Subpage Banner Image

Will the Healthcare Bubble Burst?

Will the Healthcare Bubble Burst?

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.