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March 23, 2010

A First Reaction to Our New Healthcare Reform Law

Getting health insurance for everyone in this country is a worthy objective that I have wanted to see achieved.  However, I believe the techniques used in the new law to accomplish universal health insurance create serious financial issues that its sponsors have avoided addressing, assuring that as a nation we are bound to confront a massive healthcare driven financial crisis in the very near future.

Recall that several weeks ago I put together a simple post titled “Follow the Money,” that explained that it would cost at least $200 billion to cover all 47+million of the uninsured under today’s average insurance premiums. Presumably the $200 billion would be financed by mandated individual payments and government subsidies (paid for by tax increases). These costs should be expected to grow annually by about 8% (which is the annual growth rate of HC costs, today).

It is fair to speculate, as some have, that using current HC costs and growth as a projection tool misses the latent demand for HC services present in the high-risk uninsured population.  As this manifests, it could create an immediate upward shift in demand for HC and in turn accelerate the rate of growth of HC costs.  As someone who deals with the actuarial realities of HC costs as part of many an investment analysis, I believe this concern has merit.  Over the past 20+ years, as private healthcare evolved from indemnity (80%/20% with a deductible) to first dollar insurance (HMOs, PPOs and POS plans), healthcare utilization accelerated massively, at a minimum demonstrating that HC consumption follows the law of moral hazard, i.e., it increases when HC is perceived as “free.”

As a matter of legislative necessity the new law “works around” this real economic problem and its analysis.  The mechanics of the law requires tax revenues to expand ahead of the provision of subsidies, creating a ten-year projection of net federal deficit reduction (about $134 billion, read, the plan is profitable for the first ten years).  This is exactly how the law had to be structured for it to pass the CBO test and be eligible to become law.  Unfortunately, at some point within or shortly after the 10-year projection period it seems certain that HC subsidies will overtake tax revenue, creating the same ongoing funding problem(s) we constantly face with the current Medicaid and Medicare programs.

On this basis, my first, and unfortunate, take on this law is that it will fail on a financial basis without significant modification to its financial sources, incentives and HC delivery mechanisms.  Such modifications need to be designed to curb moral hazard and HC cost inflation.

One of the main purposes of this Blog (and my professional life) is to explore (and invest in) solutions to these issues. This law accelerates the need for these solutions, almost to an uncomfortable extent.  It may be too much of a financial burden too soon in the technology cycle, which I see as only recently focused on simultaneously lowering costs and improving quality in the HC system.

For any HC reform that envisions universal coverage to work, both financially and medically, it will need eventually to include:

  1. Expansion of consumer accountability and engagement in HC purchasing decisions (HC cannot be perceived by anyone as “free” or a “right” – it is an individual and collective cost/liability that must be managed by the power of the consumer marketplace and the diligence of individual beneficiaries)
  2. Changing HC service compensation from fee-for-service to performance and quality based compensation (just like in almost every other American industry)
  3. Mandated reductions in medical errors and redundancy, especially in hospitals
  4. Deployment of technology and accountable care management designed to more efficiently care for the chronically ill, which represents 70+% of all healthcare costs, especially those insured individuals with 4 or more chronic illnesses

Unfortunately all of these necessities are materially absent from our new law, and as a result, I am unable to applaud its passage despite my genuine belief that universal coverage is a desired and ultimately obtainable goal.  With this legislation I am afraid we are headed down a path that does not portend eventual success.

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