Rational Market Theory and Black Swans in Healthcare Reform

Includes: IYH, XLV
by: Michael Steinberg

Whether you are a believer in the rational market theory or black swans, you could see that even former SEC Chairman Christopher Cox would have cause to blush at the healthcare marketplace. Cox was the champion non-interferer in charge of enforcing a level playing field for investors large and small.

So the question is can our current healthcare marketplace be modeled by rational market theory, black swans, or neither? Rational market theory is based on current security prices reflecting all available information. Perhaps the only more opaque marketplace than healthcare is derivatives. I’d call it a tie.

Patients cannot even get committed pricing from doctors and hospitals, let alone be on an equal footing to negotiate. Marcus Welby, M.D. television fans looking for a sympathetic doctor are stuck in the 1970s with their heads in the sand.

Those black swans, uninsurable patients, are left to go bankrupt or die. Private insurers have removed black swans from their membership. When they appear those member’s policies are rescinded. The only black swans that remain are either on Medicare, Medicaid, or employed by large self-insured companies and governmental entities.

So before any intelligent discourse can begin, opponents of healthcare reform must admit that a level playing field in the SEC sense cannot be developed unless every citizen is insured or no citizen is insured. And all must be insured at roughly the same level. You cannot have a cash market and an insured market at the same time. This has been the failure of Republican instituted high deductible insurance policies.

When conservatives argue that the private insurers cannot compete with the government, they should also argue that a cash market cannot compete with the private insurers. Cash buyers pay typically two to ten times the private insurer and government reimbursement rates. This alone is proof of my all or no one theorem. Individuals must pay ridiculously high premiums, with up to $5000 deductibles just to pay hospitals insurer negotiated rates. Even Cox would call this extortion.

I felt compelled to write this article after carefully reading Merck (NYSE:MRK) and Schering-Plough’s (SGP) advertisement in my Sunday newspaper. The soon to be merged companies state in bold type: “Vytorin has not been shown to reduce heart attacks or strokes more than Zocor alone.” Zocor is already available as a generic, so you would have to be brain dead to believe that any participant in a rational free market would select Vytorin without adverse financial incentives to doctors and patients. And that’s without even considering the potential adverse effects of Vytorin.

As the rhetoric is getting hotter, I would like the opposition to either come to the table with rational cash market regulation or stop fighting minimum standards for the entire citizenry to be insured. The courts have been of little help in protecting patients against extorted prices. “Financial responsibility” contracts signed in the emergency room should certainly be viewed as “beyond the conscience” of the courts. Lawyers, please help me understand.

While Sarah Palin sings to the choir, other flamboyant orators will soon face burnout. Let Whole Foods CEO John Mackey tell me how all citizens can buy into his company’s health insurance to create a level playing field. Let FOX News tell me how to create a rational cash market.

Glenn Beck lectured before three cardboard cutouts Saturday night on how debasing our currency will lead to a fascist takeover of America similar to Germany in the 1930s. The implication being that President Obama is the new Hitler and healthcare reform is the mechanism for the revolt. Government will deny care to babies and grandmas that have little economic value to save money as the country is drowning in debt. And the green movement will kill the unborn to save the planet from overpopulation.

Not only is FOX News losing sponsors for Beck’s show, it also appears that top tier guests are refusing to participate. The Saturday show was loaded with public service announcements and promos for other FOX shows. I saw only one paid commercial per break. I am also seeing FOX News anchors only interviewing each other throughout the day on other shows.

Paid sponsors do matter. Sponsors temporarily removed syndicated radio celebrity Don Imus from the air for a racial snafu. And the lack of paying advertisers and real customers led to the end of the dot-com bubble. Eyeballs alone won’t save Glenn Beck.

The healthcare opponent rabble rousers already have sugar daddies. But what they share in common with Beck is the need to constantly raise the bar of outrageous commentary and behavior to keep the public’s interest. Sensationalism is like a drug to an addict; over time an ever increasing dose is required to keep the effect. Then the addict dies from overdose.

Finally, I am perplexed as to why President Obama is being blamed for debasing the currency and not Federal Reserve Chairman Bernanke. It is Bernanke who is actually monetizing the country’s debt, not the President. You see, this is not a battle about healthcare – it is an attempt to destroy the President. In this context no rational discussion of the marketplace can proceed.

While the opposition protesters appear far less sincere than the civil rights and antiwar movements of the past, I have never seen a President so dedicated to accomplishing his goals as Obama. This President is the most aggressive that I’ve seen in my lifetime. That is what really scares the opposition.

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