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Health Care Reform, the Macro and Micro View - Part One

|Includes: ANTM, HUM, UnitedHealth Group Inc. (UNH)

So-called health care reform is not going away.  The issues involved are real and far too important.  But it is important to understand the basics, in order to know how to manage your investments accordingly.  At the macro level there is a political issue, allegedly somewhere between 25 and 50 million persons who are "uninsured," by which the proponents of the current administration's view of reform mean to say that these persons are barred from health care.  Bringing these persons under some insurance plan is the goal. Three major possibilities are a government plan, funded by taxpayers, private plans funded by taxpayers and subsidized by private carriers through lower premiums, and private plans at retail rates, funded by taxpayers.  The goals of the proponents of this aspect of reform includes at least gaining the political support of the currently uninsured as well as others of a liberal political bent.

The second issue is an economic one, that the cost of providing health care in this country is very high, it has been increasing at a rate much faster than the overall growth of the economy, and it threatens to crowd out most other economic activity and outcomes.  This clearly cannot continue, but there is no current dynamic for stopping it, as long as we are spending "other people's money" to pay for it.  Reform to address this problem, at the macro level, involves some combination of controls on cost, demand,and utilization, or a reversion to a more "free market" approach to providing health care. 

At the highest level, we have two extremes: (1) increase government control by providing insurance through the government, and reduce costs through government pricing controls; and (2) eliminate all government intervention other than quality control (FDA regulation, licensing of providers, etc.) and allow the free market to work.

Where we are now is a product of our times, with proposals that carry enough of the flavor of one or the other extreme to alienate the other side and so make it impossible to pass any comprehensive legislation, but with a mishmash of what is most simply called pork, included to increase support, that addresses a wide variety of smaller localized desires and perceived problems in ways that do nothing to promote solutions to the larger problems and perhaps even exacerbates them.

As investors we have three big questions.  One is whether in our investment planning horizon we believe the macro issues will be addressed effectively.  The second of course is which way those issues will be addressed - how close to either extreme.  And the third is how to play the current situation, especially if it promises to persist for some time.

As one example, take the big health insurers such as UNH, WLP, and HUM.  They have yo-yo'd in past months based on changing beliefs about how the insurance issue will be addressed.  A massive takeover by the Government effectively eliminates those businesses over time, while allowing them to enroll 25 million more people at retail rates is a windfall.  If it appears that this decision will wait for along time, then uncertainty reigns and the prices of all stocks in this sector will be depressed from a relative standpoint.

In my next article I will begin to address each of these big questions.

Disclosure: No positions