Health care reform is becoming a political priority
29 07 08 - 11:57
The Implications of Health-Care Reform
The U.S. health-care system faces many problems, which are widely publicized: the stress of an aging population and rising costs, tremendous inefficiencies, and imperfect quality
By Wendy Diller - BusinessWeek
With the U.S. presidential election coming this November, health care reform is becoming a political priority in a way it hasn't since the Clinton Administration in the early 1990s. What are the implications for health care companies payers, providers, and manufacturers? While it's too early to say for sure, most of the solutions presented so far share underlying principles that we think enable realistic discussion.
We believe an ongoing flow of statistics underscores the current health care system's flaws: In 2006, about 47 million Americans lacked health insurance, up 8.6 million from 2000, according to The Commonwealth Fund, a health care policy think tank. A Commonwealth study released in June 2008 noted that the number of underinsured American adults rose nearly 60% to 25 million in 2007, from 16 million in 2003. The underinsured have health coverage, but still face access and financial constraints similar to uninsured people.
At the same time, total costs are rising: In 2007, the nations health care spending was $2.7 trillion, up from $2.1 trillion in 2006, according to the Centers for Medicare and Medicaid Services [CMS]. Employer-sponsored health insurance premiums rose 10 times faster than family income between 2001 and 2005, according to the Robert Wood Johnson Foundation. Medicare trustees project that Medicares chief financing vehicle, the Health Insurance Trust Fund, will be exhausted by 2019.
Details vary, but in broad terms, most groups Democrats and Republicans, the private and public sectors, big corporations, and individuals agree that solutions must include broader access to health insurance through more affordable, simpler insurance plans, greater efficiencies, and cost containment measures. Proposals to achieve these aims typically center around a greater emphasis on value-based medicine, that is, closer correlation of reimbursement to effectiveness, more cost sharing between payers and consumers, greater pricing transparency for medical services and products, and development of reliable, independent measures of quality and cost-effectiveness of health care services and products.
In general, we think companies that are involved in initiatives of the kind mentioned above stand to benefit. Most large managed care organizations [MCOs], for example, are rapidly diversifying their customer base and product portfolios, moving into the small group and individual markets, which until recently they considered niches with modest potential. Coventry Health (CVH), Cigna (CI), WellPoint (WLP), and others are offering a bevy of new kinds of health plans at different price points that appeal to people who are struggling to afford health insurance premiums. While their main motivation is to offset slowing growth in their core large group businesses, theyre also addressing the uninsured population problem.
These niche markets remain, however, only a small part of their business, and their potential is uncertain. As of the end of the first quarter of 2008, companies offering lower-cost plans struggled to increase enrollment; a Kaiser Family Foundation [KFF] study released in April found that most uninsured households can't afford high-deductible health plans. One reason is the faltering economy, which is forcing consumers to make hard choices; another reason is, for a certain subset of people, the premiums are still too high. "The question is how low can the companies bring the price point and still provide meaningful coverage in the face of rising medical costs?" asks Phillip Seligman, a Standard & Poor's equity analyst.
Companies with larger exposure to Medicare and government-financed programs also may be more vulnerable to health care reform proposals, as government programs often lead the way in changing the health care payments and reforms. Pharmaceutical companies have benefited greatly from Medicares new prescription drug plan [PDP], but they could be at risk if the government takes steps to better control costs of this expensive program, in our view.
Among pharmaceutical companies, those with a large proportion of drugs that are widely used by seniors and thus recipients of significant PDP funds include Merck (MRK), Pfizer (PFE), and Eli Lilly (LLY). Others, like Wyeth (WYE) have less exposure to Medicare PDP, in our view. Among device companies, those that make products widely used by seniors are also at risk of changes to Medicare funding. These include implantable device makers St. Jude Medical (STJ), Zimmer (ZMH), Boston Scientific (BSX), and Medtronic (MDT).
That being said, health care reforms are likely to play out in unintended ways because Democrats and Republicans hold widely disparate views on how to achieve greater access to health care insurance and how to fund a system that is beset by spiraling costs. Democrats would guarantee access to affordable health insurance by replacing individual insurance policies with new group options, offered by both private and public payers, and, in some cases, by expanding government programs, including Medicaid.
Republicans, in contrast, favor tax credits for individuals to encourage them to buy insurance on the private market, while removing existing tax incentives for employers that offer health insurance. Employer-sponsored health insurance is the backbone of the current system, but many Republicans believe it discourages competition and disconnects costs from utilization and effectiveness.
No matter which partys candidate wins the presidential election in November, most experts agree that incremental reforms are much more likely to occur in the near term and substantial nation-wide reform remains a long-term proposition. In the absence of national consensus, states are undertaking some high-profile but small reforms on their own. Massachusetts, Maine, and Vermont have come closest to instituting near-universal health insurance coverage for their residents. Another 14 states are in the process of developing comprehensive reform plans, according to the KFF.
The two-year-old Massachusetts plan, in particular, is in the spotlight as a potential harbinger for more sweeping, nationwide change. As of July 2007, the state has mandated that all residents purchase health insurance or, beginning in 2008, face financial penalties. To help low-income people, it offers subsidies and premium fees based on a sliding scale. At the same time, all employers with 11 or more employees have to offer health insurance or pay into a fund set up to subsidize individual policy purchases. A public-private organization, the Commonwealth Health Insurance Connector Authority, administers the program. As of March 2008, some 350,000 of an estimated 600,000 previously uninsured people had obtained health insurance, KFF reports; Maine's and Vermont's programs are a fraction of the size and scope.
While state governments are driving these initiatives, some involve the private sector. Companies, however, can't yet estimate how much they will benefit, if at all.
In Massachusetts, the enrollment numbers seem impressive. However, none of the large MCOs that dominate national markets were willing to offer their services; the participating private carriers are small, regional players. Also, the Massachusetts program's costs are greater than expected, while efforts to contain medical spending are stalled in the legislature. Thus, other states may be reluctant to duplicate the effort.
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