Consumer Driven Health Care

Stansberry & Associates - August 15, 2006
Profit from Consumer-Driven Health Care: Part 1
By Rob Fannon

In a recent article, economist and author Charles Wheelan nailed some of the biggest reasons for towering health-care costs in the United States. Despite 40 million uninsured and some of the worst health indicators among industrialized nations, U.S. health-care costs represent 20% of GDP ($1.9 trillion) – the costliest health-care system in the world.

His No. 1 reason for the current state of affairs: “Nobody shops for value.” But it’s not that simple. No consumer, i.e. patient, shops for value in medicine because there’s no price information available! When’s the last time you went shopping and had no idea how much anything cost?

Wheelan states, “There’s no medical equivalent of Wal-Mart. Everyone wants Neiman Marcus.” But, in medicine, it’s impossible to figure out where you’ re shopping. Of course, you can see a doctor at well-known, top-notch hospital like the Mayo Clinic, but you still don’t know how much it costs. The fancy doctors may indeed be less expensive than the mom-and-pop shop doc down the street. Nobody really knows.

But that’s all about to change...

The Bush administration hypes Consumer-Driven Health Care (CDHC) as the saving grace to the U.S. health-care problem. CDHC, in theory, is a health-care market that mimics free-market standards, putting patients in charge. Consumers are provided a specific amount of health-care dollars to spend as they wish, ideally in the most efficient manner in a competitive market. It’s the same concept of shopping for a DVD player at Wal-Mart or Target. However, such a system could only work in medicine if consumers had price information.

At the heart of CDHC is the economics concept of moral hazard. The premise: because insured patients don’t adequately feel much price pressure, they are overly excessive with their medical services. For example, if more patients had to pay for their medical care directly, they might hesitate to see a specialist (cost ~ $1,500) before seeing a general practitioner (cost ~ $200) to determine if advanced care is needed.

Medicare, which floats 40% of the nation’s health-care bill, is slowly posting prices it pays to hospitals and doctors for common medical procedures on its website, beginning with common procedures like hip replacements and cardiac surgery. The rationale is to empower medical consumers with some standard price information. The long-term goal is to help patients choose doctors or, better yet, negotiate for lower medical prices – just as in free-market economics.

The Bush administration claims that Medicare pricing information will establish some pricing benchmarks, which have been absent from the medical industry heretofore. Again, this is an attempt to put some price pressure on the consumers, not only to force them to trim down on unnecessary medical spending, but also to become better shoppers.

The primary mechanism driving CDHC plans are Health Savings Accounts, or HSAs. Such plans are tax-advantaged vehicles made available to individual patient consumers to supplement high-deductible plans offered through traditional insurance coverage.

About 3 million Americans have participated in various forms of HSAs and that was before Mr. Bush promised to enhance and make such plans more attractive in this year’s State of the Union Address. CDHC plans and HSA participation have been increasing at impressive rates – some estimates claim 50,000 new accounts per month.

There are several specific investment opportunities to take advantage of this emerging trend, which will be the focus of my Blast next Tuesday. Until then…

Good investing,

Rob Fannon Editor, Phase 1 Investor