Healthcare Bubble

Dot com bubble. Real estate bubble. Commodities bubble. Healthcare bubble? How can the US healthcare system be a bubble when tens of millions are uninsured and more people fall through the cracks daily? The media, public, and politicians alike have been more concerned with the inadequacies of the system than with its rapid growth. US healthcare spending has grown enormously, exceeding the rate of inflation for decades to become the largest sector of the US economy. The United States now spends over 16% of its GDP on healthcare, almost double the average for developed nations.

Perhaps Americans just demand the best and priciest healthcare, with the most modern technology and treatments. Other insurance prices are on a steep rise, including home, accidental and auto insurance. If Americans paid for healthcare themselves, this would simply represent a rational spending choice. But the federal government now incurs 60% of all healthcare spending, meaning that taxpayers, and not individuals, pay for most of our healthcare. Medicare, Medicaid, and other direct government healthcare accounts for 46% of healthcare spending, while tax breaks on healthcare subsidize another 10-15% of healthcare spending [1].

At current growth rates, government healthcare spending will exceed the entire Federal budget by 2050 [2]. Total spending on healthcare will near one-third of GDP by 2030. It’s unlikely that the US can devote 1/3rd of all productive capacity to healthcare without crippling other sectors of the economy and reducing overall economic growth. The healthcare bubble thus dwarfs all previous bubbles in size, since the technology, real estate, and energy sectors are all so much smaller.

How will the bubble pop, and what will its effects be? Since most healthcare spending is federal, the bubble will pop when the government can no longer afford its healthcare outlays. The US has been able to borrow freely by issuing debt for many decades, but this will eventually end once our debt exceeds GDP. With the current downturn, government debt may actually exceed GDP by 2015 [3]. Thus the reckoning may come sooner than many expect.

Will healthcare reform contain costs and deflate the bubble gradually? Most reform plans focus more on increased coverage than on cost control, so they may exacerbate the problem. Eventually the hard choices will have to be made, and they will include some combination of reducing Medicare benefits, cutting provider reimbursements, openly rationing government health care, and limiting the tax break on health insurance. I just hope that some of the hard choices are made before we are collectively up against a fiscal wall.

[1] $200 Billion in taxes are foregone as a result of the employer-based healthcare tax deduction, equivalent to 10% of all healthcare spending. When this subsidy is included the government’s share of healthcare spending rises to 56%. This analysis does not include the exemptions on property taxes and sales taxes that healthcare providers receive; adding these subsidies in would likely drive the government’s share of health care spending over 60%.

[2] The CBO predicts that Medicare and Medicaid will account for 14% of GDP by 2050. This figure doesn’t include healthcare spending through the VA system, SCHIP program, and other federal healthcare programs, which total $100 Billion in spending today. If these programs also grow commensurately, total government spending may near 18% of GDP in 2050, roughly equivalent to total government revenue.

[3] This projection of public debt growth shows that US government debt will exceed gdp by 2050. This only takes into account debt held by the public, however. Gross government debt is already above 65% of GDP, and may grow to 75% by the end of 2010 as a result of the recession and stimulus spending. With deficits of $500B+ per year possible for several year, US total government debt could exceed gdp in less than 10 years.

13 thoughts on “Healthcare Bubble

  1. Max, see my footnote [1] above. I updated the link which indicates that 46% of all health care is directly paid by the government via Medicare, Medicaid, SCHIP, and other programs. The 46% figure doesn’t include the health insurance of all government workers at all levels of government. – there are 2.8 Million civilian federal employees – there are 14.9 Million state and local government employees – there are roughly 1.5M active duty military servicemen

    That’s 19.2 Million individuals (plus their families) receiving health care paid for by the federal government, above and beyond the 46% figure noted above.

    Average household size is 2.6 in the US, so it’s likely that 19.2 * 2.6 = 50 Million people get their health insurance from government employment. That’s 16% of the US population.

    When added to the 46% of individuals receiving health care from direct government programs, that totals 62% of all health care in the US!

  2. Where did you get the stat that the government incurs 60% of health care spending? I’ve heard it before too but i was just wondering where you got it from.

  3. Michael,

    Here’s some quick analysis of your premise:

    There were 45 million people on Medicare in 2008, and the total cost of Medicare in 2008 was roughly 400 Billion in 2008. That’s roughly $8900 per person, per year, or $740 per month.

    At that price, Medicare is actually quite a bit more expensive than many private and employer-sponsored health insurance programs. This makes sense, because Medicare treats the oldest (and thus sickest) Americans, and because it pays for a large percentage of end-of-life care in the US, which is prohibitively expensive.

    If younger Americans were allowed to join Medicare, their costs would probably be less – although it’s likely that many sick people would choose to join, keeping costs high. So I’m not sure that the plan would work. The truth is that mandatory health insurance, or a single payer system, are the only way to get everyone covered, and have everyone share in the cost. If we care about getting 100% of people covered, that is…

    Click to access HISMI08.pdf

    Click to access tables.pdf

  4. The column avoids the simple statement of the cost of Medicare for 2009.
    That shows the continuing desire to hide the facts.
    The facts are simple: divide the number of people covered into the total cost of Medicare, and that’s the per-person cost.

    Here’s the very simple solution: allow anyone to buy in to Medicare at cost.
    This will start insurance companies to scream and cry about how terrible it will be for those poor people signing on to such a terrible system, but in fact people will do so willingly, and it will show the high degree of theft in the private insurance business, whose incentive is to lie, cheat and steal, because the only way to a profit is by denying by obfuscatatory methods. Screw them.

    The most powerful solution and best form of free market capitalism is allow the only player big enough to break the big insurance monopoly to allow anyone to buy in, at cost. I would certainly do it.

    The reason the cost is hidden is because this solution is so simple and powerful. The escalation and rationing are useless arguments against the fact that everyone will finally see for themselves the truth of these arguments, and see the incentives for private insurance is billion-dollar payouts paid for by increasingly sophisticated methods for denying claims while increasing premiums.

  5. Gary, good point – we Americans are a relatively unhealthy bunch, and that is partly to blame as well. There are some perverse incentives that make that problem worse too – farm subsidies make bad food like high fructose corn syrup cheap, and make us fatter.

    But I fear that even if all of us were lean and healthy, we’d still have runaway health care costs. As long as someone else (the taxpayer) is paying the bill, costs will rise. Costs will stop rising when the taxpayer puts his foot down and says no more, or when the taxpayer runs out of money – whichever comes first.

  6. Good stuff here, nicely researched. However, we do have a fat-American bubble, which is why our health care costs soar so much (to treat all the diabetes, hypertension, digestive and ambulatory problems caused by our eating habits).

  7. I’m optimistic that cost inflation can be reined in without adverse health consequences as well – many nations achieve this!

    I am not optimistic that this will occur in the US without the fear or reality of government fiscal crisis. Measures of comparative effectiveness are great, but decisions based on those measures cannot be enforced without some form of rationing. I don’t believe that incentives alone will move patients away from less effective treatments, particularly at the end of life, when a disproportionate share of treatment cost is incurred.

    Why not just move directly to an open rationing system in which QALY measurements are used to approve or deny treatment reimbursement? The US healthcare industry has too many entrenched interests that would lose out in any reform that measures the cost-effectiveness of treatment.

    I think Orzsag (and Daschle for that matter) know that rationing is the future of government healthcare, and “comparative effectiveness” is their way of moving towards the inevitable.

    Note that I am referring to rationing of government dollars only, and I do not support across-the-board rationing as done in Canada. All patients should have the right to purchase any medical service they desire with their own money.

  8. As usual, I’m optimistic about our ability to address cost inflation. I expect the new director of the Office of Management and Budget in the White House, Peter Orzsag, to provide a good perspective on cost inflation which he’s studied in great detail in various roles over the last few years. He laid out some solutions in a recent op-ed in the New England Journal of Medicine (

    A variety of evidence, however, suggests that there are opportunities to constrain health care costs without incurring adverse health consequences. One approach that could reduce total health care spending (rather than simply reallocating it among different sectors of the economy) involves generating more information about the relative effectiveness of medical treatments and enhancing the incentives for providers to supply, and consumers to demand, effective care.

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