Seeking Alpha
Profile| Send Message| ()  

What is larger than the U.K.'s entire economy, soaring in price, obscenely profitable, the leading cause of personal bankruptcy, bankrupting America and a colossal economic bubble that nobody yet knows about? Healthcare in the USA. Though everyone is aware of the perpetually soaring cost of healthcare, virtually nobody has put two and two together and realized that healthcare has become the ultimate bubble that will put the housing bubble to shame. While the healthcare industry hoodwinks us into believing that soaring healthcare costs are our own fault and hospital scrub-wearing mini-Madoffs rake in millions by cheating their patients, a modern-day gold rush is on as young Americans frantically look to healthcare careers as one of their last remaining shots at middle class life. Expect to hear much more about the U.S. healthcare bubble in the future as healthcare becomes far out of reach for even more Americans and the healthcare industry is forced to learn that perpetual motion doesn't exist.

The cost of healthcare, like college education, has exploded in recent years, far outpacing wage growth and the overall rate of inflation:

Healthcare Bubble
(Click to enlarge)

Health insurance costs have soared 9% in 2011 alone and are expected to increase 5.4% in 2012, after rising three times faster than wages in the past decade. During this time, struggling small businesses were walloped with a 180% rate hike. Individual rate hikes by health insurance companies have become astoundingly audacious, such as Anthem Blue Cross of California's 68% premium increase in 2009 and 39% in 2010, despite being in the worst recession since the Great Depression. As long-term care insurance jumps by up to 40% in 2011 and brand name drug prices rise even faster than medical inflation, the past decade's doubling of hearing aid prices has some experts asking if there is a hearing aid price bubble! Healthcare spending as a share of the US economy reached an all-time high of 18.2 percent in 2011, an incredible threefold increase since 1960. The sad fact is that Americans spend twice as much on healthcare compared to other developed countries, but get lower quality care and less efficiency.

With the unrealistically high and skyrocketing cost of healthcare, it is no surprise that 52 million Americans now lack health insurance, up an alarming 40% since 2001. Among high-income countries, Americans are the most likely to skip medical medical treatment due to costs, with 51% of adults under-65 with health problems going without care because of high costs. While doctor visits plunged 8% in 2011, many Americans are skipping dentist visits as dental care is increasingly seen as a luxury. Exorbitant healthcare costs are a true society-wide problem, with 41% of working-age adults having medical bill problems or paying off medical debt and causing the majority of bankruptcies (62% of bankruptcies!), even among Medicare-collecting senior citizens. Scarily, nearly 80% of medical bankruptcies happen to people who have health insurance. A simple case of bad luck can land you millions of dollars in medical debt! The US healthcare system is on track to literally bankrupting this country within a few years, while unusually high healthcare costs put American businesses at an extreme competitive disadvantage, adding $1,500-$2,000 to the sticker price for GM automobiles, for example. "We have to get control of health care and Medicare costs or go the way of the Roman Empire," warns MIT economist Jonathan Gruber. While some degree of healthcare inflation is expected and justified, there is a problem at work here that goes far beyond merely elevated inflation - the US healthcare system is experiencing an epidemic of institutionalized profiteering and has devolved into a full-blown economic bubble.

Why is U.S. healthcare so expensive and rising so quickly in cost? Not surprisingly, the U.S. healthcare industry casts the blame on everybody but themselves - Americans who supposedly smoke and drink too much, the large elderly population, obese people and out-of-control malpractice lawsuits. These sound like good theories, but all of these typical healthcare industry excuses are patently false. The reality is that Americans drink and smoke far less than most Europeans and Japanese and have the lowest percentage of elderly people (as compared to the UK, France, Japan, Germany, Italy, Canada, Spain - all countries with much lower healthcare costs than the U.S.). While obesity is clearly a problem in the U.S., costs associated with it amount to less than $25 billion per year in extra spending, a mere drop in the healthcare spending bucket. Even medical malpractice, a favorite healthcare industry excuse for soaring costs, only accounts for 2% of overall healthcare spending. (please read the excellent infographic, "Why America's Healthcare Sucks" to learn more about these excuses) The U.S. healthcare industry has carefully crafted the aforementioned excuses to divert attention away from their superbly lucrative racket.

The U.S. healthcare industry's racket manifests itself in numerous ways, one of them occurring in the form of highly profitable intentional inefficiencies. Administrative overhead accounts for 21% of excess healthcare spending (mostly due to the complex insurance system), double the administrative costs of the next most expensive country and 4 times more than Finland. The US spends a mind-blowing $1 trillion per year on unnecessary healthcare, with corporations profiting heavily from the waste. Primary care doctors even admit to giving their patients unnecessary care. With unnecessary medical tests ordered by doctors costing patients at least $6.8 billion per year, one study shows that doctors who own multimillion dollar CT and MRI scanners are four times as likely to order a scan as a doctor who doesn't.

Another tentacle of the U.S. healthcare cost racket is one that people have long suspected but has recently been confirmed - U.S. doctors are extremely overpaid, plain and simple. Despite U.S. healthcare costing twice as much and being of much lower quality and efficiency compared to other countries, American doctors are paid around 5 times more than their average patient, a figure that is a shocking 3 times higher than in most other countries. A new study from Columbia University shows that US doctors' exorbitant pay is one of the primary factors in the abnormally high cost of American healthcare. Despite already being overpaid, doctors have the nerve to demand a raise from Medicare!

U.S. health insurance companies are certainly no slouches when it comes to extracting their pound of flesh from their reluctant customers. Despite the soul-crushing near-Depression of the past several years, health insurance companies are turning record profits thanks to their brazen rate hikes and customers who put off care due to cost. While even doctors are protesting HMO profits at taxpayers' expense, health insurers are fighting hard to keep details of their steep rate hikes secret from government scrutiny. A recent survey shows that healthcare executives are the highest earning CEOs, with the top executives at the nation's five largest for-profit health insurance companies banking nearly $200 million in 2009. In 2009 alone, UnitedHealth CEO Stephen Hemsley took home a staggering $102 million! Health insurance companies are eager to blame everybody else when they hike their rates, when their soaring executive pay is one of the primary culprits in the rising cost of healthcare.

Not to be left out of the obscenely lucrative U.S. healthcare racket, hospital profits have skyrocketed in recent years as they use their "local monopoly power to overcharge insurers and patients." There certainly hasn't been a recession in state hospital CEO pay as their multimillion dollar salaries have so-far been immune to state budget cuts. Excessive non-profit CEO salaries are creating an outrage, while the heads of the nation's largest children's hospitals siphon robber baron-like payouts. It's no surprise that the hospital business is so profitable when 90 percent of hospital bills audited have gross overcharges, many of them deliberate. Hospitals have such a lack of incentive to provide patients with cost-effective service that when 17 different hospitals were asked to provide an estimated cost for a common knee replacement surgery, not even one could provide a solid answer. Another major reason why American healthcare is so unusually expensive is because twice as much of our healthcare occurs in the form of very pricey (but lucrative for hospitals) hospital outpatient care compared to other countries.

In order to further tap into the seemingly boundless money tree that is the expanding U.S. healthcare bubble, hospital construction has been booming (1, 2, 3) as concern arises that children's hospitals are overspending on extravagant construction projects. A recent study showed that the current medical building boom is increasing Americans' health care costs and has been fueled by the borrowing of $144 billion through public bond issues (from 2008 to Nov 2011). An excellent animated short film entertainingly summarizes the medical building boom and how it will result in a debt crisis. In San-Francisco, hospitals have recently become the new No. 1 industry and employ nearly one-fifth of the city's workforce. The hospital building boom will only create excess capacity according to a Pittsburgh Tribune-Review report: "Though the number of hospital beds in the United States has dropped by 250,000 since 1990, the occupancy rate remains steady at nearly 70 percent, showing a general lack of need for more bed space." The hospital sector is overbuilding and overexpanding, behavior that is typical during bubbles.

Health care Bubble Chart - Rising Government Health care Expenditures
(Click to enlarge)

Chart Source: mjperry.blogspot.com

The steadily increased public funding of healthcare through services such as Medicare and Medicaid is another major reason for soaring healthcare costs, as the public sector has far less incentive to minimize costs on purchased healthcare services compared to the private sector and individuals ("Nobody spends somebody else's money as wisely as he spends his own" - Milton Friedman). Out-of-pocket payments for medical expenses comprised 46% of total health spending in 1960, while plunging to a record low of only 11.9% in 2008. Conversely, public funding paid for 24.5% of health spending in 1960, but a record 47.3% of spending in 2008. (source) Government's dramatically increased presence as a less cost-sensitive purchaser of healthcare services has helped to greatly inflate the healthcare bubble as the healthcare industry is able to steadily hike prices knowing that the U.S. government will always be a buyer. If the existing and conventional presence of government in U.S. healthcare has already caused costs to soar, entirely new levels of government involvement in the form of President Obama's 2,000-page Affordable Care Act (ObamaCare) are likely to make the situation even worse.

Now that news of oversize healthcare profits and salaries have entered the public psyche, a healthcare jobs gold-rush is officially on. Thanks to the healthcare bubble's continued expansion during the Great Recession, healthcare has been one of the few industries to add jobs (nearly 1 million jobs!), greatly softening the recession's blow (until the healthcare bubble pops, that is). As the much of rest of the economy continues to downsize, healthcare's share of employment just hit an all-time high as signs of a healthcare employment bubble have become apparent. The recently soaring popularity of nursing careers now means that new nurses are oversupplying the market, a sharp reversal from the supposed nursing shortage of several years ago. Even health information technology is likely in a bubble as health IT is now officially the "hottest" job for college graduates. While the U.S. Bureau of Labor Statistics forecasts that the healthcare industry will add 4 million jobs through 2018, with half of the 20 fastest growing occupations being in healthcare, this assumption is simply unrealistic and assumes that healthcare costs can keep rising unabated without a popping of the massive healthcare bubble as healthcare becomes unaffordable for more Americans every year.

The mainstream thinking about the future of U.S. healthcare assumes that the Baby Boomer generation will hit age 65 en masse and spark a massive boom in the demand for healthcare services and employment, especially for long-term-care such as nursing homes and assisted-living. These projections are little more than hype, however, as they don't factor in the astronomical cost of these services ($87,235/yr for nursing homes, $41,724/yr for assisted living) and the unfortunate fact that very few Baby Boomers have the kind of wealth needed to pay for such comprehensive medical care in this day and age. Sadly, Baby Boomers are on the verge of an epic retirement and personal financial crisis (1, 2, 3) and medical care is becoming rapidly out of reach for all but affluent Americans, especially as the heavily indebted U.S. government will be forced to relentlessly cut back on entitlement programs.

The U.S. healthcare system is a credit-fueled Ponzi scheme on an unsustainable trajectory and can't keep going on for much longer. With healthcare already unaffordable for large and growing portions of the U.S. population, it isn't realistic to assume that the U.S. healthcare industry can keep up such high rates of hiring, luxurious compensation and ambitious construction projects, while continuing to hike customers' fees at rapid rates. Junk mainstream analyses of the U.S. healthcare situation tend to exhibit the same overly simplistic linear extrapolation that was so common in analyses of the U.S. housing market during the housing bubble's heyday as analysts assumed prices could keep rising forever because "they're not making any more land." With chronic near-10% unemployment and a struggling economy, employers will continue to shift the burden of rising health insurance costs to employees, with many employers cutting healthcare benefits altogether. Healthcare in the U.S. will be increasingly paid for out-of-pocket, forcing healthcare consumers to become highly aware of and sensitive to healthcare service costs, a radical shift in behavior from a time when health insurance would pay for medical care without much regard to cost.

Like any other industry, the healthcare industry is tied to the health of the overall economy and when their services become even more unaffordable for vast portions of the population, such as in the next recession, the industry will experience some form of a collapse. During the U.S. housing bubble, when housing prices hit $500,000 in neighborhoods with $40,000/yr average incomes, the bubble popped and housing prices dropped to more affordable and realistic levels; the same will happen to the U.S. healthcare industry as it's forced back into line with the rest of the economy. The popping of the healthcare bubble will cause all levels of the U.S. healthcare industry to downsize in the form of layoffs, salary cuts, hospital and medical office closures. It's very possible that the healthcare bubble's equivalents of Bernard Madoff and Angelo Mozilo will be brought to light as well. As with housing, healthcare will always be needed, but the U.S. healthcare industry's current levels of largesse and outrageously parasitic profits will be excised like the malignant cancer that it is. The popping of a bubble larger than the UK's entire economy has astounding implications and will reverberate throughout the entire global economy.

While the U.S. Healthcare Bubble isn't an asset bubble like stock or real estate bubbles, it is a bubble-like phenomenon with very similar risks and implications as asset bubbles. The crucial components of all bubbles are present in the U.S. Healthcare Bubble: a highly convincing and partially-legitimate boom story, soaring prices and profits, decreasing affordability, a highly overpriced/overvalued product, blatant profiteering, a "gold rush" mentality, extrapolation of the boom's growth far into the future and debt-fueled overinvestment/overexpansion. The end result will be similar to what asset bubbles experience when prices become overvalued and unaffordable: prices will be forced down to realistic levels again and large-scale industry downsizing will occur, resulting in massive capital losses.

One of the most straightforward ways to profit from the eventual popping of the U.S. healthcare bubble is to short broad healthcare-related ETFs such as the iShares Dow Jones US Healthcare ETF (IYH), the iShares Dow Jones Healthcare Providers ETF (IHF), the SPDR S&P Pharmaceuticals ETF (XPH), the SPDR Biotechnology Select ETF (XBI) and the Dow Jones U.S. Medical Device Index Fund (IHI). Shorting individual healthcare stocks is another option, with some good candidates such as: Johnson & Johnson (JNJ), Pfizer (PFE), Merck (MRK), Amgen (AMGN), Eli Lilly & Co (LLY), UnitedHealth Group (UNH), Aetna (AET), Wellpoint (WLP), Humana (HUM), Wellcare Health Plans (WCG), St, Jude Medical (STJ) and healthcare REITs such as Health Care REIT (HCN) and National Health Investors (NHI).

Source: Beware Of The U.S. Healthcare Bubble