• BLACK FRIDAY LIMITED-TIME OFFER...

    GET THE BEST DEAL WE OFFER ALL YEAR

    EXPIRES SOON... THEN IT DISAPPEARS

Editor's Note: This is a complimentary research note published by Healthcare Policy analyst Emily Evans on 7/19. CLICK HERE to get COVID-19 analysis and alerts from our research team and access our related webcasts.

Inflation, Deflation & Geopolitics In A COVID World Order - 02.26.2020 black swan cartoon

Politics 

A persistent effect of leaving the same people in charge of politics for too long is the hardness of certain issues that leave little room for compromise, even when policy and public concern have moved on.

Tort law is a good example. Republicans, when they are lawyers (and there are a lot of lawyers in Congress), tend to represent business interests and have made tort reform a priority, long after states have enacted their own limits.

Democrats, who are more often part of the plaintiffs' bar, tend to favor regulations to protect workers even as dangerous occupations in America have diminished. The increasing irrelevance made the divide primarily an academic one.

Until the COVID-19 outbreak.

Limits on liability for employers and protection for employees has emerged as a major focus for both parties attempting to hammer out another COVID-19 relief package. 

The draft plan circulated by Republicans would create an exclusive federal cause of action that would rely on a high legal standard for finding liability. The standard, assuming Republicans get their way, would be "gross negligence and intentional misconduct," provided "reasonable efforts" were made to comply with public health guidelines.

This standard would exclude acts of ommission not contemplated by public health guidelines and general incompetence.

The new proposed legal standard for COVID-19 related lawsuits would apply to cases filed by employees and patrons against any church, school, government or business. An even higher standard would apply to health care providers in the context of services for COVID-19 patients.

In that case, "reasonable efforts" would not be required and the plaintiffs would only have to prove "gross negligence and intentional misconduct."

Democrats have favored an OSHA standard that would specify workplace regulations to prevent spread of the disease between employees and between employees and patrons. These standards could include provision of PPE, education, and even workplace clinic health care and free testing.

COVID-19, as we pointed out in last week's note, provides Democrats with the first opportunity in a generation to regain their status as the party of the working class.

Having squandered their base in the amorous pursuit of policies that favored capital over labor and foreign manufacturing over national security, they need to put up a fight to revive workplace standards as a priority. 

For Republicans, limits on liability are a showstopper which means, this being Washington, there is a compromise in there somewhere. Whatever that deal is, the result is sure to be higher per unit costs on everything.

Policy

The one place prices are not likely to increase as a result of the COVID-19 driven meltdown of international relationships and domestic politics is health care.

The perfect tsunami of deferred care, a sudden and massive shift to government payers and the implementation of the Trump administration's health agenda - COVID-19 and not - have set it up for a deflationary trend not seen since the 1980s.

Of all those things, the most meaningful change is likely to be the Trump administration's requirement that hospitals post their prices in machine readable format on their websites and to do so for all payers, including self pay. A couple of weeks ago, the D.C. District Court upheld the regulation setting the stage for implementation in January.

The American Hospital Association and others have appealed but now doing so from their back foot. Their arguments were pretty lame even for those of us generally sympathetic. Complaining about producing big spreadsheets in an industry built around sophisticated billing and coding systems does not summon one' credibility.

We also understand that the next COVID-19 relief bill will include language codifying the regulation, sidelining the judicial process. If what we hear is correct, the AHA will be in an interesting position. Do they lobby against a bill that might provide needed economic relief, including to their members? We would expect not and after having been sent billions of dollars already, Congress is not likely to be very sympathetic to an industry that doesn't want anyone to know what it charges.

The cruel irony of a deflating health care sector is that it is included in CPI incompletely and indirectly. The BLS calculates its large medical services index by estimating out-of-pocket costs, including cost-sharing and premiums paid.

CPI does not include government payers like Medicare Part A and Medicaid nor does it include the employer funded portion of the premium. CPI has and will continue to understate medical cost inflation.

Policy makers are going to be in a tough spot if things play out as the current set-up suggests. While the costs associated with part of an important household expense may moderate, prices for other things may rise. The dissonance of recent years where household inflation has been disconnected from headline CPI will start to run in reverse. Hard to tell if that will be a good thing or not.

Power

America's love for cheap stuff was an affair bound to come to a miserable end. The unholy alliance between American political and business leaders and foreign manufacturing powers, especially China, left only a blind eye turned toward tragic human rights violations, industrial espionage, environmental destruction and censorship, at home and abroad.

The payment for such surrender of the foundational American principles of free speech, rules-based governance and the sanctity of human life?

Lots and lots of cheap stuff.

Would such an abrogation have occured were it not for the way in which lots and lots of cheap stuff, from flip-flops to ibupofen, masked anemic wage growth and a stalled trajectory of American living standards? History will probably shout "no."

The cosmos' sick sense of humor sent a virus from China, of all places, around the world, forcing a re-trade of that deal, unimaginable just a few years ago. It has also laid bare the fragility of that which should be durable, like supply chains for medical devices and drugs. From there it is a short walk to examining China's influence over rare earths, digital infrastructure, medical research and technology.

When foreign policy and statesmanship become a thing again, mark July 2020 as the beginning of a new chapter on America's relationship with China. In as many weeks there will be three speeches delivered by Attorney General Bill Barr, FBI Director Chris Wray and Secretary of State Mike Pompeo on America's relationship with China and the immediate need for change.

Barr's speech last week covered a lot of ground but he dwelt for some time on American reliance on China for Protective Protective Equipment in the form of surgical procedure masks and gowns, as well as Active Pharmaceutical Ingredients and medical devices.

Echoing a similar call from Lewis Powell - later Justice Powell - during the Cold War, Barr asked American companies to end certain business practices with China, such as JVs, in-country factory construction and mandatory IP transfer, that will become tools of their destruction.

With many of China's worst human rights practices being examined in the context of the end to "one country, two systems" in Hong Kong and the prospect of arbitrary arrest of American citizens, the decoupling of American manufacturing, generally, from China seems possible for the first time.

The COVID-19 outbreak and the national security need to have dependable and exclusive control of medical supplies makes it almost mandatory for the health care sector.

Whether that supply chain migrates to Vietnam or India or some other emerging market with cheap labor or is re-domesticated hardly matters. Few countries are able to subsidize production like China. With the entire world rethinking its dependency on China for manufactured medical supplies, alternatives and its labor, will be in high demand.

For suppliers, device makers and pharmaceutical manufacturers and distributors, the aftermath almost certainly includes higher unit prices and a reckoning with the competition they may have created for themselves in China.