August 5, 2013 Update

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When Healthcare Caught a Cold

If the United States’ hospital system was a country, it would be the 16th largest economy in the world. In FY11, the government dumped $851B into hospitals, which is approximately 31% of the government’s total healthcare spending and approximately 5% of American GDP. Out of the 5,724 hospitals in the United States, 50% of them nongovernment non-for-profit entities, 20% are privately owned, 39% are government run. The recession that began in December 2007 is responsible for the rise in unemployment, and, consequently, the growth of the uninsured population; which greatly burdened the industry by increasing bad debt. The number of people insured increased in 2011 to 260mm (84.3%) from 256mm (83.7%) in 2010, the first time the numbers grew in ten years! As the Affordable Care Act in 2010 starts to come into play, it seems much more likely that the increase of those insured as a result of convenient regulation rather than a rise in employment, or a increasing in the willingness to pay for insurance. In fact, according to the US Census Bureau, those covered by Medicaid in 2011 grew to 50.8mm (16.5%) from 48.5mm (15.8%) in 2010, a tend that will likely continue due to stagnantly high levels of unemployment and a 1.5% fall in median household income YoY. In 2011, seniors covered by Medicaid grew to 46.9mm (15.2%) in 2011 from 44.9mm (14.6%) in 2010. As the baby boomer generation continues to age and seniors account for an ever-growing percentage of the American population, those covered by Medicare will likely also be a persistent trend in the future. But if income is falling, more seniors are retiring, and those covered by government-sponsored insurance is growing, then who is funding this entitled gap? While the Affordable Care Act of 2010 requires that employers and individuals who opt out of purchasing coverage pay a fine, this will only constitute a tiny percentage of the total cost of reform. The law has also enforces cutbacks in federal spending for various industries and groups across the country; targeting the drug industry who has agreed to a multitude of compromises, including lowering non-generic drugs by 50% for Medicare patients (saving the federal government $20B by 2020) and to more Medicare rebate programs. But in a country that has the highest inpatient cost per day in the world, it seems unlikely to me that relatively small savings and fines will be enough to bridge the funding the gap. According to the Centers for Medicare & Medicaid Services, Medicare premiums from 2010 and 2013 fell by 10% while enrollment grew by 28%. Hospitals know they’re getting sick and are merging at the highest pace in history to try and keep the symptoms of default away. In 2011-12, there were over 200 deals made in the industry, which is feverishly high. However, it seems to me that the most effective way to keep costs down for the industry would be to reevaluate hospitals’ stale business plan. Hospitals derive revenue by selling the most care for the most expensive prices. This classic model works for a variety of sectors, but is the reason the industry has gotten as sick as it has. Doctors are compensated for the number of treatments they perform, not on the overall health of their patients. It seems to me that the most effective way to cutback government spending would be to provide an incentive for physicians to keep their patients in good health. Whether this is done by making the market for treatment more competitive or through an alternative that incentives doctors to keep their patients healthy, I do not know. But I do know that in order to treat the recent swelling in the industry, hospitals will have to be properly cared for and looked after while the government enforced treatment begins. Where’s the Advil when the industry needs it?

Domestic News

• Market Update Futures are flat ahead of the ISM non-manufacturing report and week filled with important Federal Reserve speeches. 
• The ISM non-manufacturing index will be released at 10:00, and is anticipated to increase to 53.1% for July from June’s 52.2%

International Updates

Asia

• Market Update Markets were mixed with Japanese equities falling from performance pull-backs from various financial and technology firms and Chinese stocks rising from data showing improvement in the services industry.

Europe

• Market UpdateMarkets are up after a rise in PMI, as U.K. services sector grew at fastest pace in over six years.

Corporate

• Discovery Communications (DISCA) was upgraded to Hold from Sell by Pivotal Research, despite missing earnings estimates the company is in line with valuation.