Healthcare in the News (Part I)

Yep, I’m going there. I’m sure everyone has been hearing about it. Well, at least the readers in the US have been. Healthcare reform – President Obama’s top domestic priority – has been in the forefront of people’s minds these days. Understandably, many people understandably have strong opinions about it. So, I figured I’d share my thoughts on the topic and provide insights on potential investments opportunities that can come of the inevitably sweeping changes.

The Problem

The issue with healthcare today is, in my mind, very simple – it’s too expensive and not enough people have it. The US has one of the highest levels of uninsured people of all industrialized nations. That seems a little strange considering one would think in an open market economy, businesses would find a way to tap into so many potential customers. Furthermore, when inflation for healthcare costs is well into the 20%+, many times overall inflation, you know there’s a problem. Like any problem with this level of complexity and magnitude, there’s more than one reason for it. Here’s what I think are some of the major reasons:

Why I Think Costs are High

1. Tort Reform – I’m a firm believer that the way healthcare lawsuits are treated in US courts is a major contributor to rising costs. The reason I believe this is because of the cascading effect that healthcare litigation costs has on cost of care. When a doctor is afraid that a mistake he makes can cost him/her millions in lawsuits, he’ll always play it on the safe side. This means ordering potentially unnecessary tests that may have already been performed. This in turn creates additional costs for insurance companies that have to pay for these tests and eventually trickles down to the consumer. Furthermore, malpractice insurance rates become a huge factor in the costs for providers. Again, when a doctor has to pay $100,000+ a year in malpractice insurance premiums, these costs will also trickle down to you, the consumer in higher prices for doctor visits and procedures.
2. College, I went to a lecture given by the CEO of the Carle Hospital System – one of the biggest healthcare providers in central Illinois. His take on healthcare costs, one that I agree with, was that the cost of healthcare is largely driven by who can pay. In other words, there’s a vicious cycle going on where uninsured people cannot afford for the healthcare that they inevitably need. When they can’t pay, the hospitals must make up the difference through charging those who can pay more. Well, eventually the insurance premiums of those who can pay will go up, and this will likely lead to more people being uninsured and the cycle continuing. The reason why you have to pay $400 for that night in the hospital isn’t because it’s the Four Seasons. It’s because the guy in the room next to you can’t pay the $400, so you have to make up the cost.
3. Inefficiencies – Take this from someone who’s been consulting for healthcare companies for a few years now – there are TONS of inefficiencies out there, especially in insurance. These companies are 10+ years behind on the innovation curve as most other industries, and that is adding significantly to costs. Leveraging technology to increase the efficiency of this admittedly complex industry, I feel, will definitely help solve the problem.

Why I Think the Number of Uninsured is High

1. The Catch-22 Again – Like I mentioned in point 2 above, there’s a vicious cycle of the uninsured driving costs up thereby leading to more uninsured is never-ending. This needs to be addressed directly before any improvement can be expected
2. Lack of Competition – The health insurance industry is very regional. I was reading recently that 80% of people in the US have 5 or less health insurance companies to choose from. This is despite the fact that there are literally dozens out there. The primary reason for this is regulation differences from state to state. This leads to difficulty for companies to reach outside their respective region to compete with others and needs to change. The regulatory landscape needs to become more uniform, and insurance companies need to stretch out and compete with each other more. This will help bring down costs and get more people insured. Just look at what competition has done with pharmaceutical retailers. With the advent of Pharmacy Benefit Mangers and the fierce competition between retailers like Wal-Mart and Walgreen’s, you can now get a generic prescription filled for $5….ten years ago, that would’ve been unheard of! We need to be able to get this type of competition in place for insurance as well.

The problems associated with healthcare are obviously more complicated than the 5 points I mentioned above. But I feel that if we just address these 5 points, we can go a long way to solving one of the most prevalent social issues of our generation. For my next post, I’ll discuss the solutions that the government is proposing and where those solutions are addressing those 5 points. I’ll also talk about how you can invest to take advantage of the reform.

In the meantime, what do you think the solution should be? Do you agree with the 5 points above? Why or why not? I’d be happy to start a dialogue for any comments that you guys make.