Healthcare Choices Beyond 'Spend Till the Benefits Run Out'

Includes: AET, ANTM, CI, UNH
by: Michael Steinberg

The Wall Street Journal’s “Health Insurers Toughen Stance in Disputes Over Hospital Rates” brings to light that the problem of market concentration does not uniquely rest with private health insurers, but also is in hospitals and other medical service providers. Over the last few decades hospitals have merged to form monopolies or duopolies in smaller and medium metropolitan areas to strengthen their negotiating power. So now we have the dominate medical service providers in a standoff with the dominate health insurers in each region.

The insurers are facing hospital rate increases of up to 40% in regions with no competition. Aetna (NYSE:AET), Cigna (NYSE:CI), WellPoint (WLP) and UnitedHealth (NYSE:UNH) are warning members of standoffs and the possibility of hospitals being removed from the insurers’ networks. The hospitals have a litany of excuses ranging from low Medicare and Medicaid reimbursement rates to higher unpaid care due to the “great recession.” But hospitals are also in an arms race for unnecessary state of art equipment and prestige doctors.

This allows the insurers to cite cost shifting as one of the primary reasons for rate increases. The second reason, so aptly stated by WellPoint, is that the risk pools are more adversely populated during recessions. Only the sick buy insurance when times are tough, their story goes.

Until recently, I have heard analysts telling investors to focus on hospital chains that have little or no competition. And insurers have previously been more willing to pay up than reduce access. Now insurers are willing to sacrifice access.

Now that we are on the cusp of healthcare reform, the opposition party and private insurers are complaining that cost has not been addressed and choice will soon be restricted. The truth is that both cost and choice are still in the hands of the private insurers. The insurers just will no longer be able to offer limited benefit policies.

The private insurers have always framed the choice debate in terms of deductibles, co-pays and benefit limits. The insurers have for the most part left it up to the doctors to determine how state of the art patients’ treatments should be. Patients cannot tell doctors to use less expensive imaging so their insurance benefits last longer or their premiums are lowered.

If the private insurers do nothing, healthcare reform will bankrupt both the government and their policyholders. Benefits do increase and the sleight of hand fine print will be gone. Not all healthy people will buy insurance adversely affecting the risk pools. But the insurers can save themselves by totally redefining choice.

America has to come to terms with the fact that two distinct levels of service are required for healthcare: basic and luxury. Basic care would exclude the most advanced drugs, medical devices and the convenience of local hospitals except in emergencies. In basic plans all drugs and medical devices will be selected based on cost-benefits, and end of life treatments will focus on comfort over gaining an extra month. Private insurers have the power to competitive bid major surgeries and should force basic policy holders to travel from more expensive to less expensive hospitals.

Those trying avoid being treated like a FedEx package (shipped to Memphis for heart bypass surgery) and see value in one extra month of life should be willing to pay a huge premium for a luxury plan. Those unable to, I say tough luck. The basic plan that I’ve described still provides quality care. This is a far more intelligent form of rationing than benefits running out or uncontrollable premiums.

I know America is not ready to deny Avastin (Roche (OTCQX:RHHBY)) to cancer patients like the U.K., and big pharma cries about the need to fund research. But surely competitive bidding for hospital services and forced travel could be implemented today.

The afraid to change private insurers are destined to become utilities; pawns of the government once insurance subsidies start in 2014. They have only a few years to prove they are value adding. Instead of innovating, they are content with going down with the ship, with less and less policy holders to bail the water out.

I have little hope for the private health insurers. They have made no efforts to stretch premium dollars and give real medical choices to policyholders. Americans have to be given an alternative to the 'spend until the benefits run out' mantra.

WellPoint hosted an analyst call this past week. They stated that the future looked bright if they got all the rate increases they are requesting, including almost 40% in California, and healthcare reform does not pass. Then they closed the call with no questions allowed. Talk about putting your head in the sand.

The analogy that I like is that the driver of a midsize car can travel the same distance as the driver of a Rolls Royce for half the gasoline “premium.” Likewise, a cancer patient in my definition of a basic health insurance plan can live almost as long as one in a Cadillac plan, and cardiac patients might even live longer in my basic plan because he or she is forced to travel to a specialty hospital. Keep in mind that none of the “miracle” cancer drugs can function alone without basic chemotherapy. So what value is state of the art really adding?

Note: If you buy my argument, you might second guess Roche’s repurchase of 100% of Genentech. Roche had previously owned 100% of Genentech.

Disclosure: Author has put options on AET, CI, UNH and WLP.