The U.S. Healthcare Bubble

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By Jesse Colombo              

What is larger than the UK’s entire economy, soaring in price, wildly profitable, the leading cause of personal bankruptcy, bankrupting the United States and a massive economic bubble that nobody has heard of yet? Healthcare in America. Though everyone is aware of the Healthcare Bubble Imageperpetually rising cost of healthcare, virtually nobody has connected the dots and realized that healthcare has become the ultimate bubble that will put the housing bubble to shame. While the healthcare industry fools us into believing that skyrocketing healthcare costs are our own fault and hospital scrub-wearing mini-Madoffs pocket millions by cheating their patients, a modern-day gold rush is on as young Americans clamor for healthcare careers in the same way that young adults were jockeying for technology careers at the peak of the Dot-com bubble in 1999.

Be prepared to hear much more about the U.S. healthcare bubble in the future as healthcare becomes further out of reach for even more Americans and the healthcare industry experiences a spectacular meltdown when the bubble inevitably pops.

Introducing the U.S. Healthcare Bubble

The cost of healthcare, like higher education, has surged in recent years, far outpacing wage growth and the overall rate of inflation:

Healthcare Bubble Chart

Health insurance costs have soared by 9% in 2011 alone [1] and are expected to increase by 5.4% in 2012 [2], after rising three times faster than wages in the past decade [3]. During this time, struggling small businesses were slammed with a 180% increase in health insurance premiums [4]. Individual premium rate hikes by health insurance companies have become incredibly audacious, such as Anthem Blue Cross of California’s 68% increase in 2009 and 39% in 2010 [5], even though the U.S. was experiencing its worst economic crisis since the Great Depression.

As long-term care insurance costs rise at a rate of up to 17% in 2012 [6] and brand name drug prices rise even faster than overall medical inflation [7], the doubling of hearing aid prices since the late-1990s has some experts asking if there is a hearing aid price bubble! [8] Healthcare spending as a share of the U.S. economy reached an all-time high of 18.2 percent in 2011 [9], up threefold since 1960 [10]. The unfortunate fact is that Americans spend twice as much on healthcare as people in other developed countries, but receive lower quality care and less efficiency [11].

How the Healthcare Bubble is Destroying America

With the unrealistically high and ever-climbing cost of healthcare, it isn’t any surprise that 52 million Americans now lack health insurance, an alarming 40% increase since 2001 [12]. Among wealthier countries, Americans are the most likely to skip medical medical treatment due to costs, with 51% of adults under-65 with health problems going without care because of high costs [13]. Due to the poor economy, doctor visits fell 8% in 2011 [14] and many Americans are simply not visiting dentists as dental care is increasingly considered to be a luxury [15]. Exorbitant healthcare costs are a true society-wide problem, with 41% of working-age adults [16] having medical debt or medical bill problems and causing the majority of bankruptcies (62% of all bankruptcies!) [17], even among Medicare-collecting senior citizens [18]. Healthcare Bubble - BankruptcyScarily, nearly 80% of medical bankruptcies happen to people who have health insurance [19]. A simple case of bad luck can even saddle you with millions of dollars in medical debt! The U.S. healthcare system is on track to literally bankrupting this country within a few years [20], while unusually high healthcare costs put American businesses at an extreme competitive disadvantage, adding $1,500-$2,000 to the sticker price for GM automobiles, for example [21]. According to MIT economist Jonathan Gruber, “We have to get control of health care and Medicare costs or go the way of the Roman Empire” [22]. While some degree of healthcare inflation is expected and possibly justified, there is a problem at work that goes far beyond merely elevated inflation – the U.S. healthcare system is experiencing an epidemic of institutionalized profiteering and has devolved into a full-blown economic bubble.

Lucrative Scams Are at the Root of the Healthcare Bubble

Why is U.S. healthcare so expensive and rising so quickly in cost? Unsurprisingly, the U.S. healthcare industry casts the blame on everybody but themselves – America’s elderly population, obese people, people who supposedly smoke and drink too much and out-of-control malpractice lawsuits. These sound like good theories, but all of these typical healthcare industry excuses are patently false. The reality is that Americans smoke and drink far less than most Japanese and Europeans and have the lowest percentage of elderly people (as compared to Japan, France, Germany, UK, Spain, Italy and Canada – all countries with much lower healthcare costs than the U.S.). While obesity is clearly a problem in the U.S., costs associated with it amount to less than $25 billion per year in extra spending, a mere drop in the healthcare spending bucket. Even medical malpractice, a favorite healthcare industry excuse for soaring costs, only accounts for 2% of overall healthcare spending. (please read the excellent infographic, “Why America’s Healthcare Sucks” to learn more about these excuses) The U.S. healthcare industry has carefully crafted the aforementioned excuses to divert attention away from their superbly lucrative racket.

Healthcare Bubble - Cat ScanThe U.S. healthcare industry’s racket manifests itself in numerous ways, one of them occurring in the form of highly-profitable intentional inefficiencies. Administrative overhead accounts for 21% of excess healthcare spending (mostly due to the complex insurance system) [23], double the administrative costs of the next most expensive country and 4 times more than Finland [24]. The U.S. spends a mind-blowing $1 trillion per year on unnecessary healthcare, with corporations profiting heavily from the waste [25]. Primary care doctors even admit to giving their patients unnecessary care [26]. With unnecessary medical tests ordered by doctors costing patients at least $6.8 billion per year, one study shows that doctors who own multimillion dollar MRI and CT scanners are four times as likely to order a scan as a doctor who doesn’t [27].

How Doctors Are Causing the Healthcare Bubble

Another tentacle of the U.S. healthcare cost racket is one that people have long suspected but has recently been confirmed – American doctors are extremely overpaid, plain and simple. Despite U.S. healthcare costing twice as much and being of much lower quality and efficiency compared to other countries, American doctors are paid around five times more than their average patient, a figure that is a shocking three times higher than in most other countries [28]. A recent study from Columbia University shows that American doctors’ exorbitant pay is one of the primary factors in the abnormally high cost of American healthcare [29]. Despite already being overpaid, doctors are demanding a raise from Medicare! [30]

How Insurance Companies Are Causing the Healthcare Bubble

U.S. health insurance companies are certainly no slouches when it comes to extracting their pound of flesh from their reluctant customers. Despite the soul-crushing near-Depression of the past several years, health insurance companies are turning record profits thanks to their brazen rate Healthcare Bubble - Health Insurancehikes and customers who put off care due to cost [31]. While even doctors are protesting HMO profits at taxpayers’ expense [32], health insurers are fighting hard to keep details of their steep rate hikes secret from government scrutiny [33]. A recent survey shows that healthcare executives are the highest earning CEOs [34], with the top executives at the nation’s five largest for-profit health insurance companies banking nearly $200 million in 2009 [35]. In 2009 alone, UnitedHealth CEO Stephen Hemsley took home a staggering $102 million! [36] Health insurance companies are eager to blame everybody else when they hike their rates, when their soaring executive pay is one of the primary culprits in the rising cost of healthcare [37].

How Hospitals Are Causing the Healthcare Bubble

Not to be left out of the obscenely lucrative U.S. healthcare racket, hospital profits have skyrocketed in recent years as they use their “local monopoly power to overcharge insurers and patients.” [38] There certainly hasn’t been a recession in state hospital CEO pay as their multimillion dollar salaries have so-far been immune to state budget cuts [39]. Excessive non-profit CEO salaries are creating an outrage, while the heads of the nation’s largest children’s hospitals siphon robber baron-like payouts. It’s no surprise that the hospital business is so profitable when 90 percent of hospital bills audited have gross overcharges, many of them deliberate [40]. Hospitals have such a lack of incentive to provide patients with cost-effective service that when 17 different hospitals were asked to provide an estimated cost for a common knee replacement surgery, not even one could provide a solid answer [41]. Another major reason why American healthcare is so unusually expensive is Healthcare Bubble - Hospital Construction Boombecause twice as much of our healthcare occurs in the form of very pricey (but lucrative for hospitals) hospital outpatient care compared to other countries [42].

In order to further tap into the seemingly boundless money tree that is the expanding U.S. healthcare bubble, hospital construction has been booming [43, 44, 45] as concern arises that children’s hospitals are overspending on extravagant construction projects [46]. A recent study showed that the current medical building boom is increasing Americans’ health care costs and has been fueled by the borrowing of $144 billion through public bond issues (from 2008 to Nov 2011) [47]. An excellent animated short film entertainingly summarizes the medical building boom and how it will result in a debt crisis. In San-Francisco, hospitals have recently become the new No. 1 industry and employ nearly one-fifth of the city’s workforce [48]. The hospital building boom will only create excess capacity according to a Pittsburgh Tribune-Review report: “Though the number of hospital beds in the United States has dropped by 250,000 since 1990, the occupancy rate remains steady at nearly 70 percent, showing a general lack of need for more bed space.” The hospital sector is overbuilding and overexpanding, behavior that is typical during bubbles.

How the U.S. Government is Causing the Healthcare Bubble

Health care Bubble Chart - Rising Government Health care Expenditures
Chart Source:

The steadily increased public funding of healthcare through services such as Medicare and Medicaid is another major reason for soaring healthcare costs, as the public sector has far less incentive to minimize costs on purchased healthcare services compared to the private sector and individuals (“Nobody spends somebody else’s money as wisely as he spends his own” – Milton Friedman). Out-of-pocket payments for medical expenses comprised 46% of total health spending in 1960, while plunging to a record low of only 11.9% in 2008. Conversely, public funding paid for 24.5% of health spending in 1960, but a record 47.3% of spending in 2008 [49]. Government’s dramatically increased presence as a less cost-sensitive purchaser of healthcare services has helped to greatly inflate the healthcare bubble as the healthcare industry is able to steadily hike prices knowing that the U.S. government will always be a buyer. If the existing and conventional presence of government in U.S. healthcare has already caused costs to soar, entirely new levels of government involvement in the form of President Obama’s 2,000-page Affordable Care Act (ObamaCare) are likely to make the situation even worse.

There is Even a Healthcare Employment Bubble

Now that news of oversize healthcare profits and salaries have entered the public psyche, a healthcare jobs gold-rush is officially on [50]. Thanks to the healthcare bubble’s continued expansion during the Great Recession, healthcare has been one of the few industries to add jobs (nearly 1 million jobs!) [51], Healthcare Bubble - Jobsgreatly softening the recession’s blow (until the healthcare bubble pops, that is). As the much of rest of the economy continues to downsize, healthcare’s share of employment just hit an all-time high [52] as signs of a healthcare employment bubble have become apparent [53]. The recently soaring popularity of nursing careers now means that new nurses are oversupplying the market, a sharp reversal from the supposed nursing shortage of several years ago. Even health information technology is likely in a bubble [54] as health IT is now officially the “hottest” job for college graduates [55]. While the US Bureau of Labor Statistics forecasts that the healthcare industry will add 4 million jobs through 2018 [56], with half of the 20 fastest growing occupations being in healthcare, this assumption is simply unrealistic and assumes that healthcare costs can keep rising unabated without a popping of the massive healthcare bubble as healthcare becomes unaffordable for more Americans every year.

Why Mainstream Thinking About the Healthcare Bubble is Wrong

The mainstream thinking about the future of U.S. healthcare assumes that the Baby Boomer generation will hit age 65 en masse and spark a massive boom in the demand for healthcare services and employment, especially for long-term-care such as nursing homes and assisted-living. These projections are little more than hype, however, as they don’t factor in the astronomical cost of these services ($87,235/yr for nursing homes, $41,724/yr for assisted living [57]) and the unfortunate fact that very few Baby Boomers have the kind of wealth needed to pay for such comprehensive medical care in this day and age. Sadly, Baby Boomers are on the verge of an epic retirement and Healthcare Bubble - Nursing Homespersonal financial crisis [58, 59, 60] and medical care is becoming rapidly out of reach for all but affluent Americans, especially as the heavily indebted U.S. Government will be forced to relentlessly cut back on entitlement programs.

The U.S. healthcare system is a credit-fueled Ponzi scheme on an unsustainable trajectory and can’t keep going on for much longer. With healthcare already unaffordable for large and growing portions of the U.S. population, it isn’t realistic to assume that the U.S. healthcare industry can keep up such high rates of hiring, luxurious compensation and ambitious construction projects, while continuing to hike customers’ fees at rapid rates. Junk mainstream analyses of the U.S. healthcare situation tend to exhibit the same overly simplistic linear extrapolation that was so common in analyses of the U.S. housing market during the housing bubble’s heyday as analysts assumed prices could keep rising forever because “they’re not making any more land.” With chronic near-10% unemployment and a struggling economy, employers will continue to shift the burden of rising health insurance costs to employees, with many employers cutting healthcare benefits altogether. Healthcare in the U.S. will be increasingly paid for out-of-pocket, forcing healthcare consumers to become highly aware of and sensitive to healthcare service costs, a radical shift in behavior from a time when health insurance would pay for medical care without much regard to cost.

The U.S. Healthcare Bubble Will Pop & Cause a Major Crisis

Like any other industry, the healthcare industry is tied to the health of the overall economy and when their services become even more unaffordable for vast portions of the population, such as in the next recession, the industry will experience some form of a collapse. During the U.S. housing bubble, when housing prices hit $500,000 in neighborhoods with $40,000/yr average incomes, the bubble popped and housing prices dropped to more affordable and realistic levels; the same will happen to the US healthcare industry as it’s forced Healthcare Bubble - Hospital Crisisback into line with the rest of the economy. The popping of the healthcare bubble will cause all levels of the U.S. healthcare industry to downsize in the form of layoffs, salary cuts, hospital and medical office closures. It’s very possible that the healthcare bubble’s equivalents of Bernard Madoff and Angelo Mozilo will be brought to light as well. As with housing, healthcare will always be needed, but the US healthcare industry’s current levels of largesse and outrageously parasitic profits will be excised like the malignant cancer that it is. The popping of a bubble larger than the UK’s entire economy has astounding implications and will reverberate throughout the entire global economy.

(Note: While the U.S. Healthcare Bubble isn’t an asset bubble like stock or real estate bubbles, it is a bubble-like phenomenon with very similar risks and implications as asset bubbles. The crucial components of all bubbles are present in the US Healthcare Bubble: a highly convincing and partially-legitimate boom story, soaring prices and profits, decreasing affordability, a highly overpriced/overvalued product, blatant profiteering, a “gold rush” mentality, extrapolation of the boom’s growth far into the future and debt-fueled overinvestment/overexpansion. The end result will be similar to what asset bubbles experience when prices become overvalued and unaffordable: prices will be forced down to realistic levels again and large-scale industry downsizing will occur, resulting in massive capital losses.)

Links to U.S. Healthcare Bubble-Related Articles

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