Today’s blog is the beginning of a three part series generated by
several events over the course of the past few months. Let me disclose
I’m not an economist nor did I stay at a Holiday Inn Express last
night. I am, however, an avid student of history.
In this first segment, I want to point out the similarities among some
very large industries, the real estate industry and the healthcare industry.
(I recognize there are people who do not like healthcare being referred
to as an industry but since it represents $2.7 trillion in goods and services
being bought and sold I choose to call it such.) I’m using the real
estate industry as an example of the most recent example of how crisis
can strike seemingly out of nowhere. I’m using colleges/universities
as another comparison because they may be closer to a sea change event
than healthcare. I’ve included references to the Postal Service
because it’s almost a 240 year old institution that is not tax-payer
supported but has been able to borrow from the Treasury to cover shortfalls
(they have reached their $15 billion borrowing limit). This business has
been adversely impacted with recent technology advancements including
fax machines, e-mail, Facebook, LinkedIn, Federal Express, etc. A Congressional
solution is imminent, proving in a capitalistic business environment no
business sector is immune to changes brought about by economics.
Here are the events that set my hair on fire. First, Mark Cuban blogged
about the value of a college education (“Will Your College Go Out
of Business Before You Graduate”). This caught my attention because
there are interesting similarities between college/university and healthcare
economics. About this same time, the whole cost of student loans became
a topic of public discussion (As of this writing, due to inaction by Congress
the interest rate on student loans has now doubled). Secondly, I received
my health insurance premium for next year, a 17% increase. For the record,
I used no healthcare services in the past 12 months. Third, my neighbor
recently had rotator cuff surgery (twice but that’s a story for
another day) and was prescribed an at home rehab chair. From my non-physician
perspective, it seemed to be helping in her recovery process. Her insurance
company, however, declined to cover the cost of the device so the medical
device company came and took it away. No discussion about whether she
wanted to keep the chair and pay for it herself. Fourth, there have been
recent political discussions surrounding the replacement of Fannie Mae
and Freddie Mac (the government-sponsored home lending organizations that
have been in conservatorship since the financial crisis) with a new and
improved governmentally sponsored organization. Finally, there is the
proposed Postal Reform Act of 2013 to put the Postal Service on stable
financial ground (In case you’re interested, part of the financial
challenge the Postal Service faces is the requirement to fund retiree
health benefits required by a law passed in 2006).
So how are all these dots connected? Infrequently, a few healthcare pundits
have written and spoken about a healthcare bubble. Frankly, I never gave
it much thought until now. I started thinking about all of the above events
and reflected on the ominous parallels to the 2007 financial crisis. Is
healthcare too big to fail? If it is, how big will the bailout be and
who will be rescued and who will be the casualties? If not, how much damage
will be caused by a bubble burst? In my former job, I had a really, really
good seat to see the damage caused by the financial crisis. Upon the onset
of the crisis, I was very naïve thinking a tax-exempt organization
with a strong bond rating and outstanding tax –exempt bonds couldn’t
possibly be impacted by what was going on worlds away in real estate and
Wall Street. Boy was I mistaken. In the aftermath of the damage, the thing
that struck me most was that there weren’t any “skid”
marks. No brakes had been applied. The point of impact was reached at
full speed. Even in hindsight, the warning signals were disputed as to
whether or not they were truly warning signals. Only in retrospect did
I gain an appreciation of how interconnected everything really is in today’s
complex world.
So with this background, what is the critical factor causing my concern?
I believe there is too much money in healthcare. The system can’t
absorb it any longer and the supply is preventing the normal types of
market improvement from taking place. For comparison purposes, healthcare
at 17% of US GDP exceeds the total GDP of every country except China,
Japan, Germany and France.
Having worked in healthcare for over 30 years, it’s become painfully
obvious I had become conditioned to the many factors I now see from being
on the outside looking in. Circumstances in other industries have helped
me see the trouble brewing in healthcare. Colleges /universities, the
Postal Service, real estate all have something very much in common with
healthcare. The customer is very dependent on “external” sources
as a funding source. Let me explain. Each of these businesses/services/industries
is highly dependent on the “customer” being able to access
an “alternative” source of funding/support to be able to pay
for the product/service being provided. So what you say? When these funding
“systems” become out of whack with the general prevailing
economic conditions and are left unchecked, an operating condition begins
that lacks market discipline. As a result, the price of services and /or
goods being provided becomes significantly higher or artificially lower
depending on the business. As we saw during the financial crisis, the
price of real estate artificially grew because of the availability of
cheap financing and when the financing collapsed so did the real estate
markets. There are a trillion dollars in student loans outstanding. This
has contributed to a ten year inflation rate in education of 74%. Imagine
the impact if the student loan program undergoes a substantial change?
What if students decide they don’t want to enter the business world
with $100-200K in debt? Or what if they can’t get jobs to repay the debt?
A complicating factor in these situations is the social good that’s
being served. Home ownership is part of the American dream. Therefore,
having government sponsored organizations support people achieving that
dream was deemed a worthy cause. The same can be said for a college education.
Therefore, facilitating that goal is also viewed as important. For very
obvious reasons the Postal Service also fulfills a very important social
function and thus is substantially subsidized by the government. We are
beginning to see, however, the toxic side effects of Government supported
funding gone unguided.
Next I will cover what’s feeding the healthcare bubble.