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.
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?