While markets may lack the rational intelligence needed to become the “invisible hand” that guides constructive change, free markets (and the shrewd marketing experts that corporations employ), can be quite astute when it comes to responding to changing trends. This is, after all, a matter of survival. If they don’t get ahead of the trend, they risk a rendezvous with a moving train.
Although members of the American public may not be at all certain what the Affordable Care Act will mean for them, insurers, hospitals, drug makers and device makers have made it their business to read the legislation carefully. These companies realize that it would be reckless to assume that the legislation will be repealed: their competitors already are preparing for change. Thus, market-watchers say that in the medical marketplace, reform is becoming a reality as the health care industry implements fundamental changes in insurance coverage, access, payment, and how health care is delivered.
At a recent University of California-Irvine Health Care Forecast Conference, health care economists and market-watchers explained that whatever happens in Washington, health care “reforms are acquiring their own momentum.” The Kaiser Institute for Health Policy’s Jon Stewart explains: “Quite apart from the status of the reform law itself—whatever happens to the reform law—politically, judicially, or economically” many speakers at the conference agreed that health care reform, has left the station and is not likely to be turned back.” (For a webcast of the entire 2011 Health Care Forecast Conference at U.C.-Irvine, click here)
Talking about the market’s response to reform, Chris Jennings, a former White House health care analyst and now head of Jennings Policy Strategies, made the case that “continued implementation makes reform part of the fabric of the system and more difficult to roll back.” Moreover, “every time [conservatives] talk about repeal, this gives Democrats a chance to define what people will be losing.” And as reform moves forward, more Americans will experience how they will benefit from the Affordable Care Act. In the end, “even if repeal were somehow successful,” Jennings says, “the market will have changed so much, repeal wouldn’t alter it.”
But, what about the threat that the Supreme Court will strike down the individual mandate? Ted Shannon, a health equity analyst and hedge-fund manager from Arrowpoint Partners, a Denver-based asset management firm, argues that “a Supreme Court ruling won’t come until after the election, probably not until 2013.” By then Shannon predicts, reform will have already “given shape to a new world order in health care financing and delivery, and if industry players are not ready for it, they are going to be in a world of hurt.”
Why would the Supreme Court wait so long before taking the case and handing down a decision? After having an “‘influence’ on presidential elections in recent years,” Shannon observes, “the Court won’t rule on this until after the 2012 election.” I agree. The Justices care about their place in history. They really don’t want to be accused of “fixing” another presidential election.
At the conference, other speakers offered examples of how parts of the system are moving to adapt to reform: “Providers are joining larger medical groups and the conversion to hospital-led medical group partnerships is well underway,” noted Robert Kocher, director of the McKinsey Center for U.S. Health System Reform. “That’s a huge change in the way medicine is practiced in this country. as it sets the stage for more integrated and coordinated systems of care through the kind of accountable care organizations (ACOs) promoted by the reform law.”
John Gorman, leader of the Washington, DC-based Gorman Health Group, an organization that provides Medicare regulatory compliance advisory services to health care payers, added that Medicare will serve as the benchmark and driver for ACOs. Medicare “will lead a system-wide, irreversible change in how care is organized, delivered, and paid for,” Gorman declared, becoming “the blueprint for what you see in the rest of the payment system with a fundamental shift from fee-for-service to more risk-based payment systems that reward quality and efficiency.”
Will all of these ACOs, medical homes, and innovations such as nationwide heath information technology be up and running by 2013? Absolutely not.
But, by then, not only the government but the private sector will have invested so much money in moving away from fee-for-service care, redesigning insurance so that it will meet the new standards, offering insurance to the employees of small companies, and changing how care is delivered (as leading medical centers turn themselves into Accountable Care Organizations and physicians collaborate to create medical homes), that reform will have become all but inevitable.
A Wall Street Perspective on Why Reform is Baked into the Market’s Cake
Listening to the speeches at the University of California-Irvine conference, I was struck by hedge-fund manager Ted Shannon’s take on why reform cannot be stopped.
According to Shannon, the Affordable Care Act is “the inevitable outcome of the failure of the industry to find a sustainable solution” to providing health care for the United States. We have endured “a long-term unsustainable trajectory of [health care] inflation,” he notes, “in an industry too big now to be driving economic growth in our country.” Shannon is correct: typically small, innovative companies spark growth; mature, risk-adverse corporations that are trying to meet the expectations of investors accustomed to steady, high returns do not.
For the health care industry, Shannon explains, the “choices are very simple: either they work together through models like Accountable Care Organizations” that reform legislation proposes, or we are going to see government price regulation. As he put it, industry players must “accept cost controls with volume offset” (the Affordable Care Act brings the health care industry 32 million new customers while simultaneously forcing many players to rein in their costs) OR the industry will be forced to “accept cost controls, price controls and volume controls—while losing total control.”
Shannon is correct: The Affordable Care Act does not set prices. But it will put pressure on many health care providers to tighten their belts and reduce how much it costs them to deliver care, in part by trimming annual increases in Medicare’s reimbursements to hospitals, nursing homes and home health care agencies by 1 percent a year, every year, for 10 years. (This provision does not apply to doctors, only to institutions.) These cuts will mean that hospitals and other health care providers will have to become more efficient, reducing waste and medical errors.
If providers are not willing to shave their costs, Ted Shannon suggests, the alternative is that the government will begin to dictate health care prices. Given the threat that health care inflation poses to our economy, he, like some others on Wall Street, believes that if the Affordable Care Act fails, future legislation would impose price controls on the entire industry, not unlike the caps on prices in other developed countries.
Of course, if we opt for the conservative model that Ryan has proposed, we could simply shift the burden of health care inflation to individual Americans, turning Medicare over to for-profit insurers, and abandoning seniors to figure out how to pay for health care on their own. But I very much doubt that this strategy will succeed. Conservatives may attack the American Association of Retired Persons (AARP), but seniors represent a formidable lobby. They have time; they organize; they vote.
How the Health Care Industry Is Changing
While explaining why the health care industry has no choice but to change, Shannon puts health care in the context of the larger economy. He is not optimistic. “In ten years, the U.S. could look quite a lot like Japan” he predicts, echoing what some experienced global investors have been saying. “Japan just got downgraded by their rating agencies,” Shannon noted two months ago. “Now, Wall street is terrified that the agencies will downgrade U.S. debt.”
Last week, this happened. How could the downgrade affect our economy? “Interest rates go up, on everything from your mortgage to your credit cards,” says Shannon. Growth slows, “and we’re really in a world of trouble.”
I truly hope that he is wrong.
But what is certain is this: the levitating cost of medical care puts the U.S. health care industry in a precarious position. “The Affordable Care Act presents the best chance for the health care industry to survive,” Shannon declares.
If these companies are going to stay afloat, they will have to become leaner. Going forward, says Shannon, “The pharmaceutical and device industries are in for a long period of [profit] margin compression. Charging you $150,000 for chemo is a business model that is dying.” A $100 price tag for a brand-name drug that may (or may not) be a little better that its rivals will also became a thing of the past" he suggests.
“The changes already going on in the industry are pretty much permanent,” Shannon adds. “There is no such thing as a free-market solution. We either end up in a ‘legislated world’” with all prices set by the government, “or in a ‘reformed world’” with the Affordable Care Act.
For too long, we have been paying too much for everything, from a pill to a hospital pillow. As just one example, Shannon lays out how well drug and medical devices companies have done in our extravagant health care system:
“The average S&P company returns 12 cents for every dollar of investment, and that’s good. For companies that spend a lot on R& D the return is actually closer to 18 percent—and that’s really good. For pharmaceutical and Medtech, it’s like 35 percent to 40 percent—depending on the company. Is Pfizer really that much more innovative than Boeing?” he asks.
In recent years, “the number of new medical products that have been brought forward for FDA approval has fallen by 2/3” Shannon points out. At the same time, “the number of ‘supplemental products’ has doubled. So basically we’re making incremental little improvements to products that have been around for ten years.” Meanwhile drug-makers and device-makers are “telling Mr. Hospital Executive that they expect a 30% premium, because it’s new.”
“You all have been sold a bill of goods,” Shannon told his audience. “No question, R& D is expensive, and no question it’s time consuming.” But “the returns these companies have enjoyed—largely because of their profitability in the United States—have come out of the hides of the people in this room.”