America woke this morning and the sun still rose; the Earth was still spinning on its axis. Fourteen months after its initial proposal -- two days after street trash posing as concerned citizens called one of the great civil rights leaders of modern times a "nigger" and the man always regarded by both parties as the smartest man on Capitol Hill a "faggot" -- and a few weeks after I wrote it was hopelessly dead, health care reform passed Congress to be signed into law by the President on Tuesday.
Will it work? Some parts of it will – more people will have access to health care; many more people, over time, will see insurance premiums be more muted than they otherwise would have been. Other parts of the legislation that depend on future Congressional bravery -- a rarity at the best of times – will not, namely cost controls. This makes the reforms a typical piece of legislation – put off the hard part for future votes someone else may have to take.
The journey started roughly one hundred and thirty years ago when Otto Von Bismarck, Chancellor of the newly united Germany, created the first modern social security system to tie German workers to the new German Empire and the new German Emperor, Kaiser Wilhelm I. The street trash wearing red white and blue and calling Pelosi, Lewis and Frank et al communists and Stalinists (in addition to calling them "bitch," "nigger" and "faggot") did not know history, as to be expected; the Republican Congressmen wearing red white and blue lapel pins urging them on from the balcony of the Capitol did not know history, also to be expected. And herein lies the reason the bill – and our medical system – is so fiendishly complex, hard to manage and full of inconsistencies. In the twenty first century, we all have agreed sick people need not die due to a lack of funds – not one Republican, well, perhaps people who agree with Ron Paul, disagree. That means the government has to intervene through subsidies. And, in the twenty first century, we continue, as we should, to insist on choice – and that means government intervention must be severely circumscribed.
This clash would work – it works in almost all other parts of the American economy and system of governance except public education K-12 – except for one big factor. First, physicians and other medical providers in the US make far too much money based on unspeakable inefficiencies to allow the intervening parties – the US and state governments – to just stand by and write checks as they do for other social welfare systems. And this clash has placed us in a hybrid system that is neither efficient nor fair to those who make less than needed to pay for adequate medical care. Hence the legislation. A flawed set of reforms passed in the hope it will save a failing system.The big fight is over – according to the Congressional Budget Office by 2014 97%-98% of Americans will have access to what they deem “affordable health care or health care insurance.” The mop-up – cost controls – will take a generation with a major flare up in about five to six years when Medicare goes broke, assuming Congress does not restructure that program in the interim. For sometime in 2015-2017, Medicare will run out of money and come to Congress to tap revenues from the general fund, forcing the ongoing battles between generations into the public eye. And Medicare will lose – the cost of the program is unsustainable and includes far too much waste, indulging far too much choice by people who are not paying for their insurance. Who? People with diabetes who do not monitor their glucose levels, creating more health problems; smokers who refuse to enter smoking eradication programs; terminally ill cancer patients receiving hip transplants at the age of eighty five.
Where does this leave investors, always the bottom line?
• For the next few years, companies that enable cost reduction – from new treatments and devices that lower costs, such as MRSA and C difficile testing from Cepheid (CPHD) to electronic medical records – will be in the headlines and should gain traction in the marketplace.
• For the foreseeable future, companies with innovative treatments and tests that meet unmet and critical needs will also prosper – the classic biotech or bioinformatics startups such as Curis (CRIS) or Compugen (CGEN). An emphasis on cost reduction will not totally compromise the inner engine of the US (or Israeli) medical industry – innovation.
• Starting today, big providers – HMOs and hospitals – will begin planning for an age of fewer unpaid bills, more elective procedures and more emergency room visits funded (poorly) by Medicaid – a net gain to the bottom line. And in five years they will see the prices they are able to charge begin to fall and in some areas, fall dramatically.
• Starting today Big Pharma (the PPH) – the dinosaurs known as Pfizer (PFE) and Merck (MRK), et el - will plan for more patients and more pills and ignore they will get them at lower unit prices and even slower overall revenue growth than today – not to mention the impact of $20 billion or so in patent expirations in the next 24-30 months. That also means the big generics companies such as Teva (TEVA) and the innovative ones such as Impax Labs (IPXL) will prosper.• And what about insurance companies? A stock picker’s playing field – the good ones will evolve, the typical ones will do all right and the weak ones will evaporate.
America entered the twentieth century last night – the question is how long it takes us to move to the twenty first century when disease prevention upstages disease treatment. In the interim, there is money to be made.