Is The U.S. Healthcare System An Economic Bubble?

Includes: FXH, IHF, VHT, XHE, XLV
by: Tim Plaehn

Over the past week, I read two articles discussing the high level of healthcare costs in the U.S. These articles led to a question whether healthcare could be viewed as a financial bubble, with unsustainably high costs and participants who do not see that the bubble exists. The idea of a healthcare bubble brings forth the question whether a bubble can exist in this sector of the economy. Then, if it is a bubble, how does it deflate?

The first article was an off-topic discussion by trader Peter Brandt. The article noted the U.S. spends the highest amount of GDP on health care - 18.2 percent - with the U.S. healthcare system ranked 37th for performance by the World Health Organization. After the U.S., the two countries spending the most GDP on healthcare are Switzerland and France at 12.3 percent and 12 percent, respectively. Out of GDP, the U.S. spends 50 percent more than the next most expensive countries.

The next article - a blog post on the New York Times - compared the out-of-pocket consumer spending in different categories by the citizens of the U.S., Canada, the United Kingdom and Japan. Americans spend 6.9 percent of their personal income on health care, compared to 4 percent in Canada and Japan, and 2 percent in the U. K. Another chart in the article shows per capital healthcare spending in the U.S. - 60 percent higher than the number two country, Norway.

With 50 million people uninsured or under-insured, the U.S. still manages to spend 50 percent more on health care than the next most expensive developed countries. Looking at median healthcare spending, the U.S. expenditures are double both on a GDP and per capita basis when compared to other developed economy countries. A survey by The Commonwealth Fund found that patients in the U.S. - compared to 10 other wealthy countries - are more likely to not receive needed care due to costs and medical debt.

The basic thoughts I take from these articles are that the U.S. healthcare system is very expensive, and that it does not offer very good care. Yet costs for health insurance, medical care and the amounts of money the government spends on healthcare keep rising at rates much higher than the growth of the economy. In 2000, healthcare consumed 13.8 percent of GDP. At the current rate of increase, healthcare will consume one-third of the U.S. economy sometime soon after the year 2030 - 18 years from now.

Wikipedia puts this definition on economic bubble: "trade in high volumes at prices that are considerably at variance with intrinsic values" or "a trade in products or assets with inflated values." Using those definitions the healthcare system is probably at inflated values, but it takes a stretch to figure out where the trading part comes in. Is the trade in healthcare the prices citizens, companies and the government are willing to pay for healthcare services?

So the U.S. healthcare system may not be a market bubble in the traditional sense, but the amount of money being consumed by the sector is growing at what appear to me to be unsustainable rates. The other concern I have is that there is not a viable mechanism to slow and unwind the growth. A radical solution would be to freeze all healthcare costs for a period of years until the healthcare expenditures reach an acceptable percentage as the economy grows - hopefully - and health spending does not. What would a freeze do to the values of health insurance companies, hospital companies and the drug manufacturers? Plus, it is hard to imagine price controls working as those who can afford to pay more will find ways around the system to get the care they want and things will be even tougher on those who cannot afford to game the system.

My fear is that there is a healthcare bubble in the U.S. and like all bubbles, the popping of the bubble will not be obvious until after the fact and many have been severely harmed by the implosion. The healthcare industry and associated investment opportunities have been able to keep increasing prices and increasing investment values. Investors owning stocks in the sector should at least consider what a bubble implosion would look like and be ready to adjust portfolio holdings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.