The Real Problem With Healthcare

In all likelihood there will be a final vote on healthcare reform this coming Sunday afternoon.  It looks as if the healthcare bill will be passed.  I’ve said in the past that for the market, this is a positive thing, it takes uncertainty out of the picture, investors can now run the numbers under a new set of rules and decide where opportunities and risks lie in the new environment.  Yes, it is completely possible that over the coming months many healthcare stocks slowly bleed as fundamental investors move to the sidelines given the new rules.  I don’t see a large volatility event though given the passage of the bill, taking uncertainty off the table results in lower volatility, not higher, just look at the financial crisis timeline of political events to see how that works.

I am certainly not the axe when it comes to the healthcare sector, I am often scared to hell of holding long or short positions in biotech companies, which has recently raised my level of stress as I am currently long a few.  You never know if you’ll wake up and see your stock trading down 50%, or if you’re short, up 300%.  The point is that I’m really not educated as to how the bill will effect the healthcare sector.  I will be taking clues from certain value investors over the coming months as to its effect and the new opportunities for investment there.  Remember, at the end of the day I am a trend / momentum investor, I’m not looking to buy cheap stuff, I want to catch the meat of the move, from when a stock or sector breaks out, to when it goes euphoric.  I’ll let the value guys do the heavy lifting.

Below you will find an article from Briefing.com which takes a short look at the deeper issue with healthcare.  Frankly, this is the best article I’ve read to date, it’s concise, gets to the heart of the problem, and is written in a very neutral way.  I do not agree with everything here, including the fact that healthcare insurance companies should not be villainized, there is plenty of blame to be placed on them.  And there are plenty of things around the edges that we can do to make healthcare more affordable in the long run for everyone, including a massive push in preventative care, like getting this country to stop eating shit food and lose some weight.  But the author is correct when he says that there is a fundamental flaw in the system, and I agree whole heartedly.  At the end of the day, it comes down to the fact that our government has decided healthcare is a fundamental right, that everyone deserves healthcare no matter there ability to pay.  I generally disagree with this, but as with trading, you must always deal with the market you have, not the market you want.  Please read on.

While Congress debates and perhaps votes on the massive health care reform bill, the real problem with health care in this country has gone unstated. Americans expect that all health care should come without cost. This is the real problem. As an example, take the test on prescription drug costs at the end of this article.

Health Care Costs Today

Health care represent approximately 17% of the US economy.

This is roughly triple the 5% of GDP that health care represented fifty years ago in 1960.

The rise of a certain component of overall GDP is not, by itself, a negative trend. If this is what citizens want and are willing to pay for, then such a trend represents an increase in the standard of living.

For example, since 1950, the incredible rise of total expense in the US economy on air conditioning would not be viewed as a troublesome problem. It would, instead, be viewed as a measurement of the quality of life in the US.

The same is true of health care. There is nothing fundamentally wrong with the continually rising cost of health care — by itself.

The History of Healthcare Benefits

Yet the continually rising cost of health care is universally pointed to as the reason why health care reform is needed.

Why is this?

The answer is because Americans have come to expect that health care is something that they are entitled to — without cost.

The roots of the view of health care as an entitlement stems from the early days of unionization negotiations, particularly after World War II.

In fact, some have argued that the wage caps imposed on employers by the federal government during WWII are the “root cause” for today’s health care problems.

This argument asserts that employers during that time began to offer health care benefits as a “non-wage” incentive to attract and keep employees during the wartime restraints on granting raises.

Once health care costs became accepted as a form of compensation, however, the push to make them entirely “free” soon followed.

At that point, a “good” union was able to negotiate for health care as a component of compensation.

In 1950, General Motors began to pay health care benefits for the members of the United Auto Workers union. Although initially agreed at 50% of the cost of health care benefits, the labor negotiations in 1964 drove GM to pay 100% of health care benefits for all of its employees, including retirees.

This trend, which is now more than fifty years old, firmly established the idea in American culture that health care costs are someone else’s problem.

Instead, the focus became “how good is the health plan,” not “how much does it cost?”

The Political Situation Today

The focus today on the quality of health care, instead of the cost of health care, is the real problem with health care in America.

The expectation has grown to the view that every American, regardless of income, legal status, racial background, and even current health condition, is entitled to everything the health care industry can provide — and all without cost.

When combined with the idea that there should be no stratification of quality of health care, the viewpoint becomes solidified as an “entitlement.”

Despite the fact that we accept stratification of almost everything in our society according to an ability to pay, society appears unwilling to accept this same type of pricing for health care.

For example, we have low-cost and high-cost housing, low-cost and high-cost foods, low-cost and high-cost transportation, all of which is — for all but the most radical revolutionaries — accepted in society.

Yet the concept of low-cost and high-cost health care is somehow unacceptable.

This fact is underscored by the attempt to tax “Cadillac health care plans” provided by some employers with a 40% “penalty” tax.

It is hard to reconcile such a suggestion with the idea that reform “reduces” the cost of health care when a tax on Cadillac health care plans increases the cost to the employer who provides a “good” health care plan.

Yet, somehow, the idea of “reducing” health care costs by imposing a 40% tax upon quality plans goes unchallenged in the general media.

The only explanation for this is the real problem behind health care: everyone expects it to be free.

The Villainization of the Health Care Industry

As part of this problem, the health care insurance industry is commonly painted as the “villains” behind the rising health care cost problems.

However, insurance companies only pass on costs to their users. In general, insurance companies base the current year’s rates on the prior year’s costs.

When an insurance company raises health insurance costs by 25% in a single year, it is virtually impossible to trace that raise to an increase in profits by that company.

In fact, the entire health care insurance industry is one of the least profitable of all sectors of industry. With an industry-wide net profit margin of just 3%, it is one of the least profitable industries of our economy, despite the incredibly steep rise in revenues.

Why do insurance rates go up?

Because the types of benefits and services provided in health care plans continually increase.

All one needs to do is to think of the types of health care services that did not even exist 10 to 20 years ago to realize how the costs of providing those services, particularly new technologies, have realistically increased.

Expensive procedures such as MRIs, colonoscopies, arthroscopic surgery, artificial joint transplants, and many others simply did not exist as part of “health care” in the past.

Anyone who thinks such procedures should be provided at the same cost as health care procedures from 20 years ago is simply being unrealistic.

Yet that is exactly what most of the American citizenship is doing when they consider health care costs.

The villainization of health care insurance companies is made easy because consumers erroneously see only the insurance company as the “payee” for their health care, instead of only the “middleman.”

There is no clear linkage in the mind of most consumers between the cost of services provided and the payment for those services.

The reason for this “disconnect” is that virtually no one actually “writes a check” for their health care services.

Even the uninsured consumer who enters an emergency room with an uncovered injury rarely “writes a check” for the full value of the services provided.

The Disconnect

Consumers pay for their health care with deductions in their paychecks. While they are fully aware of the costs and impacts of those charges, there is virtually no way to provide a linkage between the insurance costs and the actual costs of what is delivered.

Part of the problem for this is that — unlike other forms of insurance — consumers of health care rarely get an actual bill for those services.

In a covered car accident, by contrast, a consumer receives an “estimate” from a body shop for the cost of repairing damages. In a covered accident, the consumer then receives a check directly from the car company, or the body shop is paid directly.

In either case, the consumer can clearly see the relationship between what they paid for car insurance and what the car insurance company had to “pay-out” on behalf of that consumer.

This type of clarity is simply non-existent in most health care situations. The only awareness most consumers have of health care costs is the amount of their “co-pay.”

Test Yourself — What Do Your Prescription Drugs Cost?

As an example, if you, the reader, has a health care plan that provides prescription drug coverage, ask yourself the following questions?

1. What is your payment amount for a month’s supplied of a covered prescription drug?
2. What is the amount billed to your insurance company for that covered prescription drug?
3. What is the amount that the pharmacy would bill to Medicare for the same covered prescription drug?
4. What is the amount that the pharmacy would bill to Medicaid for the same covered prescription drug?
5. What is the amount that you would have to pay for the same monthly supply of the prescription drug if you had no insurance of any kind?

We suspect that most readers — and most Americans — are able to answer question #1 only.

The irony is that the answers to the other questions — which logically should be the same amount for each situation — is almost always widely different.

Why does this bizarre situation exist?

Because the ultimate consumer of health care services and products has become completely detached from the payment for such services.

The Real Problem

Products and services in a free, competitive market have prices set by demand, offset by the availability or supply.

Demand, however, is often regulated by the consumer’s ability to pay. Supply of luxury items is adjusted by vendors to match to the size of the market who can afford such services.

In sharp contrast, however, the price of health care has been set by excessive demand on the part of consumers, none of whom are restrained by having to pay for services themselves, as is common in other industries.

The above situation is the “real problem” with health care in the US. It is not the “villainous” health care insurance companies, nor the “unfair” provision of good health care coverage to “upper class” members of society.

The current health care reform bill not only does not address this “real problem,” it in fact, might exacerbate it since it portends to make quality health care available to all Americans — while reducing cost at the same time.

Neither the health care reform bill nor the trends of the current situation of health care provision in America address this fundamental problem of misalignment of supply and demand.

This means that the current health care “reform” bill will not likely change the expensive and “draining” costs on the US economy, even if it is passed this weekend.

It is for this reason that we believe health care will continue to be an “uncontrolled” expense in the American economy for the foreseeable future, meaning that the industry will divert capital from other productive sectors of the economy.

There is nothing fundamentally wrong with that, except that such allocation of capital should be made in a fully conscious and aware manner by the individuals in that marketplace.

And that doesn’t happen in the health care marketplace.

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