How High Can Healthcare Go Before it Blows Up?

The cost of healthcare in the US is high by any measure, but the more ominous reality is that it continues to get even more expensive. Most assume that rising healthcare costs are a natural phenomenon, or are concerned only that the growing costs of healthcare are covered by insurance or by government. But that assumption will likely prove to be completely wrong. Sooner or later a day of reckoning will hit what is generally regarded as the most sacrosanct sector of the US economy, and when it does things will get ugly. How high can healthcare go before it blows up? I suspect we’re going to find out very soon.

Healthcare’s Share of GDP is Eating Up the Economy

Healthcare research group Altarum Institute recently reported that healthcare now consumes 18.2% of US gross domestic product (GDP) in 2016, costing a total of $3.36 Trillion. That means that nearly one out of every five dollars generated by the entire US economy is being soaked up by healthcare. That’s well up from 13.3% recorded in 2000, and well above the 9% that’s being experienced in other industrialized countries.

How High Can Healthcare Go Before it Blows Up?
How High Can Healthcare Go Before it Blows Up?

Meanwhile, according to the Kaiser Family Foundation only 9% of the entire US workforce is employed in healthcare. This means that healthcare is costing the economy twice as much as the number of jobs it’s generating, 18+% vs. 9%.

If the situation were merely static, we might achieve some form of equilibrium. But healthcare’s share of the total economy is growing rapidly, due to the fact that the industry is growing much faster than the economy at large. Though few put such a label on the industry, it is clearly in a bubble.

The Growing Out-of-Pocket Burden on the Middle Class

People often fail to appreciate the implications of macroeconomic developments. This is especially true when costs start running into the trillions of dollars. No one can imagine how much money that really is, so we quietly accept on faith that it is a number that can be comfortably absorbed by the “massive” US economy, and that all will be well.

If only it were true.

In an attempt to minimize healthcare costs, insurance companies are both increasing premiums and out-of-pocket costs paid by consumers. Employers, overwhelmed at the rising cost of paying subsidies for employee’s health insurance, are reducing their contributions. The end result is that consumers – whether on employer plans or private plans – are paying more for healthcare across the board.

The Kaiser Family Foundation recently reported the effects of higher out-of-pocket healthcare costs for consumers, and they run across the board:

“Between 2004 and 2014 covered workers’ average out-of-pocket costs grew 77 percent, outpacing health plans’ average payment per enrollee, which rose by 58 percent. Overall, workers’ out-of-pocket costs rose from an average of $422 in 2004 to $747 in 2014, while average payments by health plans rose from $2,748 to $4,354. As a result, the average generosity of health plans declined slightly, covering 85.3 percent of covered medical expenses in 2014, compared with 86.7 percent in 2004.”

One of the big culprits is increasing reliance on prescription medications. Not only are tens of millions of people on prescriptions, but many millions are on multiple medications. Both the use and the cost of those medications are rising exponentially as forced demand increases. But as an indication that the top of the healthcare bubble may be near, it’s becoming increasingly apparent that the miracle drugs may be no miracle as increases in US lifespans are slowing. Increasingly, we’re not even getting what we’re paying so steep a price for.

Obamacare Only Moved the Healthcare Bubble into Higher Gear

There was considerable optimism in many quarters a few years ago as the Affordable Care Act, better known as Obamacare, was rolled out. But that optimism is fading fast. Yes, there are a few less people without health insurance, but the cost of healthcare has only accelerated since the Act began. From a national economic standpoint, Obamacare has been a complete disaster. The problem is that Obamacare has been focused almost entirely on enabling funding, while virtually abandoning any serious effort at cost containment.

It’s likely the majority of people who did get coverage under the program are people who were put on the Medicaid program. This is certainly good from a standpoint of getting coverage for people who were previously uncovered. But the problem is in the cost. Medicaid is a federal program, being funded out of tax dollars. Not only do recipients not have pay premiums, but they also pay close to zero in deductibles and co-payments. This means that the entire cost of the plan is being borne by the system – which is you and me. There’s no magical wellspring of money paying for all of these costs.

Nationally more than 72 million people are on Medicaid, which means nearly one-quarter of the population. The share is even higher in large states like California and New York, where about one-third of the population are in the plan. None of these people are paying premiums into the system for that coverage.

Common Industry, Public and Political Assumptions about the Healthcare Bubble

Most people assume that the current healthcare spiral will continue to grow for the foreseeable future. Even among healthcare industry leaders and politicians, it’s generally assumed that the healthcare juggernaut is unstoppable.

Part of this is due to the fact that increased healthcare spending is wildly popular among the public. And in fact, it is. That is, increased spending is immensely popular. What isn’t popular is increased costs, as in the part of healthcare that’s paid for directly by us.

Everyone wants more healthcare coverage, as long as they don’t have to pay for it. And that ultimately is likely to prove to be the undoing of the entire system.

Healthcare is not some sort of inert cosmic fixture, like air, water, and sunlight. It’s a man-made construct, and one that since World War II has been able to grow without limit. But no matter what the popular perception of health care is, there is nothing created by man that is eternal.

Even the much touted “single payer” system is unlikely to remedy this runaway train. It might even be better understood as the last gasp of a dying system to save itself. The Europeans are struggling to maintain single payer healthcare at 9% of their economies; we should not expect similar success with our healthcare system consuming 18% – or more – of our economy. To paraphrase a well-known former president, it’s the cost, stupid!

How the Healthcare Bubble is Almost Sure to End

Given that no political action is likely to be taken that will seriously reduce or reverse the healthcare bubble, we should assume that the spiral will continue until the bubble finally bursts. And it will.

I believe that the 18.2% share of the US economy currently being claimed by healthcare is part of the reason why the economic expansion since the Great Recession has been so anemic. Healthcare functions as something of a fixed cost, like rent and taxes. That means that it affects every business and every household in the country. And no matter how highly regarded the benefits may be, the cost of said benefits represent a serious economic drain on the economy, on businesses, and on individuals.

Sooner or later, some sort of perfect storm is going to develop that will bring the entire system crashing down. There’s no way to know if that will happen with healthcare consuming 18.2% of the economy, or if it will be delayed until we reach 20%, 25%, or even 30%.

The reality is that no matter how valuable the public considers healthcare to be, a top will be reached in regard to how much society can afford to pay for it. When that day comes, look for the towers of the industry to wobble and collapse.

The Likely Triggers of the Healthcare Bust

So far I’ve been outlining the theory behind a healthcare collapse. But since most people can’t fully embrace theory, let’s consider some specific triggers. Here are three that I can envision; there are certainly more.

The middle class will be tapped out. This is already happening, but it’s moving closer to the point of saturation, where the money will no longer exist on a big picture level. The likely outcome will be unpaid co-payments and deductibles that will go into collection, ultimately turning into bad debt, just as subprime mortgages did a few years ago. The losses to the healthcare industry will be in the hundreds of billions of dollars.

An insurance funding crisis. The insurance industry will continue to tool along as long as money is flowing into their coffers in the form of premiums. Obamacare mandates are temporarily enhancing that cash flow. But as more employers terminate their plans (due to high premiums) and more individuals opt out of the healthcare system due to affordability issues, the insurance companies will begin pulling back on reimbursements.

Insurance is the life’s blood of healthcare, and when that rug starts to pull back, the effects will be swift and all-encompassing. With the US government already deep in debt (even in a “recovery”) the money simply won’t be there to expand Medicare or Medicaid. That’s under the assumption that the industry will even welcome such a development, since both programs force providers to charge lower fees. But when insurance funding begins to dry up in a major way, the healthcare gravy train will come to an end. A cash market will likely then eventually force lower costs.

A general economic crisis. This will likely be the trigger that trips the first two. We can expect this to happen as soon as the next recession – which is why I believe that a bursting of the healthcare bubble is imminent. As the economy weakens, companies will terminate employees and health insurance plans. Unemployed and under-employed workers will be unable to afford coverage, but will likely continue to draw services (ie, emergency rooms will be swamped). We’ll then experience Ross Perot’s “giant sucking sound” across the healthcare universe.

Any one of these events could trigger a full-blown blowout in the healthcare industry. But more likely is that all three will occur at roughly the same time. When they do, we will finally be forced as a society to do what we could never do politically, and that is rebuild the healthcare system from the ground up.

Rest assured that when that comes, the price spiral of healthcare will finally collapse. Should we live in fear of that day? I think not. Throughout human history, we’ve showed a remarkable ability to adjust and adapt to changing circumstances, even those that may have been judged to be catastrophic at the time.

If the current healthcare system collapses – which is increasingly becoming the only possible outcome – it will happen because the entire system is bloated, inefficient, and uneven. It’s likely that we have nowhere to go but up after that happens.

It may not be a pleasant thought, but it may be the only “solution” to the healthcare crisis. After all, we’re not doing much in the meantime to keep that day from coming. For that reason alone, we should expect that the end will not be pretty. But we can dare to hope that what will arise from the ashes of the current system will be better than what we have right now – or at least more affordable. Until that happens we’ll have to muddle through with the broken system we now have. That may include strategies such as relying on part-time jobs with health insurance.

Are you of the opinion that the current bloated healthcare system will continue to grow and to cost more? Or do you agree that some sort of day of reckoning is in the not-too-distant future?

( Photo by _gee_ )

12 Responses to How High Can Healthcare Go Before it Blows Up?

  1. My cynical and conspiracy theory oriented brain definitely believes that Obamacare (isn’t the title Affordable Healthcare Act quite ironic?) was never about making healthcare or insurance less costly, but in actuality it was about driving insurance companies out of business so that the government could take over with single payer government rationed healthcare. When you tell companies they have to cover transgender surgeries, eliminate pre-existing conditions and force men to get birth control coverage you are creating obstacles to profitability, thus they will opt out of the program and potentially get fewer customers.

    Another problem with U.S. healthcare is actually in the people as opposed to the providers. I recall an example regarding my in-laws who would race to the doctor for every bruise or cough. They could do this because due to Medicare and their supplemental insurance, they never saw a bill. If they had to pay something out of pocket, they might skip going for every bruise they had. People have to walk a fine line between going to the doctor when it isn’t necessary and waiting too long so that an illness becomes so entrenched that it is harder to get rid of.

  2. Hi Kathy – I think you’re right on all counts. Obamacare was set up to drive us to a single payer system, which I think will fail miserably for the reason I gave in the article. But I also agree that the healthcare system is being abused by consumers. My mom is in that category. She’s “medically stable”, but runs to the doctor constantly. She also has both Medicare and a supplement and never sees a bill. She’s often remarked that at the senior home where she lives, the ambulance comes and goes regularly. And most of the people in that home are not that old. Regrettably, this arrangement has become common among the elderly, and is seen as an entitlement. Meanwhile people with children avoid the system out of fear of the cost of copays and deductibles. This is an example of how the healthcare system is seriously unbalanced.

    There are a lot of mindsets that go with the US healthcare quagmire, and that’s what makes fixing it impossible. There’s no way to fix a system in which someone won’t find that their “rights” are being denied. What the public really wants is free and unlimited healthcare, and that’s not going to happen.

  3. Your last sentence is the ultimate word on our problem. I have to laugh each time I read about “free” healthcare in a variety of other countries. Then when I ask what their tax rate is, it is something exorbitant like 65% or more. But people don’t understand that just because they don’t see a bill addressed to them, it isn’t free.

  4. I agree except for the part about ‘pre-existing’ conditions. Insurers were turning down cancer tx because a person had had acne treated as a teenager.
    I witnessed my partner’s mom abusing the system. She would go to the doc to get her toe nails cut and because one of her girlfriends had a condition (that she did not have and had no symptoms of) and she also wanted to be looked at for that same condition. I think many people, especially females of the older generation, use docs for social life and to avert loneliness.
    I think the Boomer gen will not be quite so abusive. Not only have we had to deal with higher costs but we have a different slant on health and medical care. I only go to the doc when I have a definite medical problem that can only be helped by professional medical care. I don’t go for minor problems or go repeatedly and I never will.
    People talk about death squads for Grandma. NO! We don’t want that! we simply want Grandma to stop treating the medical system as a social venue and to not be a hypochondriac!

  5. Hi Mary – I agree about people being turned down for pre-existing conditions, that was one of the good points about Obamacare. But as a doctor friend of mine said, “they could have changed a few healthcare laws, without revamping the whole system”. Pre-existing is an example of that, and hopefully we won’t go back to the old way on that ever again.

    But I also agree with the overuse of the system, particularly by the elderly. Though I do know some younger people who milk it as well. And I also agree that there’s a strong use of the system for social life and emotional support. For people who don’t get much attention in life otherwise (what ever the reason), going to the doctor means someone HAS to pay attention to you. I’ve seen people go into the system for reasons they can’t even describe to the staff, which makes me highly suspicious of why they’re there in the first place.

    We’ve got two classes of people in regard to healthcare. The abusers, who have good coverage and go in for any and no reason, and those with standard coverage who are afraid to go to the doctor for fear of getting a massive bill. As an example, my wife went to an outpatient clinic for suspected broken/cracked ribs last month. Turns out the ribs were merely bruised, but we got a bill for $750, which we have to pay because she hasn’t met the plan deductible of $4,000. I’m guessing that happens all the time.

  6. Healthcare is clearly one of the biggest unknowns/risks in every Americans’ retirement planning. My employer recently dropped retiree medical, and I’m planning $1500+ / month in our retirement forecast for private insurance. I suspect it will ultimately collapse, but suspect it will take a long time. Until then, we’all likely face outpaced inflation in healthcare. Build it into your plan!

  7. Hi Fritz – That’s an excellent strategy. Virtually all of the early retirement writers/sites I’ve read have been careful to ignore the health insurance issue. I suspect that in most cases the whole early retirement strategy collapses on health insurance. $1500 is a serious chunk of change to come up with every month out of investment income. I wish that would get discussed more, but it’s an unwelcome fly in the early retirement ointment. It will be tough enough to manage Medicare + a supplement when retirement comes at 65, let alone the price of exchange coverage before 65.

    I think of it this way…Using the safe withdrawal rate of 4%, a $1 million retirement portfolio would generate $40,000 in income. If $18,000 (or even $12,000) of that has to go for health insurance, 45% of your investment income will go just to get coverage. Keeping in mind that there won’t be any pension or Social Security income for early retirees, it’s tough to swallow.

    You’d really need $2 million to retire early, which most people are never going to reach at any time in their lifetimes. If that’s the case, then the drive for early retirement isn’t really about early retirement, it’s about becoming a multi-millionaire – which is not at all the same thing. The millionaires I’ve known and worked with over the years were never about retiring – most NEVER retire, and don’t even think about it. They’re always off chasing the next million, if you know what I mean.

    Do you ever sense that connection, whether intentional or otherwise?

  8. Your math, per usual, is spot on. Unless folks are making some very poor decisions (e.g., going without health insurance), I see no practical way that retirement at any age <55 can be done with less than $2M in assets. As you said, most folks with that kind of $$ aren't interested in retirement. Most, but not all. 😉

  9. You’re unique Fritz, in that you tell the truth about early retirement. Not even close to all of your competition does. I was also thinking that if you do retire early, and you do have a large investment portfolio, there’s no way you can do without health insurance. If nothing else you’d need to have the coverage to protect your assets from being raided for non-payment of a major health bill. One major health event could put the kabbash on your retirement. I don’t know why that doesn’t get more attention.

  10. I tend to agree with your views. I think that if/when they re-write the law they will need to allow insurance companies to cross state lines and eventually I feel like insurance will turn into the phone companies with a few major players competing.

  11. That would be an improvement, I think, but the problem is it won’t be allowed to happen. We have a top-down system where market forces aren’t allowed to evolve, and consumers have no real choice. It seems beyond the ability of the political system to reform itself into a more citizen-friendly body – which would be necessary before there can be any meaningful change in healthcare. I believe it will take a serious, disrupting crisis to make any real change remotely possible. And when it hits, it won’t be a comfortable transition, but a hazardous journey through a gauntlet, to who knows where. That’s what tends to happen when industries and price structures are protected by government.

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