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Part III- Will the Healthcare Bubble Burst?

Part III- Will the Healthcare Bubble Burst?

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
  • Recession
  • 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.