IBJNews

Is health care bubble about to burst?

Back to TopCommentsE-mailPrintBookmark and Share

Will health care go the way of the housing market?

Citigroup economist Steven Wieting posed that provocative question last week in a lengthy analysis of the U.S. health care system, likening its dynamics to those of the U.S. housing market before its colossal collapse in 2007.

“The health care system in the U.S. reminds us somewhat ominously of the bubble in housing finance, a ‘public/private partnership,’” wrote Wieting, a managing director of New York-based Citigroup’s investment research and analysis unit, in his report titled “Evidence of a Fundamental Healthcare Bubble.”

“Housing consumption still receives strong tax preferences, as does health insurance. Most aptly, prior to quasi-nationalization, housing GSEs [i.e., Fannie Mae and  Freddie Mac] earned private profits from public subsidies for housing, as do U.S. health care providers," he wrote. "Ultimately, more housing was produced and consumed than incomes would support.”

And just as employment in construction and real estate brokering crashed when the housing bubble burst, the same could happen in health care, Wieting warned.

“If we can question where the financing will come from for current and future health care spending, then we also need to question the financial underpinnings of employment in the industry, and other forms of real economic impact,” he wrote.

That line of thinking goes against conventional wisdom, which for years has said that retiring baby boomers (who began to hit age 65 last year) would provide a huge and sustained wave of profitable demand for health care providers.

But with government health plans—which currently pay for about half of all health care—having no present means to pay for this looming demand, Wieting questions the viability of the whole health care sector.

In Wieting’s analysis, the problem isn’t that Americans consume more health care than their peers in other developed nations. Citing data from the 34 countries in the Organisation for Economic Cooperation and Development, Wieting shows that Americans actually make fewer doctor visits and undergo fewer surgeries, per person, than the average of their peers in the other 33 nations. Americans do, however, receive more than twice as many tests and exams as their peers in developed nations.

The big difference is that American health care costs so much, according to Wieting's analysis. Citing data from the International Federation of Health Plans, he notes that a normal birth delivery procedure costs more than $9,000 in the United States versus less than $4,000 in Europe. The typical coronary bypass surgery costs nearly $68,000 in the United States compared with $19,000 in Europe. Prescription drug prices show similar disparities.

So what’s to be done? Wieting makes policy recommendations that will appeal to and repulse both conservatives and liberals. He suggests profit caps and spending limits for government-financed health care, and greater price transparency for privately financed health care.

“To the extent that government health care spending is a public good, not a private consumer good, is it not reasonable to subject these expenditures to profitability limits such as those set for other industries like public utilities?” Wieting wrote. “Certainly, at least, health care providers themselves shouldn’t solely be left to determine the level of public spending on their products.”

But on the side of greater market competition, Wieting notes that only 12 percent of current U.S. health care spending is borne directly by consumers and that the huge amount of goverment-financed spending greatly distorts the private parts of the health care market.

“If instead of more intervention, private market competitive forces are the preferable solution to health care shortages, it should be understood that sizable public expenditures on health care could and likely do warp market functioning,” Wieting wrote. “In arguments for or against a market-determined health care system, U.S. policymakers shouldn’t pretend that one now exists.”

ADVERTISEMENT

  • 2 big reasons to invest in health care
    2 big reasons to invest in health care: 1. Obamacare will increase demand. 2. The baby boomers are about to turn elderly.
  • Wisconsin School of Business Healthcare Prediciton Market
    The Wisconsin School of Business is running a prediction market study on the U.S. Supreme Court's decision on the Healthcare Reform Act. By participating you will not only be helping university students, you will also get to express your opinion and compete with others to show that you have the most accurate prediction.
    https://hra.inklingmarkets.com/

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
ADVERTISEMENT