This note was originally published at 8am on February 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”
-John F. Kennedy
Keynesian dogmas are often criticized at Hedgeye. While fiscal and monetary policy is often the target for critics, health spending is often ignored. Perhaps it is easier to comment on growth and inflation metrics in the broader economy than it is in the healthcare sector. But the similarities are apparent. Over the last 50 years government health spending has coincided with rising medical inflation and slower growth. Maybe it is time to try something different.
The health reform debate has a long history, but one that has generally ended with rising demands on public financing. As of today, government payments account for over half of the total medical spending today in the United States. Medical spending finds itself again as central issue in the current political debate.
For all of the public support for the health sector, or because of it, affordability and access continue to be the chronic platforms of the debate. Since 1999, family insurance premiums have risen at over 8% per year and 3X the rate of wage growth, rising from $5,791 in 1999 to $15,073 in 2011 (Kaiser Family Foundation). At this rate of increase, a family policy will cost $22,000 in 2016 and $32,000 by 2021. Meanwhile, the employee share of insurance premiums has risen while wage growth has been stagnant. But worst of all, access is shrinking. Out of pocket expenses and deductibles make it unaffordable for many to seek care, while of those insured by Medicare and Medicaid, physicians refuse these new patients 13.7% and 28.2% of the time, respectively.
We are hopeful that President Obama’s Affordable Care Act will produce all that has been promised by the President and the Congressional Budget Office, namely improvement in access, lower costs, and reduced federal deficit. For reasons we won’t elaborate on here, we believe The Affordable Care Act, while different in the details, will have the similar outcome as past expansions of government health spending. We expect the legislation will reduce access, drive medical costs higher, and worsen the deficit.
PRICES ARE THE PROBLEM
It is cliché at to say health spending rises faster than broad measures of inflation such as the Consumer Price Index. Despite the widespread belief that this is driven by an aging population, the surprise finding far less spoken about is the miniscule contribution an aging population makes to annual medical inflation. According to a 2006 study of hospital care, the annual contribution to hospital spending from an aging population is 0.74% (Banker et al, Health Affairs 2006). In other studies of total medical spending, the aging contributes only 0.50%. Removing the demographic fallacy, the conclusion should be to focus on prices.
Putting this in the populist context of Apple and its $108B in fiscal 2011 revenue, an annual price increase on the $2.6T Health Economy adds $130B in additional revenue, or cost, to the system, with a corresponding “value” that is impossible to compare.
TRY SOMETHING NEW
We find it a shame that the healthcare sector is entering its second decade of decelerating growth and lower multiples yet enjoy more government support, more regulation, while Americans have a profound need than ever before. We’d love nothing more than see routine 5% annual price increases and $130B in new spending turn itself into a new industry to analyze. Unfortunately prices are going up, and the system remains broken and ineffectual.
WHAT CAN BE DONE
My bookshelf is cluttered with too many books on how to fix healthcare that I have spent too much time reading. Many offer intelligent alternatives. Many are diligently researched. But all of them lack a simple and practical solution. Here’s my simple solution: create a National Health Score, or a credit score for your health.
A NATIONAL HEALTH SCORE
A National Health Score would convert well known patterns of per capita medical spending and creates a national underwriting table. With a Health Score, creating a price for a health insurance policy for an individual is turned into a function of age and a few simple risk factors. Additionally, remove the risk of catastrophic event by insuring and caring for those rare events separately.
On an individual basis, the Health Score would focus an individual on factors they can control. A 42 year old father of 2, who is overweight, has high cholesterol, and is a tobacco user should pay more than a healthier 42 year old. However, if by his own effort he slims down, quits smoking, and improves his Health Score, he should pay less. By consolidating the risk factors into a Health Score and using it to set the monthly premium, an individual has the “skin in game” that consumer directed healthcare advocates so desire, but its centered on things the individual has control over. Over time, the system benefits from lower long term costs.
CHARGING MORE AND LESS, LEGISLATORS AND POLICY SETTING
The fact that the existence of a three tier system is accepted so calmly in the United States (private insurance, government, none) while we lead the globe in per capita health spending at close to $8,000 per capita, should be alarming. With a Health Score in hand, legislators and policy will be allowed to turn to how much support an individual receives and how to improve the aggregate Health Score of the population.
GETTING SICK IS NOT A CRIME
The reality for the vast majority of people is that a serious episode of care is a rare event. For a hospitalization, the percentage of people are admitted to a hospital in a given year is in the single digits. For those between the ages of 18 and 44, the rate is 5.9%. For those between the ages of 45 and 64, the rate is 6.9%. The downside of course is when you find yourself in the group that goes to the hospital. The high cost of the care, which carries a mean expense of $11,433 and $20,252 for these two age groups, can harm many, and bankrupt others, and make health insurance prohibitively expensive after an individual does get sick. By treating people who find themselves unlucky enough to have a major episode, they should be considered a separate group and insured and cared for that way.
The prognosis for the Health Sector is not good. Decades of expanding government spending appears set to continue. Growth will continue to decelerate, multiples will move lower, while government expenditure rises to new highs. Consumer trends will continue to rise in importance, and pricing leverage will continue to wane. I’ll continue to play the game in front of me, but I am hoping for something different.
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1714-1744, $117.81-120.28, $79.06-79.67, and 1348-1360, respectively.