An investment analyst discusses the problem of high costs associated with the Affordable Care Act and the types of companies best positioned to capitalize on the solution.
Diana Wagner: In health care, I cover services companies — so, health insurance companies, HMOs (those bad guys) and the hospital companies and pharmacy benefit managers. That’s why I’ve been spending a lot of my time of the last few years on Obamacare.
So far, we now have about 20 million new people in the system with insurance — 8 million on the exchanges, 12 million in Medicaid. That’s about 40% of the uninsured that now have coverage, which sounds great: almost a 50% dent in the uninsured over two years.
The problem is that all these newly insured people are coming into the same old broken system — a system that rewards doctors for quantity instead of quality, how much they do to you rather than stuff that actually makes you healthier. In fact, when we look at the $1.4 trillion that we’re going to be spending on the ACA [Affordable Care Act] over the next decade, 99% of the money is going to subsidies for people to get insurance in this same old broken system, and only 1% is going toward any kind of reforms to figure out how we can pay providers in a new and a more functional way, how we can contain costs or improve quality.
So for now, we’re trying to get as many people as we can signed up into the system. But at some point — maybe in the next administration — we’re going to have to deal with how much this whole thing is costing and just the whole encumbrance of the cost of health care in this country. We’ve already got Medicaid, Medicare and now these exchanges with these subsidies. The government is paying for way more than half of America’s health care bill, and they’re going to be caring more about cost.
But the market is not waiting for the government to figure this out and to lead the way on cost containment. The private sector is already innovating and responding to these cost pressures and changing the way that health care is delivered and consumed. And so this is what health reform 2.0 is going to look like. The next decade in health care is going to be all about containing costs, paying for quality — not volume — and empowering the consumer.
So when I look at this as an investor, I want to own the companies that are going to be part of the solution — managed care (the HMOs) help, drugs help, IT helps — and I’m trying to avoid the sectors that are part of the problem, like hospitals and nursing homes. Industries will be reborn, like drug stores, which used to be convenience stores with a pharmacy attached. But now, in a consumer-centric health care world, these could be low-cost centers of care delivery. And new industries will be created, like cloud-based tools that bring price transparency to health care for consumers. And all of this is going to create a lot of opportunity for investors like us.
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