A Loan Crisis May Be Brewing in Health Care

Article excerpt

An inability to cope with change is to blame for many losses suffered by bankers over the past decade.

Loans went to the energy, real estate, Latin American, and highly leveraged sectors; and they went in increasing amounts, as lenders failed to perceive that these industries would eventually turn negative.

The health-care sector may be the next to move from rapid growth to massive loan loss. Ameicans simply cannot afford the medical services now being offered, and this means the industry must slow its growth or contract.

The transition will result in large numbers of industry participants - from medical practitioners to biotechnology companies - being unable to sell their products and pay their bills. It is time for perceptive bankers with exposure to this industry to peer into its future.

The medical industry has been estimated to be about $700 billion in size.

To put it another way, the industry that consumed 5% of gross national product in 1950 is now absorbing 14% and promises to rise to 40% in 2030 if its growth continues at the current pace, according to industry projections in a recent Business Week supplement.

This "advertorial" also said the average worker has seen the cost of health-care insurance rise to $1,300 a year, from $150 just 10 years ago.

Growth Potential

From 1970 to 1989, businesses saw their expenditures for health insurance rise 163%. Real wages are believed to have grown by just over 20% in the same time frame.

The Wyatt Co., a benefits consulting firm, estimates that employers spend an average of $4,081 per employee per year, on health costs, which will rise to $14,300 by the year 2000.

These numbers would suggest that the health-care industry has all the elements of continued expansion. However, a different set of numbers in the Business Week section raises questions about the future of growth of health care: * In 1965, when Medicaid was introduced, 76% of poor Americans were eligible for the service. Today, only 38% are. * Less than 40% of businesses with fewer than 10 employees offer health insurance. * The increased utilization of part-time workers has left a significant number of American workers with no insurance.

Overall, 37 million people are not covered by health insurance. Meanwhile, an increasing number of doctors refuse to serve the whole market because the government may pay only 50% of what a private-sector patient pays for the same medical procedure.

Moreover, doctors who do work with government-funded patients are willing to provide only minimal service. Volume must make up for low margins in these cases.

In short, the number of people that cannot afford health care is growing rapidly while the market could be on the verge of contracting.

The demographics are not very compelling. Baby boomers will not reach the age of significant medical demands in this decade. The number of people in the age range of 60 to 70 will actually decline in the 1990s, a result of historically low birth rates in the 1930s.

Granted, there will be a sizable increase of people above the age of 70, but this is still the smallest age cohort in the population. Therefore, the expected, near-term surge in the need for medical services due to population growth may be overstated.

The real source of increased demand for medical services is acute, emergency, or disaster conditions. AIDS, crack-addicted babies, and the last 10 days of an individual's life may create a greater demand for service than any demographic influences.

But detailed analysis is beginning to suggest that future health-care demand is a function of fewer and fewer people paying more and more for increased services. This is not a good basis for a growth industry.

It is unlikely that Americans - whether at the individual, business, or government level - will continue to find more dollars for health care by taking them away from other activities. …