2.7 Trillion
Medical Bill,” that was published in the June 1, 2013 New York Times.
It’s a great article and I would suggest reading it. But this was
only the beginning of the fun. Uwe E. Reinhardt, Princeton economics professor,
responded with a blog posting, “The Culprit Behind High U.S. Health
Care Prices.” This then started a firestorm of responses including
one from Leah Binder, CEO of The Leapfrog Group. Then Jeff Goldsmith,
President of Health Futures, Inc. weighed in on the topic along with many
others. This just reinforced for me the volatile nature of healthcare
these days and the many varied opinions experts have on the topic. Therefore,
I’m sure some will refute the whole notion of a healthcare bubble
and dismiss my concern and believe at $2.7 trillion the government won’t
allow it to fail.
My perspective is different. It’s different because of the harsh
reality of capitalism. Healthcare has been growing at unprecedented rates
compared to other industries (the only thing close is college tuition).
Healthcare is no longer a back burner issue for American businesses that
are competing globally. As previously mentioned, we have seen what the
weight of healthcare costs did to GM. We’re seeing companies develop
wellness programs, higher deductible insurance plans, more self-insurance,
healthcare reform-related initiatives, competitive bidding, Health Reimbursement
Accounts, etc. These are like using a fly swatter to go elephant hunting.
The California Public Employees’ Retirement System (CalPERS) has
been aggressively implementing new programs and processes to reduce healthcare
costs. In an LA Times article, CalPERS reported savings of $4.7 million
over two years by establishing flat rate pricing for knee and hip replacements.
While this sounds impressive keep in mind, however, CalPERS spends $7
billion on healthcare annually and is the third largest purchaser of healthcare
in the US.
As well documented, the inherent assumption built into the real estate
bubble was the belief the price of real estate would continue to increase.
When this no longer was true, the “pop” was felt around the
world. I can’t predict what pin will pop the healthcare bubble or
the possible disruption somewhere else that will migrate along the interconnected,
economic paths to cause the pop. But, I do have some scenarios to offer-
- Change in taxation of healthcare benefits
- Leading organization(s) radically changing their health benefit structure
- Competitive foreign advantage attributed to healthcare costs becomes insurmountable
- Increased transparency of healthcare costs
- Disruptive entrant to healthcare delivery system
In summary, very few predicted the extent of damage the financial crisis
caused. Similarly, I don’t claim to have the crystal ball to predict
the impact or timing of the healthcare bubble bursting. The order of magnitude
of $2.7 trillion in healthcare spending shrinking to $2 trillion or $1.4
trillion will be monumental.
While impossible to predict when and what the consequences might be, being
prepared is very possible. What makes it possible is scenario planning
and systems thinking vs. traditional strategic planning. Because of the
massive amounts of uncertainty combined with the complexity of the many
levels of interconnectedness between government and private enterprise,
waiting to react to whatever happens may prove fatal for the tardy healthcare
organizations. Thinking through various scenarios and developing responses
and plans for these situations, will help to understand the potential
for transformational change and will significantly improve the chances
of an organization making it through whatever challenges the actual sea
change brings about.
I recently ran across some random facts about the airline industry. Living
in one of the first cities Southwest Airlines flew to outside the borders
of Texas and for the last 12 plus years living in Southwest’s hometown,
I have become more of a student of the airline industry. According to
an industry report, the airline industry is about a $600 billion industry
these days. From 2000 to 2010, 30% of the US carriers filed for chapter
11 protections and 30% of airline shareholders lost their investment.
Just another frame of reference for what industry change can look like.
Scenario planning can be uncomfortable for those who have never done it
before. We at Royer-Maddox-Herron Advisors are experienced in these activities
and would love an opportunity to discuss how we might help your organization
be prepared for the bursting of the healthcare bubble.