Friday March 19. 2010
My job is to understand events and translate them into investment views and strategies. It is in this vein, that I offer the following comment on the latest health care reform bill that seems likely to pass this weekend. It is also my attempt to help you understand it better. The United States spends 2-3 times more per capita on health care than most other developed nations and we don’t get our money’s worth in my opinion. Among developed countries, for instance, the US is below average in life expectancy.
The fiscal impact of the bill on the nation’s balance sheet is the primary investment issue and there are details in the bill that I see, as presented by the Wall Street Journal, that are going to be negatives to the market. There are some slightly positive aspects and finally there is a glaring omission that leaves me concerned. The CBO has announced that the bill will result large savings over 10 years and into the future. Be skeptical of that. They are under tremendous pressure.
Negatives:
The negatives surround the extra taxes that are going to be levied to pay for the expansion of coverage to those who now are not covered. It should be noted that the indigent go the emergency room when they really need medical attention and they are admitted. The cost for their care, and emergency room care is quite expensive, is passed onto all of the rest of us in higher prices. So there is some part of this expansion that is already in the system. The extra taxes are focused on those with incomes over $250,000. For those people, interest and dividend income will be taxed at higher rates next year it appears if you are above that income level. There are other taxes, but again they are not directly affecting the majority of people, but are going to have some influence on the market in the future and the consumption of certain items such as super expensive health plans. New taxes such as those on insurance companies and medical device companies will probably be passed on to us. There is some element of charade in these numbers.
The bill will probably hinder some job growth. The rhetoric against the bill misses that it is employers of more than 50 people, for instance, who will have to provide a plan or pay a $750 per employee penalty. That penalty isn’t huge and presumably the fee will be used by the government to subsidize a system of health insurance accessible by individuals. Employers of more than 200 employees don’t have the option of not providing health insurance. What we think of as small buisiness, those employing less than 50 persons, doesn't pick up a mandate to provide health coverage.
Positives:
The positives begin with the fact that the issue will be better defined and the uncertainty can diminish. Good for everyone to get this worked out, but this is only the beginning. A very very long slog lies ahead.
Another positive is that the cost of care issue in the US is being addressed, though only superficially, by the pooling of insurance buying for individuals and small business people. I believe the market is also going to be opened up to interstate competition. Competition will help but it is indirect isn’t it? It is competition between the insurance companies that charge 15% of the system’s cost to allocate funds. This is helpful but not a solution.
It is positive that health care will be more accessible and the risk of financial devastation due to health problems will be reduced. This is a positive for small business and the general welfare of the nation. Broad coverage also offers us hope that inefficient emergency medicine can be reduced as the gateway to health care by the poor. That can save us all money it is hoped.
Omissions:
I am going to say here that I am very critical of the absence of health care cost reductions in this bill. The government has an opportunity to get something important done here and they have passed on it. The most obvious reform would be tort reform, opposed by the trial attorneys. It should be noted that the trial attorneys are politically very powerful and are in particular patrons of the Democratic Party. Tort reform would limit damage awards and eliminate medical malpractice as a gold mine for attorneys and an unmanageable risk for physicians. It would undoubtedly decrease the cost of healthcare in the US by allowing physicians to practice sensible medicine and not order every possible expensive test in order to protect themselves from lawsuits.
We should wonder why the absence of tort reform in the bill should be tolerated by the taxpayer. Certainly it is a reform that would be quite popular among voters but not politicians.
Another omission is how the $438 billion cut in Medicare reimbursement over 10 years is paid for or what it means in practice? This cost reduction is the cornerstone of the savings in the plan and it hasn’t been given much airtime. It seems to be a cut that the care providers are supposed to work into their practice. Will it mean they serve Medicare clients differently? I don’t know. It probably does.
In the US, we pay more for drugs and specific treatment than other countries. There are incentives for treatments to be offered us regardless of cost or the effectiveness. Incentives such as more profits for the provider, or a patient who feels better cared for or to avoid the attacks of trial attorneys all contribute to our too expensive healthcare system. Does this bill really tackle this issue? I don’t see that it does.
I also think the role of insurance companies needs to be justified in our system. 15% of the cost of healthcare is the insurance industry’s “administrative cost”. The hospitals also have significant administrative costs as do companies who provide insurance to their employees and then the government is administering too as do individuals who are bombarded with bills, and letters about deductibles and denied coverage. Pretty ungainly apparatus it seems, the value of which is questionable.
While it is good we are finally dealing with the health care issue in our country, without smart cost reductions, we should be concerned about the effect on the economy and for the coming generations who are being left with a legacy of debts. Real reform isn’t just about coverage expansion. Health care reform without cost reduction is at best a neutral but probably amounts to a negative and which is probably why there is so much opposition to the bill.
Post Script; March 29, 2010
There is a growing list of talented and non-partisan voices refuting the claim by the Congressional Budget Office that the Health Care Reform Bill will lower the cost of health in America. William Gross of Pimco manages more fixed income money than anyone on the planet and it his business to comment on this issue. If the US government isn't solvent at some time in the future, he has to take steps to protect his client's vast holdings of government bonds. Gross sees the CBO estimate as false and in his montly report last week sees at least a $500 billion cost deficit instead of a savings.
More than anything, the health issue is a fiscal issue. A 50 year old man who is 50 pounds overweight can ill afford to put on more weight if he wants to enjoy a healthy retirment. A 234 year old man, Uncle Sam is now doing just that. He is alot overweight and gaining much more every year. Will he make it to 250?
National Geographic, Excellent Graph Showing Heath Care Cost Problem, Dec 2009
http://blogs.ngm.com/.a/6a00e0098226918833012876a6070f970c-800wi
Wall Street Journal Table
http://online.wsj.com/public/resources/documents/st_healthcareproposals_20090912.html
New Yorker Article on Cost Overruns of Medicare
http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande
