Health care cancer

Olivier Garret Contributor
Font Size:

We all know that the U.S. health care system is broken and most of us know that Obamacare is only adding additional bureaucracy and entitlements (read expenses) to an already unaffordable system.

In fact, the current reform does not address some of the most serious issues that have plagued the health systems for decades. Among the issues unaddressed

  • The rising cost of professional liability insurance
  • Exorbitant administrative costs
  • The long & painful collection of fees from insurers (with Medicare and Medicaid being the worst payers)
  • A monopolistic situation allowing price gouging by the pharmaceutical and medical research industries
  • Universal access to emergency care paid for by a shrinking base of insured customers (which forces employers to drop unaffordable coverage)
  • Poor preventative care
  • And the list goes on…

The fact is that the system is broken and needs a complete overhaul, not a patchwork of additional mandates and the wide array of pork that was included to pass this legislation.

Let me go back in time and pull a few examples from my own experience to demonstrate how quickly the health care system has deteriorated in this country.

I first moved to Vermont in the early 1980s. In those days, there was one family doctor in our small town. In his office, he had a nurse/office assistant who handled all of the administrative needs for the practice. I do not remember what the actual cost of the visit was then, but I do remember that Dr. Groskin spent as much time as he felt was necessary with each patient (sometime as much as 45 minutes) and that his nurse was not overwhelmed with administrative tasks (insurances used to reimburse submitted expenses reliably and promptly).

In 2010, our local medical practice has four physicians and a staff of 25. The practice had to be sold to the local hospital to handle a lot of the administrative oversight. Both physicians and nurses complain that they spend approximately half of their time on paperwork instead of taking care of patients. A routine visit means 45 minutes in the waiting room, five minutes with a nurse, a 10-25 minute wait in the patient room, and 5 minutes with the doctor (who has absolutely no idea who you are or, god forbid, knows anything about your family & living environment).

In 1994, I was CEO of a manufacturing company in Vermont. We offered a comprehensive health insurance plan through Blue Cross Blue Shield (no deductibles, no co-pay, full drug coverage). That year, BCBS’s family plan cost a full $250 per month ($3,000 annually) and employees and their families had virtually no additional health care expenses (unless they had an urge for cosmetic surgery).

Sixteen years later (2010), our company offers one of the best plans available locally through Cigna. The cost per family is $1,250 per month ($15,000 annually) for a dramatically less generous plan. The Cigna plan we offer has a $1,250 deductible and 20 percent co-pay, a drug card that gives you access to negotiated prices but does not cover any expenses, and many, many expenses and procedures that are not covered. I estimate that our employee families spend on average $5,000 a year in uncovered expenses. This means that in Vermont, health care costs have increased 567 percent during the last 16 years (a compounded increase of 12.6 percent annually).

In addition, for any expenses other than the basic routine preventative care, the insurers always start by rejecting the charges and initiate a six-to-nine-month three-way pingpong game between the patient and the service provider. The only “positive” outcome is that it keeps employment high as both the insurers and the service providers have added a very large staff of cubicle dwellers to handle paperwork and follow-up phone calls.

Moving forward to 2005, I worked on the turnaround of a regional medical equipment supplier. The company had two distinct businesses: medical apparatus sold to patients (wheel chairs, lifts and elevators) and patient-handling equipment sold to hospitals. The company was growing rapidly but it was almost bankrupt because it could not manage its working capital requirements. A quick analysis of both business segments revealed the main source of the problem.

The patient retail business had theoretical margins of 45 percent but it required very large inventories (approximately six months worth of sales). The real problem was that most insurance companies (Medicare and Medicaid once again being the worst) almost systematically rejected the charges even when they had been pre-approved. At that point, a 6-to-12-month battle started between the office administrator and the insurance company staff, the result of which was that the company averaged collections of approximately 80 percent to 85 percent of the billed amount. Add to this the fact that many patients could not afford the co-pay amount and failed to pay and you ended up with the struggling company losing most of its theoretical margin in the process while having to carry the working capital for at least a year.

The hospital business on the other hand, was not covered by insurance and was much healthier. The company obtained a down payment of 30 percent on orders and was paid in full within 30 to 45 days after the installation was complete. All the equipment was supplied and installed to specs, so there was minimal inventory.

This was one of the easier turnarounds I had ever been involved with even though the company was literally bankrupt when I started. In the span of a few months we sold the patient retail business and freed a lot of capital to pay down debt and expand the hospital business. Four years later, the company is continuing to grow very profitably.

These three examples all demonstrate that we have a completely broken system in dire need of overall. That said, there is only one solution, which is to study the best health care delivery systems in the world and adopt some of their most effective practices. (Athough in the U.S. you can have access to some of the best specialists, surgeons and equipment, the delivery system as a whole is ineffective.) The relationship between patients, physicians, hospitals, and drug companies needs to be based on free market principles with fewer laws, regulations, mandates, patent monopolies, class action suits, and so on.

The additional mandates, entitlements, and pork included in Obamacare will not fix the system. These expensive and superfluous extras serve only to kick the can down the road, ensuring that expenses will continue to increase at double-digit annual rates until no one but the extremely affluent will be able to afford care.

Olivier Garret is the CEO of www.caseyresearch.com, an independent investment research firm and newsletter publisher seeking to provide superior returns to self-directed investors.