Health Care: The Next Bubble?

Student loans. Social-media start-ups. Apple.

All of these have been described as America’s next great bubble, readying to pop.


New research from Citigroup adds another specter to the list: the U.S. health-care industry. A pair of economists at the bank, Steven Wieting and Shawn Snyder, note that “functioning market price competition barely exists” in the health industry, whose per-capita spending is now nearly twice that, on average, of other developed nations.”

As the duo point out, consumers directly finance only about 12 percent of total health-care expenditures in the U.S., the rest of which is covered by private insurance and government transfer programs like Medicare (and this share is expected to fall below 10 percent in the next decade, absent major reform).

This helps explain how health-care spending has grown 2.5 times faster than incomes over the past three decades. “The health-care system in the U.S. reminds us somewhat ominously of the bubble in housing finance, [also] a ‘public/private’ partnership,” cautions Citi.

Of course, when taxpayer subsidies produced more housing than incomes could support, demand ultimately eroded and prices collapsed. Health care is different. If more of the cost of care is shifted onto patients directly, demand for some pricier services might collapse (and prices with it).

More likely, though, the market would come to resemble the market for other types of consumer goods: wealthier patients able and willing to purchase fancier products and procedures. Trouble is, an elderly patient who has a heart attack either gets life-saving (and costly) procedures, or dies. Demand is much less discretionary, and choices often bleed into questions of fairness and ethics that market signals alone can’t govern.

Still, concern about the need for nearly unlimited taxpayer resources to fund programs like Medicare has economists increasingly concerned. Indeed, Citi notes that “the housing boom and bust had a strong cyclical element to it, while the rise in health-care consumption…[has] no immediate end in sight.”

Even more troubling to Wieting and Snyder is that the spending on health-care today is inefficient and even wasteful, because the industry hasn’t been subject to market discipline, broadly resulting in costlier, less effective care. As they observe, “If today’s health-care expenses are unworthy of financing with today’s resources, why should future taxpayers pay the price for past spending and carry that burden along with their own?”

The Urban Institute, a Washington-based nonpartisan think tank, estimates that retirees are set to consume nearly twice the health-care benefits they have paid for with their lifetime tax contributions, as Citi notes; “In our view, the U.S. doesn’t have another decade to wait before making adjustments affecting future benefit recipients.”

Follow Kelly Evans on Twitter: @kelly_evans