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Sunday, January 10, 2010

The Health Care Bubble

I read the book "Bailout Nation" by Barry Ritholtz. It is a very interesting history which takes a somewhat different perspective from the book "Demons of our own design" by Richard Bookstaber which focuses on the blindspots created by the Wall Street Quants whose models where believed to allow for investors to avoid risk. Ritzholtz both assigns blames to a host of parties and identifies an issue separate from the all of the exotic financial instruments which Bookstaber describes.

Beside having nothing but utter contempt for Allan Greenspan as Fed Chairman, Ritholtz takes aim on the problem with asset inflation which developed as a consequence of the ridiculous free money policy which marked Greenspan's tenure as Fed Chief. Cheap money drove home prices up and stimulated speculation on further asset growth. The underlying assets grew in value beyond the actual use value obtained.

The housing bubble has burst. It will not be re-inflating again anytime soon despite pumping huge amounts of capital into real estate. Buyers will not be so stupid to purchase these assets at inflated values. Even the government cannot possibly pump enough money into this segment of the economy and the foreign money that participated has moved elsewhere.

Where is the next bubble? Where have stupid subsidies and tax breaks been piled into a segment of the economy and driven prices upward to absurd and unsustainable levels? Where has investment been made based upon the assumption that despite large debt service the cash flows will be more than adequate to make the investments profitable? What business is both highly leveraged and heavily dependent upon a tax favored status of its business and incomes streams, which could be reversed by legislative fiat?

The answer seems obvious. It is the health care industry. Health care costs are increasing at more than twice the background level of inflation. Like the Federal Reserve, state and national governments are pumping increasingly larger sums of money into the health care economy. On top of this are the increasing sums from private insurers. Health care reform or no health care reform, this increasing cash infusion is coming to a stop. The results are predictable. We will see a deflation of the health care bubble. As the pressures to reign in costs become more pressing, the favored tax status of a variety of funds flows will be lost, thus shrinking cash infusions even more.

When this bubble bursts, the asset values which will be deflated will be both physical and human assets. Valuable technology will that which allows doctors and hospitals to get better outcomes for less. GE and Seimens will need to figure out how to make those scanners for less. As less money is pumped into health care, payment for professional services will be cut. Like the housing bubble, those who leveraged themselves to get in late will be hurt the worst. Medical students with hundred's of thousands of debt will discover they have made bad investments. Practices who leverage themselves to buy expensive equipment will find they cannot cover their debt service.

Who will be hurt? Perhaps a more important question is will patients be hurt? In the short term likely yes, some will. Physicians will need to change their expectations. I suspect that something different will arise from the ashes of the system which will be substantially disrupted. "Coverage" will mean something different. What actual care is delivered and by whom will likely bear scant semblance to what we have now. Hold is going to be wild ride!


  1. Yes, it will be a wild ride, but I don't see us going over the cliff. The public has not weighed in yet, since they (nor the legislators) really understand the ramifications of the pending health care legislation. When they grasp that the costs will continue to escalate and that care will be trimmed, they will push back hard. The first evidence of this effect will occur in November 2010.

  2. The question is whether the public will weigh in not only with their votes but with their wallets. Will they be willing to pay for care outside of an insurance model?