BlindReason's  Instablog

All these congressmen are making the media rounds calling Cash for Clunkers "wildly successful".

Congress gave away $1 billion dollars in a week; was anyone worried it would be unsuccessful? Gosh Senator, we tried to give them the cash but everyone just turned us away. When has giving money away every been "unsuccessful".

The program doesn't even have a decent fuel economy standard, yet Congress is so proud of their innovation and creativity with this program and its "success". What about a more substantive plan to expand on the brilliance Congress has demonstrated here, yet again.

Instead of Cash for Clunkers, this one is Called Cash for Your 2007 Portfolio Statement. A reasonable and equitable exchange if I have ever heard one.

In this unique and specialized program, you can turn in your old, used portfolio statements for 30 year Treasury Bonds all backed by the full faith and credit of the US government. These securities can be then traded in to buy crappy furniture and electronic goods made in China, or Oil from a petulant dictator.

Got some auction rate securities? No problem... The government will give you 80 cents on the dollar in treasuries. Got some Fannie Mae Preferred --85 cents on the dollar with the extra 5 cents since Hank screwed up that deal. And don't worry, if the government runs out of treasuries--there is plenty more where that came from.

So in answer to a spiraling out of control costs in health care, the Administration’s solution is to expand the program to more of the population and give government a bigger role in a broken and syphilitic system. If you are in a hole, first you have to stop digging.

While expanding coverage to the uninsured might be helpful in reducing some costs, generally it would be a massive expansion of a dysfunctional and out of control system that raises prices by 9 percent last year in an environment where the rest of the economy is out of control. Where is all that money going?

The United States spends 17% on health care while the next highest in the World is Switzerland at 11% and they cover everyone. Has America become so fat and inefficient that it can’t do the same? Why isn’t 11% our goal too? Instead we are shooting for 20%.

Right now the President’s plan in Congress is stalled in the Senate and it deserves to be. What President has come into office with a mandate for more change than this President—and this is what we get? Just expand the bad system we have to make it bigger.

Further, why do we keep seeing all these announcements about “savings found” and health care companies promising the government all this money. Getting to 11% of GDP isn’t going to come because Congress negotiates it through back door deals, it’s going to come through competition, efficiency, and reducing government incentives to over consume.

Congress is worried about the details of a health care plan where they can take virtually any plan in the industrialized world and it would be better than what we have now. Take Switzerland or France or Holland—any one would be better than what we have now since its bankrupting the country. A lot of this feels like Rahm Emanuel, aka Mr. Execution, just wants to get a “win” by passing anything. This is a huge part of our economy and we need something that’s actually economically sensible.

This means instead of making health care bigger, we need to focus on cost control issues. Among these are:
 

• No health care plan should be adopted that increases aggregate spending. We should be working to get health care down to 13% of GDP, not trying to raise it.
• Shifting to outcome based health care. US consumers are used to over consumption across every major sector, it’s no surprise it’s a problem in health care too. We need to cut back here just like everywhere else. This also means, preventing unnecessary procedures and tests and reducing waste and over consumption.
• To understand a thing you have to classify a thing and health care is a black hole if I've ever seen one. Preventive and routine care needs to be separate from advanced medical research and experimental treatments. Similarly, people need to understand the difference between insurance and just prepaid medical plans. Advances in research on medical technology and procedures should become a lot more separate from preventive care than it is today. Think of it like the border between investment banks and commercial banks. Almost like a Glass Steagle for Health Care. Why? It’s a totally different type of business. Providing preventive care and routine procedures needs to be run a lot more like Walmart than a nuclear lab. It's just my gut, but right now I think the US mixes the two pots too much. The effect is that the US pays for advances in health care for the rest of the world thorough their monthly health care premiums which are ridiculously too high.
• People need to understand the difference between insurance and prepaid medical. Getting "insurance" for a dental cleaning that you know is going to happen every six months is not bloody insurance. You cannot insure for something you know is going to happen every year anyway. That's prepaid expenses. Preventive care for everyone is not insurance--that's prepaid medical. The two concepts need to be separated out and dealt with differently as part of any health care reform package.
• Eliminating government policies that encourage over-consumption. For example. The tax exemption on these “golden” health plans are remnants of wage control we had in World War II. They encourage over consumption and should be eliminated. Use that money to provide coverage for the uninsured. This idea has surprisingly little support in Congress given it’s a World War II policy. Mostly because unions have some of the most golden of the health care plans and guess who won the last election. President Obama needs to think of the whole country here, not just who elected him.
• Why should someone who gets a $60,000 a year health care benefit for his family and whose over consumption while some can't get $500 in routine annual checkups for their family get a tax deduction for it? All so we can protect the unions? No thanks.
• IT Initiates are the only sensible area where spending should increase. Even if this gives us a better idea of where we are wasting money—it’s worth it.
• Means testing for government benefits. If you’ve got 50 million in the bank, you don’t need Medicare.
• People keep asking where is the money going to come for to pay for health care? That's the wrong question. Even if you assume the 1 trillion in estimated costs of the Congressional plan, ask about year 11. Year 11 the costs start to balloon into a true disaster.
• You shouldn’t have to be a doctor to provide preventative care and basic procedures. More “substitute” doctors need to be allowed to do more procedures and more health care should be shifted to self monitoring where possible.
• The GOP needs to stop road blocking real reform here too. Their opposition to real reform and change here is just as backwards as the President’s policy. If you are the party of economic conservatism how is “rationing” a four letter word to you? Fear tactics such as "the President wants to take your doctor away" are also unconstructive. Nobody can afford cheap points here because the system is so broken and sucking too much of our national output.
• Debate over public plan vs. cooperatives is pretty meaningless. It’s not who owns health care that’s the problem, it’s the incentives that need to be changed.

What are some investment conclusions about this? First, it's one more area of our economy including autos, banking and home builders that is excessively dominated by government influence. Since last year we've been negative on the sector over all and right now it's getting a bit of a bid because people are anticipating failure in the Senate for any meaningful reform. That's probably correct, however, better just to stay uninvolved with the whole sector. Even if health care fails this year, it will be back next year.

While the values overall are compelling, the revenues are at risk to some sort of significant reform that could make it a value trap. If public disgust gets to critical levels, it's possible that some sort of wholesale cataclysm type takeover could take place. Additionally, the efforts to compromise with the GOP minority could fail and a more draconian plan than is currently being contemplated could be enacted. i.e. Kennedyesque squared.

Without making any judgments on whether that's a good or a bad outcome, why involve yourself at all in the sector broadly with these types of risk/reward relationships.  The exception to this is both public and private companies health care IT.   Investments in health care IT and modernization that are somewhat outside the influence of government spending, yet still benefit from it as well as macro trends are more sensible from a risk reward ratio.  Plays like Cerner and Aethena health are a way to play this (Long Both).  It's a method to get exposure to a huge and growing portion of US GDP while waiting for some dust to clear.   A process that may take a lot more time and iterations than investors are currently expecting.