Medicare for All?
“Legislation which compels you to join in a federal health insurance plan is wrong. It is also wrong—morally and economically wrong—to ignore the health problems of those who cannot pay the cost of adequate medical care. Federal aid to local health plans that helps make medical care available to those who need it is right.”
― Dwight D. Eisenhower October 10, 1952
from a speech about Medicare legislation
A Little Perspective
This blog is about investing, DIY investing to take care of yourself, your family and the causes you support with your gifts. I don't follow or profess any ideology and I don't belong to a political party; so you'll have to put your own judgement aside and just accept that my neutrality in this matter is focused on cost and benefit. I'm also quite confident that this will be the most divisive article I ever post.
So why am I writing about Medicare For All?
Simple, if we follow the money and the results, the answer to providing healthcare for all becomes amazingly clear and easy to understand.
The quote above from President Eisenhower is interesting. Eisenhower was a great supporter of Medicare, but advocated for a system of federal aid to health insurance companies in order to reduce government costs, improve healthcare for all and run Medicare as efficiently as possible. What we got from Congress was a mixture of public and private healthcare insurance, not what Eisenhower asked for and also not what Truman asked for.
Establishing Ground Rules
Personally I feel the healthcare industry in America is broken, but not for the reasons most people think. Let's just agree that changes are needed. I think its important that we define the things where we can all agree. Healthcare is too expensive, costs are rising too fast, insurance premiums are rising too fast, too many people have no health insurance, people with health insurance still can't afford good healthcare. I think those universal themes are easy to agree on.
When we say Medicare for all, what does that mean, where are the boundaries? Within the healthcare industry there is a concept known as 'SOC' or Standard of Care. Every disease and patient condition has a 'Standard of Care'. When we were kids and got a cold, the standard of care was stay home and mom made chicken noodle soup. Outside of the Standard of Care are all kinds of very expensive, elaborate and sometimes experimental treatments. In between each of these three stages of care we can identify a broad spectrum of healthcare services. While overly simplistic there is the spectrum of healthcare: Mom's soup, Standard of Care, Advanced and experimental treatments.
I would like to propose that we define healthcare for all as 'Current Standard of Care'. I add the word current because the standard of care is constantly changing. That's pretty broad and leaves doctors and patients with a vast number of choices for treating any ailment; because Standard of Care is a progression of treatments that follow one another until a favorable outcome is reached and no other options are available outside of experimental treatments.
I don't believe this approach or any other is perfect, but as we'll see soon, using this standard of care approach will treat the most people, with the overall greatest level of care at a cost that we can afford as a nation. And just like other countries with national healthcare systems we can offer insurance for higher levels of coverage to those who choose to pay for it and keep the trial programs open to patients who wish to use this method of care.
Key Issues According to Bernie Sanders
Below are the key points of the Medicare for all debate taken directly from Bernie Sanders web site along with a short response from me. I'm starting with these points because they seem to be the foundation of most politicians who support Medicare for all and they are important to our investment decisions.
Over 30 million Americans don’t have health insurance
27 million is more accurate
Medical bills are the number one cause of bankruptcy
True, 61% of bankruptcies are due to medical bills, 78% of these had health insurance
We spend significantly more of our national GDP on this inadequate health care system than other developed nations
True, the US spends $9,237 per capita, or almost 20% of GDP on healthcare costs yet rank 12th in life expectancy. There is little correlation between spending and health outcomes.
We must invest in the development of new drugs and technologies that cure disease and alleviate pain—not wasting hundreds of billions of dollars a year on profiteering, huge executive compensation packages, and outrageous administrative costs.
The first part is in fact being accomplished, numerous diseases have been cured in recent years and more are being announced. The second part is a different argument that suggests US pharmaceutical companies are wasting tax payer dollars when in fact they are mostly funded by investors, revenues from existing products. The administrative costs are primarily a function of Congress and the rules they insist the FDA administer.
The giant pharmaceutical and health insurance lobbies have spent billions of dollars over the past decades to ensure that their profits come before the health of the American people. We must defeat them, together.
In 2018, 406 healthcare companies hired 1,441 lobbyists and spent $281,472,969. To get to 'BILLIONS' we would have to add up decades of spending on lobbying. Keep in mind that every industry hires lobbyists to have their issues heard. Is this buying influence, yes. So the question to be asked is, why do we allow any industry to buy influence when the job of our politicians is to hear and represent the issues of their constituents.
Medicare-for-all, single-payer program
Medicare for all assumes that Medicare is the right answer, single payer system defines it as a government run and tax payer funded system.
Allow Medicare to negotiate with the big drug companies to lower prescription drug prices
I would agree that Medicare is at a disadvantage here; Congress set the rules, change it. Or get Medicare out of the system and switch to organizations that do negotiate drug prices.
Allow patients, pharmacists, and wholesalers to buy low-cost prescription drugs from Canada and other industrialized countries with the Affordable and Safe Prescription Drug Importation Act.
Anyone can go to Canada and buy prescription drugs, its just really inconvenient to make the trip. Canada doesn't have some secret drug industry that makes drugs cheaper. Canada is simply a different market, so drug companies from all over the world have different wholesale and retail pricing strategies for the Canadian market. Would anyone expect that a Honda or a washing machine would cost the same in every country? Congress can simply take away the restriction on buying drugs from foreign suppliers which would add competition, ultimately lowering drug prices. The result in the market would be US pharmacies and Canadian pharmacies setting more equatable prices.
Cut prescription drug prices in half, with the Prescription Drug Price Relief Act, by pegging prices to the median drug price in five major countries: Canada, the United Kingdom, France, Germany, and Japan.
This would be a disaster. This proposal suggests that price fixing would be better than competition. Price fixing will eliminate innovation and lead to a massive decline in the development of new drugs. Drug prices have been coming down every year for the past decade. Currently prescription drugs only amount to 10% of total US healthcare spending, down from 12% two years ago; thank you Dr. Scott Gottleib former FDA director. The reduction is due to competition and internal FDA efficiencies. Drug prices are not where escalating costs lie.
How Do American's Receive Heath Insurance
Follow The Money
As investors we should always follow the money to learn what the real story is. When an analysts goes on TV and says XYZ company is going to soar higher do we just believe him? Of course not, we do our own research. When the consensus was that global growth is slowing I chose to ignore the rhetoric and look at the data; and the data does not support the argument.
Medicare is a national health insurance program in the United States, begun in 1966 under the Social Security Administration (SSA) and now administered by the Centers for Medicare and Medicaid Services (CMS). This is a complex and highly politically sensitive agency. The political sensitivity is primarily due to the amount of money (tax dollars) that Medicare controls. High tax dollar programs mean greater power for the politicians who seek to influence and control these agencies.
What I wanted to do was compare Medicare with private health insurance companies to see how they stack up. Basically I'm viewing Medicare as an insurance company to try and unlock who has the greatest balance between cost, cost efficiencies and medical coverage. Since there are over 900 health insurance companies in the U.S I chose to simplify this exercise by looking at the top 8. To do this I researched how many customers each company has, how much money flows in, and how much is spent per customer. To measure medical service we can't really compare plans, but we can compare the amount of coverage a customer receives for the dollars paid in and out-of-pocket expenses; this is easy to track using the Co-Insurance ratio.
Use your browsers zoom feature to increase the size of the spreadsheet.
In the spreadsheet above I've listed the 8 biggest insurance companies plus Medicare. All figures are for 2018. It should be noted that Molina Healthcare revenues for 2018 were a bit of an anomaly but the big picture holds up.
Revenues - Looking at the Revenues column we see that the combined revenues for the top 8 insurance companies was $564.883 billion dollars. By comparison Medicare took in $704.6 billion dollars.
Customers - In 2018 the top 8 served 164 million customers, while Medicare served 58 million.
$ per Customer - So if we simply divide customers by revenues we can see that Medicare costs roughly 3.5 times more than private insurance. What's interesting is that even the smallest of the big 8 has twice as many employees as Medicare and yet still delivers more healthcare services at significantly lower cost ($3,709 vs $12,148).
Co-Insurance - To compare service levels and value received per dollar spent on premiums we can use the co-insurance ratio. Most private insurance companies have an 80/20 ratio, meaning that insurance pays 80% of costs and the customer is responsible for the other 20%. While there are 100% coverage plans I'm looking at the most common. Medicare by comparison has a 50/50 plan. In fact almost no one uses just Medicare to pay their healthcare bills, some sort of private coverage is required to cover that 50%. Under Medicare the customer only received 50% coverage, needs to purchase additional insurance to have reasonable coverage and by the way, the rest of U.S tax payers are paying for both Medicare and their own private insurance.
With Medicare providing just 50% of the coverage required at a cost of $12,148 per person, we can assume that Medicare for all would cost $24,256 per person for universal coverage without private insurance. The median US household income is $56, 516.
What's The Solution
The basic premise that we have to buy into is that a tax funded, government run agency will be more efficient and cost less than what private industry can accomplish. Please email me all the government agencies that have been able to accomplish this. Further more we have to believe that Medicare will get more efficient over time; sorry, next years budget is over $800 billion.
If we believe the arguments that Medicare for all is the solution to fixing U.S healthcare; we have to do this in the face of numbers that simply do not support that Medicare is the answer. The stark reality is that Medicare is so much more expensive that as a nation we simply cannot afford a system that leaves so many people with less healthcare than they deserve. Medicare simply does not meet the Standard of Care metric that I said we would adhere to.
Presidents Truman and Eisenhower had it right, use Federal funds to provide universal healthcare coverage for all Americans by providing reimbursements to private insurance carriers. Eisenhower in particular foresaw that this government agency would devour resources that should be going to healthcare; he was right. A 6,000 person agency, a fraction the size of any one of the big 8 insurance companies needed $704.6 billion dollars for just 58 million customers, yet the big 8 served 164 million customers with just $564.8 billion. Not only did the big 8 provide more service for less money, they employed more people, over 844 thousand full-time positions. All those employees also created a significant amount of economic activity.
US health insurance companies are some of the best managed corporations in the world, and yes they are highly profitable. The profit motive is what makes them run more efficient operations. Eliminating these companies or artificially capping their revenues or profits removes the incentive to be better. However there are incentives that Congress could introduce that would deliver even better results and help lower costs for all.
Using our Standard of Care premise I would propose the following:
Eliminate Medicare as an agency, its simply too expensive and inefficient
Adopt the Standard of Care policy for all
Remove the limitations on various treatments and allow the patient to allocate healthcare coverage to the treatments they need most with a cap on total expenses. No one will use every component of the coverage they pay for so simply allocate the total value to wherever its needed most. If a family member is sick and runs out of insurance, allow another family member to use a portion of their coverage to fill the gap.
Reduce Medicare taxes and use the taxes that are collected to reimburse insurance companies for providing coverage to those who cannot afford insurance and for reducing premiums to everyone.
Tie insurance company corporate tax rates to a value metric (premium reductions, coverage of uninsured, value received).
Eliminate the Social Security Administrations practice of buying US Treasuries with excess collections and re-direct those funds to private investment accounts for all citizens, specifically to a total stock market index fund that cannot be spent until retirement so that ever American is participating in the growth of the country and has a substantial retirement fund. This will reduce the cost of entitlement programs and provide much needed healthcare money for everyone's golden years.
Aggressively streamline the FDA to lower the cost of developing drugs, remove the petition policy that allows drug companies to hold up competitors, increase competition to lower costs. Use savings to significantly staff up the FDA to shorten time of drug approvals.
Dramatically lower the cost to apply for FDA approval to encourage more small, innovative drug companies to enter the market.
Open online drug and medical device sales online from international markets for FDA approved products.
Make compassionate use programs more accessible and less onerous on doctors.
How Do We Invest
United Heath, Cigna, CVS/Aetna and Centene are amoung the best investments in this category. Just looking at the 1 year consensus estimates for all of them shows considerable upside potential, even after the recent rally. I would buy any of these companies and add to them by reinvesting dividends or on any pull-back below your cost basis.
Recently all health insurance companies saw their stock prices get whacked over talk about Medicare for all. I suggest that those investors who sold their shares should go watch School House Rock and learn how the legislation process works. Even if we agree on Medicare for all, any approved legislation is years away.
I don't think you have to buy these companies right now, you could wait until some more heated rhetoric about Medicare for All emerges; but I would rather see investors take a nibble on these names and add to them over time.
The growth in these stocks may very well pay for your next medical bill.
Stay Invested,
Clay
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S&P 500 declines to 2,350 or more (1-3-2019)
Healthcare and Biotech sectors outperform (1-3-2019)
S&P reaches 3,000 by year end (1-11-2019)
CSCO reaches $60/share (1-18-2019)
VEEV reaches $145/share (2-14-2019)
CVS reaches $91.50 (2-27-2019)
Bull market takes another leg up (4-7-2019)
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
