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Harlan Levy was an attorney at the Federal Communications Commission's Cable Television Bureau before becoming a reporter at WGTR-AM in the Boston area. He then worked as a TV news reporter at WXEX-TV Richmond, VA., WCIX-TV Miami, FL (winning an Emmy), and WVIT-TV, West Hartford, CT. He was... More
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  • Interview With Ipsita Smolinski, President, Healthcare Consulting Firm Capitol Street: Imperative Cost Controls, Like Lower Subsidies, Higher Cost-Sharing And Co-Pays, And End-Of-Life Care Limits

    (click to enlarge)

    Ipsita Smolinski is founder and president of Capitol Street, a consulting firm focused on U.S. healthcare policy. Previously, she was the senior equity research analyst for healthcare policy at JPMorgan Chase. Before that she held a similar position at Citigroup.

    Harlan Levy: Is our big healthcare problem more a problem of cost rather than anything else?

    Ipsita Smolinski: I would say there are two problems: cost and volume. There really is no measure for people to reduce utilization. If you are insured, that is, have Medicare or Medicaid or a private plan, you can largely get the care you need. There's not too much stopping you, and, as you can imagine, the fragmented system of doctors and clinics may lead to duplicative costly tests and such. For government-funded programs like Medicare and Medicaid and now the Affordable Care Act, the government is shelling out a ton of money to care for people, and most don't have enough skin in the game for this to work.

    Yes, some insurance programs have a prior authorization process where they say, "No, you can't get that expensive test," or "No, you're not eligible for this orthopedic surgery." However, for the most part, with the backlash after managed care in the 1990s, most insurers will largely acquiesce, so there's no one really trying to ration care. And that eventually drives up healthcare costs and the deficit.

    Out of every $4 spent by the government, $1 is spent on healthcare, and that's growing extraordinarily, especially now with the new law. The next phase in the healthcare debate is to reduce entitlement spending: Medicare, Medicaid, and Social Security.

    H.L.: Do you think Congress will actually do that?

    I.S.: Because of the distrust between the two parties and the 11 o'clock at night fiscal cliff deal, there's not a whole lot of political will to get to a Grand Bargain. I think this year will be marked by smaller patches versus a grand deal on entitlements. I hope I'm wrong, but that's what the political climate looks like currently.

    H.L.: So how would you improve the healthcare system?

    I.S.: First putting in some cost mechanisms into the Act is imperative. Massachusetts is now going at it with cost control legislation, and of course, Massachusetts' program is the model for the Affordable Care Act. There are several ways to confront costs in the coming years. You could be less generous with the subsidies for the insurance exchanges [that become operational Jan. 1, 2014 for those who don't have insurance], request higher beneficiary cost-sharing and co-pays, and potentially address end-of-life care. I doubt that Americans will ever get there on the latter point, because it is such an emotional issue.

    Second, as of 2016, about half of the newly covered people will be covered by Medicaid -- which is for low-income families and the disabled -- and the other half will get insurance from the exchanges where people will get subsidies to gain coverage. Medicaid is already a program fraught with problems: State budgets are grim, and Medicaid rates to providers aren't the best. Some would argue that expanding an already hobbled program is a bad idea.

    As for the expansion of Medicaid starting in 2014, states can participate in the Medicaid expansion, or they don't have to. But they are for the most part, because they're getting additional dollars, paid for by the federal government. It's an expansion up to 133 percent of the federal poverty level. Thus far, 10 states have refused to expand Medicaid. Five states are leaning against expansion.

    H.L.: What cost control measures are in the new law, and how effective will they be?

    I.S.: Reforming our fee-for-service system is something that's promising in the new law. Among other payment reforms, there are something called Accountable Care Organizations, new bundled payment systems, where hospitals are incentivized towork with doctors to work with nursing homes to work with home health agencies. These guys would get one fixed payment, and they would be at risk of caring for the patient.

    Things like that are the "cost control mechanisms" of the Affordable Care Act, but over time, people are starting to understand that they're not necessarily going to save a whole lot of money.

    ACOs are approved by the Centers for Medicare and Medicaid Services, and were developed by a new part of CMS called the Center for Innovation, something that I like that came out of the Affordable Care Act. It's an office which has people trying to design different payment demonstrations or pilots to see what works and what doesn't. The Center just announced 106 ACOs. ACO savings are slated to be less than $1 billion over the next 10 years, which is kind of a pittance. Medicare spends $500 billion in one year. So it's not really a game changer currently. If there is fast and widespread adoption over the next few years, then I would feel differently.

    H.L.: Is the private health insurance system the best way to go?

    I.S.: Even though insurers are vilified, they are part of the solution and not part of the problem, because they are doing things like disease management and trying to coordinate care. They also have single-digit margins, so it's not like these guys are making money hand over fist.

    H.L.: Aren't the insurers going to get lots more customers under the Affordable Care Act?

    I.S.: Yes, as long as they price their products and underwrite correctly, they will profit from the Act. Insurershave millions of covered lives coming to them through Medicaid and the exchanges, where they compete againstother insurance companies. Open enrollment starts Oct. 1 of this year for 2014, and there might be some skittishness among investorsjust because it's new, it's uncertain. There are lots of concerns about how affordable the products in the insurance exchanges will be. So maybe you'll have a little bit of nervousness at the very beginning, but over time I think it's a good deal for insurers. They do benefit from this expansion.

    H.L.: What effect will the Affordable Care Act have on pharmaceutical companies?

    I.S.: Pharma companies have begun to pay a market-share tax to fund health reform. However, the coverage expansion, which should benefit the industry, doesn't start until 2014. In proportion to their market share, all the pharmaceutical companies together have paid or will pay a total of $2.5 billion in 2011, $2.8 billion in 2012 through 2013, $ 3 billion in 2014 through 2016, and it goes up from there. Now, some would say they got a raw deal by having to pay their tax early, but in the long run it likely helps them because of the volume of the newly insured, there will be more people who have access to prescription drug coverage.

    H.L.: Hospitals will also make out well, wont' they?

    I.S.: Acute care hospitals, some would argue, are the biggest beneficiaries of the Act because of uncompensated care. Before they were eating the cost of caring for uninsured folks who largely came through emergency rooms. Now, people will have some access to coverage, and some pennies on the dollar are better than no pennies on the dollar.

    H.L.: How do the healthcare systems in England, France, and other countries in Europe and Canada compare with ours?

    I.S.: Generally speaking, the governments you mention provide healthcare to all citizens. However, a two-tiered system can emerge. So, the government provides a basic level of care. You can go to your doctor, and if you need surgery you have it, and if it's an emergency you are seen right away. If it's not a true emergency you might have to wait six months for care. So what ends up happening is that if you have the means to buy a supplemental product or you have an issue that you think the government isn't getting to quickly enough, you can pay for additional coverage.

    Many of these government insurance programs are expensive and add to country deficits. It seems like it works pretty well in Europe, but if you don't have the means and want an expensive biotech drug or procedure, then you might be out of luck. It's not all puppies and rainbows.

    H.L.: Could that work here?

    I.S.: The problem here goes back to World War II and the whole advent of the health insurance system. With wage growth being what it was, companies at that time decided to offer health insurance as an extra benefit. If you were to start from scratch, something like a European program isn't a terrible idea. But the problem is that we're so entrenched in employer-sponsored healthcare, we're now creating this patchwork solution.

    H.L.: Will what we end up with will be as good as what's in Europe?

    I.S.: It depends on how you define "good." If you look at outcomes, the U.S. is not at the top of the list by any stretch. The Affordable Care Act may not be perfect, but as it progresses a few years out there will be legislative tweaks to improve what isn't working, and I'm cautiously optimistic about it. It could bea step in the right direction. Once you address healthcare costs, manage the chronically ill, and provide the right incentives to all players in the system, such as physicians, hospitals, manufacturers, and other providers, then yes, it could be a very good thing.

    H.L.: By the way, what do you think of the economy?

    I.S.: We're sputtering along. We're not out of the woods by any stretch. Right now the biggest threat to the economy is the politicians in D.C. Unfortunately with the sequester, with the debt ceiling, with the funding showdown in late March, there's going to be a lot of volatility in the markets because of D.C.

    If politicians can come together and do the right thing, which is looking at individual and corporate tax reform along withentitlement reform, that's progress. But because Republicans and fighting with Democrats, and there's a lack of trust, I'm just a little less sanguine that cooler heads will prevail. It's a shame. I see it. I spend my time on the Hill with members of Congress and their staffs, and I just don't see a deal-making environment in Washington D.C.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Jan 24 4:14 AM | Link | Comment!
  • Interview With Oppenheimer Asset Management Chief Investment Strategist Brian Belski: Eurozone Debt Problems Are Not A Major Factor In U.S. Economy.

    Brian Belski is a managing director, chief investment strategist, and leader of the Investment Strategy group at Oppenheimer Asset Management. Previously he was the chief U.S. sector strategist at Merrill Lynch.

    Harlan Levy: The U.S. economy seems to be improving, given recent data, but is it too soon to say we're out of the woods?

    Brian Belski: No, especially considering the depth of the pullback, No. 1; No. 2, the general skepticism from investors and consumers; and No. 3, the over-reliance on sound bites by consumers and investors, which continues to put a swirl of speculation about the market.

    H.L.: What's your prediction for the U.S. economy this year and in 2013?

    B.B.: We are projecting 2.5 to 3 percent growth in Gross Domestic Product -- slow but steady improving growth. We want to be in a situation where we can up our projections rather than lower them. That was the trap of many economists last year. They had too high projections and had to bring them down.

    H.L.: Where are we in the housing market?

    B.B.: We believe housing is in the process of bottoming through the summer. Bubbles take 10 years before appreciable asset accretion occurs again. So if housing prices topped in 2007, 10 years from there would be 2017, so we're about halfway through the unwinding of the bubble. That's the bad news. The good news is that we're starting to see signs of bottoming and that excess inventory is being worked off, and that's a positive.

    H.L.: Some economists say that the immense sovereign debt problems in the Eurozone are a major factor in how the U.S. economy will fare. What do you think?

    B.B.: That is a fabrication in the press which has come to that conclusion and pushed it down our throats. No one knows for certain the magnitude, low or high, with respect to the eurozone situation. The press is blowing it out of proportion because they didn't do the work. When you do the analysis and look at the percentage of business done in Europe and the percentage of companies doing business in Europe it could be a positive for the U.S. Let's not jump to conclusions.

    No one is talking about the positives of a slowdown in Europe. For example, companies around the world could be much more comfortable doing business with American companies rather than European companies, given the consternation of ongoing events in Europe. That could be the positive that no one is talking about. So we believe that this instant conclusion that the problems in Europe will have a negative impact on the U.S. economy is way overblown and is one of those sound-bite conclusions that we cannot and will not support.

    H.L.: Is the stock market responding too optimistically?

    B.B.: No, because institutional investors are playing a near-term game of catch-up, given that No. 1, they underperformed last year; No. 2, they owned the wrong stocks in their portfolios; and No. 3, the fundamental constructs of the United States market is the strongest asset in the world.

    H.L.: What do you see ahead for stocks and the market?

    B.B.: We continue to be very comfortable with our 1,400 target for the S&P 500. It could occur sooner than later, but we believe it would be difficult to exceed 1,400 without a few things: No. 1, we need constructive and consistent job growth. No.2, we need to see some sort of definitive plan with respect to structural change in Washington D.C. What does that structural change include? A, cut costs. B, build revenues, and C, we need some sort of tax reform that will incentivize companies to employ U.S. workers.

    H.L.: So where are we with jobs?

    B.B.: Again, we need to see stronger structural change out of Washington in terms of tax reform and tax incentives to hire before we see substantive gains in employment, but employment overall on a short-term basis is improving.

    H.L.: How would you build revenues, and would you have to increase taxes?

    B.B.: It doesn't necessarily mean you increase taxes. You come out with new revenue streams or different revenue streams. No. 1, you offer a one-time repatriation [of U.S. companies' cash held outside the U.S.], and once that cash is here, you tax it at the revenue amount. NO. 2, you incentivize companies to hire. You give them a laddered tax situation for the next five years, putting forth a situation where you are able to hire employees, and those people you hire are paying income taxes. No. 3, you simplify the tax code where you go after those companies that are not paying taxes and simplify to the point where those companies that are over-paying taxes will come back down to reality where everybody else is paying. Those are three revenue events where you don't have to increase income taxes.

    H.L.: Should the tax cuts for the rich, the "carried interest" tax loophole - which allows private equity and hedge fund managers to characterize their labor income as a capital gain, taxable at 15 percent -- and other tax provisions favoring rich people be eliminated?

    B.B.: No. There are loopholes across the board that are not just about the rich, and that's all I'm going to say about that.

    H.L.: A lot of commentators talk about the widening income inequality in the U.S. as an issue of unfairness that must be addressed. What do you think?

    B.B.: Income inequality is a direct result of capitalism. If you want income equality, that's a more socialist communist platform, and history has shown that that doesn't work.

    H.L.: Should bank regulations be dramatically cut and are proposed rules just too complicated

    B.B.: There are four areas that we think could ultimately be regulated, one of which could be the hedge funds, two would be the futures markets, three would be the high-frequency traders, and the fourth would be the leveraged exchange traded funds.

    It is our belief that any legislation with respect to regulation should be clear-cut and concise, meaning the more noisy it is, the more paradoxical it is, the less likely people will be comfortable with it. We need to be able to sell it to the American people that, in fact, this will be a good thing. The more confusing it will be, the more no one will understand it.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GE over the next 72 hours.

    Additional disclosure: No other stock plans

    Jan 23 12:35 AM | Link | Comment!
  • Mark Zandi: Job growth to double in 2011. No reason to be nervous about stocks.

    Mark Zandi is chief economist of the economic research and consulting firm Moody’s Analytics. He is also the author of Financial Shock, an exposé of the financial crisis. His forthcoming book, Paying the Price, provides a roadmap for meeting the nation’s fiscal challenges.
    H.L.: How upsetting to the U.S. and global economies is the turmoil in Egypt, Tunisia, Yemen, and any other countries that follow their lead?
    M.Z.: It’s premature to draw any conclusions. I don’t know. I assume if the turmoil spills over into much of the Middle East it would be a problem for the global economy, but it’s much too early to think that that is what’s going to happen here.
    H.L.: What do you think of the dramatic negative stock market reaction on Friday?
    M.Z.: Stocks react to information that’s often important and a lot of times not.
    I don’t think it’s important from a macroeconomic perspective. It’s obviously important to people in the market, but I don’t think it has any meaningful broader economic meaning, at least not yet. The market has been going pretty much straight up for six months. It would be surprising if it didn’t correct at some point in time.
    Fundamentally, the economy is in good shape. Corporate earnings are strong. Interest rates are low. Prospects are good. Valuations are reasonable. I don’t see any reason the market should go down for any extended period of time. It may correct, but I don’t think there’s a reason to be nervous about the stock market.
    H.L.: What’s your outlook for the economy in 2011 and 2012?
    M.Z.: I’m optimistic; I think growth will accelerate and create more jobs, and unemployment will decline. The unemployment rate today is somewhere between 9.5 and 10 percent, and I expect it to be close to 8 percent by the end of 2012.
    There are many reasons for optimism. But fundamentally it’s because American companies are very profitable, and their balance sheets are strong. It’s no longer a question of can they invest and hire more aggressively. It’s a question of are they willing. I expect they’ll become more willing as we move through 2011.
    H.L.: Talk a bit more about the jobs picture.
    M.Z.: The economy created 1.35 million private sector jobs in 2010 from December to December, and I expect job growth in 2011 to double that — somewhere between 2.5 million and 3 million. That’s enough to bring down unemployment in a meaningful way.
    H.L.: Is the housing situation stuck in the mud?
    M.Z.: Yes. The weak link in the economy remains housing. Home sales, construction, and house prices are still moribund and very weak. I would say the market is stabilizing but at very low levels. I do expect more house price declines this year, because there is still a couple of million loans in the foreclosure process that will go to a distressed sale during the year, and that will put downward pressure on house prices.
    Housing remains a threat to the economy. I think it’s the most significant threat to the economy at this point. I think the economy will make its way through and digest the house price declines, but that’s the key risk.
    H.L.: Will Congress do anything on the deficit the next two years, or are we in for a continuing stalemate over Republican efforts to slash spending and Democrats intent on spending now and cutting later? If so, will that be a substantial threat to the economy?
    M.Z.: I don’t think there will be a significant amount of progress in addressing our fiscal problems in the next two years. I think our deficit will shrink in the next two years because of the better economy, and I’m hopeful that policy-makers will use the next two years to develop an intellectual consensus about what to do, and then when the next president takes office there will be legislation, and we’lll meaningfully address our fiscal problems.
    H.L.: What’s the correct policy on spending and deficit reduction?
    M.Z.: My view is that roughly three fourths of the deficit reduction should come through spending restraint and one quarter through tax increases. On the tax side, I think we nee to focus on reducing tax expenditures like the mortgage interest deduction, the property tax deduction. If we reduce those expenditures we could even lowermarginal tax rates.
    On the spending side I would focus on two things: One is cutting discretionary non-defense spending, which the president has proposed, and the Republicans in Congress seem amenable to. I’d also focus onSocial Security, and I’d move it from being an entitlement to being an insurance policy so that your benefits depend on your financial situation.
    H.L.: What should we do about Medicare.?
    M.Z.: That’s clearly a serious problem, but I would wait to address that until after we do the things I just proposed. It’s a very difficult problem that requires a look at the health care system, and I don’t think anyone’s prepared to do that in the next several years,and I don’t think we need to. We can redress that a few years down the road.
    Jan 31 9:46 PM | Link | Comment!
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