Prognosis for Health-Care Reform
As legislators work to repair a clearly cracked system, the impact could be more dramatic for some health-care industries than others.
Stock Strategist
With both chambers of Congress now in recess, the original deadline for comprehensive health-care reform has passed with no viable and broadly popular plan emerging, despite the months of deliberations and pressure from the Obama Administration.
It appears that the challenge of providing universal coverage for all Americans while maintaining a level of fiscal responsibility and appealing to a multitude of industry participants has proven to be an arduous task for lawmakers.
An inability to reach consensus and produce a plan that would address mounting concerns about health care shouldn't come as a surprise to anyone who has followed the history of health-care reform in this country--from President Roosevelt's failure to include universal coverage in the Social Security Act to "Hillary Care" never reaching the floor of Congress.
This time around, however, it is rapidly becoming critical to address the growing disparity between health-care costs and treatment outcomes. The U.S. pays significantly more for health-care products and services than comparable developed countries, yet the quality of service and patient outcomes hardly reflect the drastic difference in pricing. The U.S. trails the developed world in life span, infant mortality, and medical mishaps--a tough pill to swallow for a country that spends more than 16% of its gross domestic product on health care. The problem looks even worse when we consider that 46 million U.S. residents lack health insurance altogether, whether because of their uninsurable status or unaffordable premiums.
How Do We Fix the System?
The million-dollar question is how do we repair a clearly cracked system? The seemingly best, albeit completely unattainable, solution would be to blow up the current health-delivery system in its entirety and start from scratch, as been done in other modern nations, notably Taiwan. A system with one main payer (the federal government) would have unquestionable bargaining power and would no doubt be capable of slowing health-care cost inflation, via rationing of services to curb unnecessary and often abusive use and price controls.
However, the complexity of the existing U.S. system, massive obligations associated with the present entitlement programs, and, most importantly, overwhelming political opposition would hinder any attempts to drastically overhaul our current payer-provider framework. That is why we're not seeing any attempts to introduce a single-payer system similar to the one in the U.K. or Canada in a form of a government mandate, despite the Democrats filibuster-proof majority in both chambers of the Congress. Instead, greater government involvement with health care is being introduced through a rollout of a public plan that would--in theory--rationally compete with existing insurance plans, while also extending insurance coverage universally.
Despite some potential benefits that a government plan would provide, its existence in itself is a major sticking point for a sizable group of Americans. The challenges of simply getting proposals that contain a public-plan option to the negotiating table underscore the reluctance of some Americans to fully embrace government involvement with health care. Right or wrong, the uproar over a public plan could doom broad health-care reform in its entirety, and leave us with the unsustainable status quo.
Where Could We See Changes?
It is, however, possible that an amicable compromise could still be achieved. There are a number of areas where the support for reform is strong, such as the proliferation of information technology to reduce administrative waste, disease prevention, and universal coverage, among others. The desire to reduce medical cost inflation is also widespread, which may yield a greater willingness by some industry participants to proactively seek ways to reduce overall costs. A recent agreement between the pharmaceutical industry and government to save federal programs an estimated $80 billion in drug costs over the next 10 years could be a harbinger of future price concessions offered by various industry players.
It is also possible that the U.S. government, which already wields significant bargaining power over providers through its Medicare and Medicaid programs, could attempt to turn down the spigot over the next decade through benefit cuts and direct price negotiations. Comparative effectiveness regulations could also come into play, impacting drug and device makers. Ripples of reduced government spending would most likely be felt throughout the system, potentially hitting every company in the health-care space. The magnitude of the impact will most likely vary anywhere between materially negative to positive, depending on the relative strength and each industry's positioning within the health-care value chain.
Below we dig into the facets of reform as they relate to two major health-care industries: pharmaceutical firms and managed care organizations.
Four Possibilities for Pharma Firms' Fair Values
The pharma industry's proactive approach to cost-cutting may be its saving grace.
Will Reform Put a Target on Pharma's Back? (Video)
Morningstar's Damien Conover says that current reform proposals are more like a slingshot than a rifle aimed at pharmaceutical companies--which are currently priced for a worst-case scenario.
What Health-Care Reform Means for Managed Care Organizations
2009 could be a year of major regulatory change for the MCOs.
Although a new public health-care plan could drastically cut MCOs' fair values, there is much opposition and more likely outcomes for reform.