Rally Theory

The timing is too coincidental to ignore, yet the Wall Street Journal, CNBC, IBD et. al. really can’t seem to connect the dots.

The US stock market topped out on January 19th.  That was the day Scott Brown was elected in a Massachusetts special election for the Senate seat formerly held by Ted Kennedy.

The stock market has now rallied to that high, and looks like it will exceed it.  Coincidentally, this rally can be tracked almost point-for-point with the political process that has made the change in our health service payment system likely to be modified.

Say what you will about the anti-government fever sweeping the country, I have to say that whole markets move because the big money players see advantage or disadvantage.

For those investors, it’s pretty easy to see why they would think defeating health insurance reform (Brown’s primary campaign promise) might be a negative for US businesses and the US economy.

From a pure macro-economic standpoint, we’ve created the worst of all possible worlds by handling health care payments the way we do.  By my estimate, the overhead alone is nearly as large as the total revenue of the personal income tax. Worse yet, the cost of that overhead increases by double digit percentages every year, seemingly with no end in sight, and no way to contain the cost inflation.

How can that be?

By the numbers, here’s how:

Let’s start by assuming that the actual care (tests, procedures, drugs, doctors and hospitals) is better than anywhere else.  How much better?

Let’s say that it’s better by the ratio of our GDP per capita plus 25%.  That means we should spend 25% more of our GDP than comparable advanced economies in Japan (where they have a lot more older patients), Germany, the Netherlands, Switzerland or France.  For estimating purposes, those countries spend 8%, so let’s assume 10%.

Why do we spend 17%, and have inflation four times as high in this sixth of our economy than we do anywhere else?

Because the hybrid system we have encourages overuse, overcharging, and innefficiency.  Our senior, indigent, handicapped and very sick citizens are ejected by the private insurers, and end up wards of the state.

In the private insurance market, we leave small businesses and individual entrepeneurs at the mercy of a small group of legally protected monopoly providers who have every incentive to make their service as expensive as possible.  Then we make it worse by only giving a tax deduction for these costs to companies.  It’s truly amazing that any individual entrepeneur can succeed at all with the deck stacked against them so badly in America.

If that set of hurdles weren’t bad enough, we don’t let the end consumers of health care services know what the products and services they are getting cost before they decide to buy, and play along with the fantasy that the seniors have “already paid” for unlimited future health benefits.

I had a cyber-discussion recently with a  political “conservative” on Medicare who is quite well off, thank you, with a golf handicap below 7. He’s convinced that he is self-reliant individual, and hates all welfare, considering it all to be some kind of political bribery.

He was complaining when he heard the President had a “virtual” colonoscopy while he had to have the less expensive conventional version.

The sense of entitlement is simply overwhelming.

I knew something about this procedure, since I had one some years back.  Even though I had premium health insurance (Oxford’s top of the line), they would not cover the CT scan version of the colon.  I was a healthy 50-year-old at the time, and my employer was paying roughly $15K a year to insure myself and my spouse.

[Quite a deal for the insurance companies, given that our combined total in doctor’s bills had averaged under $1,000 a year for 20 years at that point.]

Because I had an extreme work schedule at that time, I paid $1,500 out of pocket for my virtual examination so I didn’t have to give up a whole day of work or have general anaesthetic.  I suggested my cyber correspondent give up a few rounds of golf and pay for his own care.

He was insulted, feeling that his few dollars of Medicare deductions years ago justifies his demands for anything he wants, no matter what it costs.  All on the taxpayer’s dime, of course.

At least Medicare only spends only 4% on overhead unlike the 20% or higher overhead costs at the private payment processors (insurance companies).

That doesn’t count the staff at the doctor’s office and hospital and labs who fill out forms and fight with payers, of course.  The numbers we have count those extra overhead people as “providers” even though most of them don’t know which end of a stethoscope goes up.

The ridiculous part of this expensive scheme is that even those of us who want to be responsible about how our money and our fellow citizens’ money is spent are locked out from knowing what our care will cost before we decide to have it.

In point of fact, there isn’t a price you could call a “price” for most medical procedures or even manufactured medical devices or drugs.

Check out this Business Week article.

You’ll see what I mean about not having real prices in this crazy “system”:

Yet as I fought to buy my husband more time, it didn’t matter to me that the hospital charged more than 12 times what Medicare then reimbursed for a chest scan. It also didn’t matter that UnitedHealthcare (UNH) reimbursed the hospital for 80% of the $3,232 price of a scan, while a few months later our new insurer, Empire BlueCross & BlueShield, paid 24% for the same test. And I didn’t have time to be thankful that the insurers negotiated the rates with the hospital so neither my employers nor I actually paid the difference between the sticker and discounted prices.

So how should we look at this from a purely economic viewpoint? I look at it the same way I look at taxes and the government workers they support. Jobs exist, and people get paid, but the benefits to our economy other than additional consumption by those workers seems pretty limited.

There’s no doubt that a system that can charge a self-employed entrepeneur or small business owner or worker many times as much for the same service bought by others penalizes those small business and self-employed people.

There should be no doubt that expecting our large businesses to devote money and resources to negotiate and renegotiate and renegotiate again every year to provide basic necessary service like health care is also an unfortunate burden on our companies competing in a world-wide market, but at least they have some negotiating power when it comes to costs.

It didn’t escape my notice while working for a Dutch bank that even though the Dutch spend half what we do on health care, my Dutch colleagues could go to any doctor or dentist here in the US, and paid nothing as co-pays or deductibles.

In spite of that potentially very expensive system, the Netherlands is demonstrably among the most competitive places on the planet to keep your head office for a global business.

If you doubt this, just pick any global business, and see whether there are any Dutch companies among the ten largest.  You’ll be surprised at the results — energy, banking, insurance, shipping, electronics — they’re all right there, often with several of the top ten companies based based in Holland.

On January 19th, nearly every political and economic observer opined that the watered-down mess our House and Senate created was “dead.”

The stock market headed south.

Even without a major shift toward the systems other countries use to make their economies and business more efficient than ours, the elimination of predatory charges for individual and small business insurance customers is enough to make our economy stronger.

Even the Senate gift of millions of new customers and billions of taxpayers’ subsidy dollars to our private insurance companies had a couple of provisions that would slow down (not stop) the uncontrolled increase in this non-governmental tax on our economy.

For example, the exchange that effectively turns individuals and small businesses into a large group with negotiating power.  Another example is the limitation on how low they can push the “medical losses,” the actual money they pay out to providers.

Both of these are effectively limitations on the rate of increase in “tax” this industry charges us.

If we really fixed it, of course, we could realize national savings of 7% of GDP without one bit of lowered standards or care provided.  That would be roughly equivalent to the entire take from individual income tax.

Imagine how our markets would take off if we woke up one morning to a future decade of no income tax being taken at all!   Of course, that would require us to emulate a business hostile environment like they have in the Netherlands.  (cough, cough)

We might even end up healthier and living longer like those poor oppressed Dutch people.

hh