Healthcare Reform: The $700 Billion Lie


“The trust of the innocent is the liar’s most useful tool.”

— Stephen King

On Sunday night, the U.S. House of Representatives passed comprehensive healthcare reform legislation and, in so doing, participated in the biggest and most costly scam in American history.  More on that later.

Real Healthcare Reform Is Needed

Now, don’t get me wrong. I would be the first person to tell you that the U.S. healthcare system is broken and needs fixing. For example, people who lose their jobs should be able to keep their existing health insurance – including their level of monthly premiums. Insurance companies should not be able to cancel policies if the policyholder files “too many” claims and there should be no lifetime benefit limits on coverage.

Furthermore, it’s obvious to me that healthcare spending is totally out of control. Over the past 50 years, healthcare spending as a percentage of U.S. GDP has skyrocketed from 5% in 1960 to 9% in 1980 to almost 18% today. If left unchecked, the Congressional Budget Office estimates that healthcare will constitute nearly half of U.S. GDP by 2082, a completely unaffordable number. Health insurance premiums have followed suit, increasing four times faster than employee wages (119% v. 34%) over the past decade.

Three’s a Crowd

Why are healthcare costs exploding?  One main reason:  the moral hazard inherent in a third-party payer system. Health insurance companies (the third parties) pay the medical bills charged by doctors (the second parties) for treating patients (the first parties).  None of the parties feel responsible for the actual cost of healthcare. Patients like you and me only directly pay a fraction of the cost via office visit co-pays, coinsurance (if any), and our insurance premiums, which themselves are heavily subsidized by our employers who usually cover two-thirds of the cost. Employers don’t fully pay for the subsidy they provide employees because they can deduct the cost from their taxes and reduce employee salaries to cover the remaining cost. Insurance companies don’t care about costs because they just raise the premiums they charge employers to cover the cost increases. 

In 1965, prior to the creation of the Medicare and Medicaid programs, patients paid for 43% of healthcare costs directly out of pocket. Today, patients pay for only 11% directly.  It’s a basic economic principle that the less something costs, the more of it one is willing to consume. Last fall, in the September issue of The Atlantic, a business executive named David Goldhill wrote about this very issue and concluded that real healthcare reform requires eliminating the third-party payer system and its perverse set of financial incentives:

Every time you walk into a doctor’s office, it’s implicit that someone else will be paying most or all of your bill; for most of us, that means we give less attention to prices for medical services than we do to prices for anything else. Most physicians, meanwhile, benefit financially from ordering diagnostic tests, doing procedures, and scheduling follow-up appointments.

Moral hazard has fostered an accidental collusion between providers benefiting from higher costs and patients who don’t fully bear them. In this environment, trying to control costs is awfully tough.

Real healthcare reform requires the end of the third-party payer system. Individuals need to take more responsibility for the cost of their healthcare. For example, there is no reason that “insurance” should pay for routine doctor office visits. Insurance should be reserved for catastrophic illnesses and injuries.

The Bag Holder is the U.S. Government

Although the third-party payer system makes it difficult to figure out who actually is paying most of the spiraling healthcare costs, rest assured that that someone is the U.S. Government. Through the employer health insurance tax breaks mentioned above, as well as through Medicare/Medicaid where the Government is responsible for reimbursing healthcare providers, the Government ends up holding the bag. If you aren’t feeling sick enough, just watch the following 60 Minutes video to see how the Government is suffering from massive Medicare fraud. Of course, the Government is not some isolated entity; it gets its money from us. All of us are actually paying for healthcare through higher taxes and government debt; we just don’t seem to realize it.

And debt we have — in spades. According to the most recent economic forecast of the Organisation for Economic Co-operation and Development (OECD), the 2010 U.S. Government budget deficit as a percentage of GDP will be an astounding 10.7% (worse than Greece or Iceland) and total Government debt will be 92% of GDP. 

Expansion is Not Healthcare Reform

What really burns me up is that this so-called healthcare “reform” legislation that Obama signed on Tuesday does absolutely nothing to reform the moral hazard inherent in the third-party payer system that is at the heart of spiraling healthcare costs. All the legislation does is expand the current system to cover 32 million more people, which makes the U.S. debt load even bigger.   

The Public Isn’t Stupid

In this time of incredible fiscal stress, does it make sense to increase fiscal burdens with a massive expansion of healthcare obligations? Of course not.  The Congressional leadership pushing the healthcare legislation knew that the American public would never support a budget-busting bill. In fact, public opposition to the Democratic bill remained steadfastly strong in the months leading up to the vote with between 52% and 58% of Americans against and between 38% and 44% in favor.  According to the polling data:

66% of voters believe passage of the president’s plan will lead to higher deficits. . . . 59% of voters say that the biggest problem with the health-care system is the cost: They want reform that will bring down the cost of care. For these voters, the notion that you need to spend an additional trillion dollars doesn’t make sense.

Liar, Liar Pants on Fire

How did the leadership in Congress turn the tide? They lied – big time, as in $700 billion worth of lies. True enough, the non-partisan Congressional Budget Office “scored” the legislation as reducing the federal budget deficit by $138 billion over the first 10 years of the program. But the CBO is required to accept the budget assumptions they are given at face value, no matter how unrealistic they may be.  And the assumptions Congressional leaders forced down the CBO’s throat were whoppers. Douglas Holtz-Eakin, the former head of the CBO from 2003-2005, wrote an op-ed piece in the New York Times outlining all of the “gimmicks and budgetary games” used to conjure up the phony deficit reduction number. He lists too many examples to regurgitate here, so I urge you to read his op-ed. Bottom line, after stripping out this chicanery, Holtz-Eakin concludes:

The healthcare reform legislation would raise, not lower, federal deficits, by $562 billion in the first 10 years. . . And the nation would be on the hook for new entitlement programs rapidly expanding as far as the eye can see.

The difference between the alleged $138 billion in savings and the $562 billion in extra debt comes to . . . $700 billion.  Hence, the title of my article.

Healthcare Repeal?

Just because the bill has become the law of the land doesn’t mean it’s going to stay that way.  With Republicans expected to make huge gains in November’s mid-term elections, this boondoggle baby could get repealed very quickly.  And 13 states have already sued the U.S. Government, claiming that the legislation – which requires, starting in 2014, that most U.S. citizens purchase health insurance or pay a fine — is an unconstitutional usurpation of states’ rights and imposes a huge unfunded mandate on the states that they cannot afford.

Healthcare Stocks are Winners

Assuming the “reform” legislation stays in place, the question remains which health care stocks will benefit and which will be hurt. Given that the law expands coverage to 32 million additional people and increases federal and state healthcare spending outlays by hundreds of billions of dollars, I think virtually all healthcare companies are winners. That is why stocks in the healthcare sector rose on Monday morning after the House’s passage of the bill on Sunday evening. And it should therefore be no surprise that KCI’s own Ben Shepherd, co-editor of the new Global ETF Profits advisory service, told me in our recent interview, that healthcare was one of his favorite industry sectors for future investment.

There’s only one loser from the healthcare reform law – the U.S. taxpayer, which is all of us.


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