Tuesday, July 07, 2009

Health Care: Obama Has Three Hammers

Let's say health reform is enacted this year?

How would we know if it works?

One of the first signs would be that lower stock prices of health insurance companies, big pharma, and hospital corporations.

According to one conservative outlet, The Washington Post, the Obama administration is going to announce a deal for hospital corporations to reduce costs by $155 billion over the next ten years.

Most of the savings -- about $100 billion -- would come through lower-than-expected Medicare and Medicaid payments to hospitals, said the two industry sources. About $40 billion would be saved by slowly reducing what hospitals get to care for the uninsured, they added. The reductions would probably not begin for several years, after a significant number of people have enrolled in the new insurance programs.

For their part, hospital officials have an understanding that, if the final legislation includes a new government-sponsored insurance program, it will not pay at Medicare or Medicaid reimbursement rates, which the industry has long argued do not cover
the cost of services.

The Obama administration's idea is that these kinds of negotiations work to lower the cost of health reform down from the initial $1 trillion price tag.

It also reduces corporate opposition to public-option health insurance.

So Obama has struck deals with the drug companies as well as hospital corporations. WalMart has also bought in and the AMA quickly withdrew its opposition.

The Obama administration has been able to get these deals because it has three hammers that it can use in relation to medical companies.

There's always the threat of socialized medicine. There's strong support among Democrats for single-payer health insurance and broadly socialized medicine. That's certainly what I'd like to see. Likewise, the Democrats have big majorities in the House and Senate with the Republican meltdown meaning that Obama has a strong prospect for re-election. As a result, the medical sector has strong incentives to cut a deal with the Obama administration now in order to avoid socialized medicine later.

The second hammer is that the federal government already provides what the medical industry views as low levels of reimbursements for Medicare and Medicaid. The hospital corporations were genuinely afraid of the possibility of the Obama administration making Medicare/Medicaid reimbursements the core of their cost containment strategy for this round of health reform. So they traded lower costs for a promise on Obama's part not to do that.

But the medical companies still know that Obama could mandate Medicare/Medicaid level reimbursements if he wants.

That's a second big hammer.

Finally, there's the fact that the American public really does not like to pay taxes. If a public sector insurance option is adopted, it's going to inevitably be seen as a tax and that will act as a hammer on the Obama administration to press the medical sector to keep costs down.

But keeping "costs" down for the Medical sector means reducing profits. That makes medical companies less attractive as targets for mergers and takeovers and that medical sectors stocks should be less attractive for investors.

If health reform is adapted and it works, medical stocks should tank.

And I would be happy to see it.

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