Health Care Bubble?

Over at Wikipedia an economic bubble is defined as follows,

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, or a speculative mania) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. (Another way to describe it is: trade in products or assets with inflated values.)

So, is there a health care bubble?

FILED UNDER: Economics and Business, Health Care,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    No, I don’t think so. Unless you’re talking about the hospital, clinic, and office building that’s going on.

    What I think we’re seeing is deadweight loss and overinvestment. We’re overinvesting in healthcare at the expense of other things. There’s really no other way to explain the cost increases in healthcare that took place between about 1971 and 1979. Since then cost increases in healthcare can largely be explained by inflation.

    This is definitional. It really can’t be gainsaid. You can’t simultaneously argue that without Medicare old people would be dying because they didn’t get enough healthcare and without Medicaid poor people would be dying, etc. without arguing that we’re overinvesting in healthcare. They are equivalent statements.

    That we have, at least to some extent, chosen this overinvestment is a different subject.

  2. sam says:

    I suppose it would depend on how you define ‘intrinsic value’.

  3. I remember that when oil bubbles were discussed, people like Jim Hamilton said “look for storage.” If oil wasn’t going into tank-farms it probably wasn’t a speculative bubble. Now, for oil the definition of storage was complicated by a number of things …

    but when you say “bubble” in health care, do you mean in the prices of services consumed?

    There would be no speculation in that. I can’t buy a coronary bypass and then sell it to you later.

  4. spencer says:

    What is the value of a coronary bypass and is significantly above or below the market price?

    Can you even answer that question?

  5. What is the value of a coronary bypass and is significantly above or below the market price?

    They are ready to sell us some in India, below our market price. That underscores the difference in our pricing structure, but I’m not sure it makes the “bubble.”

  6. Our Paul says:

    There is more than a grain of salt in Dave Schuler (December 4, 2009 | 02:42 pm) analysis. I am not so sure “over investment” is the correct term. The introduction of Medicare and Medicaid dumped a huge pool of money into the system attracting entrepreneurs, expansion of existing facilities, and the rapid corporatizing of medicine.

    This clearly can be challenged:

    Since then cost increases in healthcare can largely be explained by inflation.

    For at least the past 10 years health care cost increases have been higher than inflation, higher than the increase in Gross National Product, and when compared, outstripping the increases in other industrialized countries.

    However, I am not sure about this:

    It really can’t be gainsaid. You can’t simultaneously argue that without Medicare old people would be dying because they didn’t get enough healthcare and without Medicaid poor people would be dying, etc. without arguing that we’re overinvesting in healthcare.

    Prior to the Federal programs, Long Term Care was a minor industry, and the “City” or “County” hospitals served the destitute and many of the chronically ill. Today Long Term Care is a major industry, the City and County Hospitals have for all intense and purpose disappeared.

    So, to answer Steve Verdon, yes, there is a health care bubble. It has nothing to do with “prices that are considerably at variance with intrinsic values” and allot to do with health care dollars flowing into the pockets of folks who do not contribute to health care. In polite society they are referred to as investors, entrepreneurs, or skilled executives…

  7. So, to answer Steve Verdon, yes, there is a health care bubble. It has nothing to do with “prices that are considerably at variance with intrinsic values” and allot to do with health care dollars flowing into the pockets of folks who do not contribute to health care. In polite society they are referred to as investors, entrepreneurs, or skilled executives…

    FWIW, I think you are describing a distorted market, but not a bubble. A bubble, if it is to retain any meaning, must be a speculative excess.

  8. sam says:

    Grist for this mill:

    Questioning a $30,000-a-Month Cancer Drug

    This is kinda mind-boggling:

    Folotyn [the 30K drug] has not even been shown to prolong lives — only to shrink tumors….

    [James V. Caruso, the chief commercial officer for Allos, maker of the drug] also said the price of Folotyn was not out of line with that of other drugs for rare cancers. Patients, moreover, are likely to use the drug for only a couple of months because the tumor worsens so quickly, he said. [my emphasis] So the total cost of using Folotyn will be less than for many other drugs with lower monthly prices.

    I’m dumbfounded. $30,000/month for a drug that hasn’t even been shown to be life-prolonging? And loses whatever limited efficacy it has after “only a couple of months”? What the hell good is it? Does anybody think it’s $30,000 good???

  9. Steve Plunk says:

    It’s not a bubble within the definition provided. The intrinsic value of relieving pain, prolonging life, or even saving a life are all very high. We have our emotions wrapped up in health care like no other product we buy.

    We could also say a scarcity exists which drives up the price. That scarce resource is the newest most promising diagnosis, treatment, drugs, and care versus those from five years ago. Last years way of doing things may cost a lot less but patients and doctors insist on the newest and most expensive course because of what’s at stake.

    Rational economic choices are hard to make in health care. That $30,000 drug sam mentioned is a good example. Who’s going to tell grandma she can’t have it?

  10. Rational economic choices are hard to make in health care. That $30,000 drug sam mentioned is a good example. Who’s going to tell grandma she can’t have it?

    I doubt HMOs will provide it now. But certainly the political game is to hide the rationing.