Category Archives: Health Reform

CIGNA and the international market -     Yesterday, CIGNA, a US health insurer announced an interesting new product offering that is a symptom of the trends that are happening within the global healthcare market.  They are now offering an individual international healthcare plan for around $4500 that covers hospitalization, surgical procedures, cancer tx, and emergency around the world.  Outpatient options can be added for additional fees.  The current target audience are wealthier, jet-setting expatriates individuals with a current mkt value of around $1B.  CIGNA plans to expand the concept to high-net worth inviduals overall and are optimistic about the potential.

This is a departure for CIGNA from its core of employer-based insurance.  As the insurance markets in the US matures, CIGNA has been looking to expand overseas mainly targeting companies and employers that send employees abroad.  A major roadblock for CIGNA is that many other countries often have a form of public coverage for their citizens, thus relegating private insurance to supplementary roles if at all.

Shifting from a core of employer to individual based insurance is a must for CIGNA.  Health reform in the US is expected to favor individual based choice of insurance options with employers possibly having incentives to send their workers to the individual health exchanges.  This international plan for individuals is a good start for CIGNA to expand into new markets and gain new capabilities.  The international jet setting crowd is a valuable one and one whose needs are not currently being met by insurance companies, and with good reason.  The entry barriers are high to be able to gather a network across countries and negotiate payment and reimbursement rates with hospitals.  A company like CIGNA, who has experience in the international market via employer-groups is at an advantage vs other insurance companies.  The implications of a global health insurance plan are potentially large and who knows how accessible it can go.  Currently it is confined in its niche and to a high end few but as time goes on it will get cheaper and cheaper to offer.  No doubt, this is converging on the medical tourism trend and will be interesting to see how quickly they will partner on a larger scale.

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Healthcare spending underestimated -  Traditionally, when healthcare spending is reported, it takes its numbers from how much was spent in hospitals, prescription drugs, insurance, physicians, or more “formal” areas of healthcare.  Very rarely it appears, does it take into account the consumer spending on more “informal” ways that consumers try to deal with their healthcare issues.  A recent Deloitte study shows that the that costs of healthcare as traditionally reported may be underestimating the costs of healthcare by as much as 15% or around $363B.  A lot of these costs revolve around opportunity costs of informal caregivers who may be family, relatives, and friends.  But a significant part, around $164B, include traditional medicine, functional foods, nutraceuticals, cosmoceuticals, nutritional supplements, and other various informal “services.”  What is interesting about this part is that it seems to be a replacement if you will for formal medical alternatives because its costs are too high.  That is to say, rather than going to a hospital for treatment, someone might replace that with traditional medicines/alternative medicine.  Or rather than getting rx drugs, a person will buy nutraceuticals with “natural healing” elements.

To extrapolate the study results, I think this is interesting b/c it seems that the formal and informal medical options are substitutes for each other, especially in the eyes of the consumer, especially those of lower income and uninsured.  So the question and topic to keep an eye on will be the outcome of US health policy reform concerning these uninsured and underinsured.  Assuming that they will get coverage, will they use more formal healthcare services, will they continue to buy the informal health alternatives?  If so, what will happen to this nearly $164B industry?  My best guess is that they will buy less informal medical products and services, but unfortunately it doesn’t end there.  This is also interesting b/c several pharma companies have long term strategy to diversify their business with most developing their “consumer products” divisions.  Their rationale is that governments and other payers will attempt to control costs thus forcing beneficiaries to go into cheaper medical alternatives.

So there is an interesting circle forming here for the future, wider coverage means more people having access to formal medical treatments, this in turn raises the formal costs that payors will have to spend, which in turn will cause payors to control costs, which in turn drives people back to cheaper medical alternatives.  No one said this was supposed to be easy.


60 minutes and Medical tourism    As a follow up to last blog about aerotropolis and healthcare where I mentioned that I believed the hospital stakeholders would be an ideal fit, 60 min ran a medical tourism piece mainly concerning hospitals located in Thailand and India.  Despite the general poverty throughout these countries, world class hospitals with state of the art technology and US-trained physicians are sprouting up.  Thailand currently is estimated to about around 1/10th the price of the US and India around 1/20th.  So far though, the main foreign usage of medical tourism has centered around: 1.) people who generally did not have insurance or were underinsured and thus forced to look elsewhere 2.)people who did not want to wait for a procedure in their country 3.)Procedures (e.g. plastic surgery) generally not covered by insurance.

There is a potential 4th group that could really make a boom in the medical tourism space and that would be the commercially insured group.  Under this currently-in-the-works system, medical centers in Thailand and India would contract with US insurers to provide low-cost and high quality care.  It sounds like a reasonable proposal especially with health insurers looking for ways to reduce costs and potentially reduce burden on US hospitals when 49million people become insured under health reform.  Of course though, a main potential objection to all of this would be flying half way around the world so that insurance can save a buck.

This situation and these trends have not gone unnoticed by entrepreneurs.  What 60minutes missed and probably would have been more relevant to most Americans would be the developing medical tourism industry in the Caribbean.  Ironically, entrepreneur minded physicians in India are already laying down the ground works for specialty heart, eye hospitals to be built in the Caribbean with the main goal of picking up those from a future overburdened US health system.  Under such a situation, there is a very high likely hood that insurance will go to the table with these Caribbean hospital centers now that their beneficiaries are more willing to travel under this condition.  World class status however doesn’t come cheap and insurance will be adamant about this point especially at the beginning to make the concept more palatable to its beneficiaries.  Thus these hospitals will likely need significant capital investments.  Wouldn’t be surprised to see medical tourist corporations via the Caribbean-US potential come up especially if insurance is willing to hop on board, which I believe they would be.


US Healthcare Policy and pharma industry

In terms of looking at the grand strategy of healthcare policy, there are 3 main policies that have a counterbalancing effect on one another.  In this sense, I’m reminded of a Caltech saying that there are 3 things that you can do in school:  1.)study 2.) socialize 3.) sleep and that at Caltech you can only pick 2 and the other suffers.  In a similar vein, healthcare policy has its own three: 1.) Low cost 2.) Access 3.) Innovation, pick 2.

For most of the world, the choice with universal healthcare obviously focuses on 1.) low cost and 2.) access with many of the the latest innovations not available and/or not having an industry producing innovative treatments.  The U.S. however has a fairly unique combination of of 1.) Low cost and 3.) Innovation while suffering on 2.) access.  While many of us won’t debate that the U.S. has innovation, but does it have low cost?  In a sense we do even if it is not in absolute terms.  For example, generic drug prices are among the lowest in the world.  The low cost is a result of near free market pricing in a competitive environment.  Over time, this drives down prices of innovations.  The downside is that access suffers since only those with insurance (and their collective bargaining power) will have access leaving 49M uninsured in the US not able to receive tx.

However, the U.S.’s policy is changing with regards to healthcare policy in the sense that Healthcare reform seems to be strengthening 1.)Low cost and 2.) Access.  Based on the three legs described above, it is hypothesized that 3.) Innovation will start to suffer.  If not, then the U.S. has a very ambitious goal of giving everybody access to low cost tx and drugs while maintaining a healthy environment for innovation.  This in my mind is very tough b/c the low cost is a result of squeezing biopharma and med device companies and/or squeezing payers/providers who then squeeze biopharma.

But health reform believes that there is a way to get everything.   The magic word is “healthcare information technology (HIT).”  The theory is that HIT will remove the inefficiencies and waste in the system and hence lower costs while at the same time, improve patient outcomes.  There is some legitimacy to the claim, which is probably why companies in HIT such as Cerner, Allscripts, McKesson have been having some nice rides.  An ETF for this industry could be interesting, but in my mind, this is a zero sum game since one’s success is another’s failure.  But back to the 3 legs, I think that the cost savings from HIT for “right tx, right person, right place, right time” might be overblown b/c this is suggesting that innovation is being funded by waste and inefficiency.  While certainly true in an incremental sense, but in a fundamental sense certainly not.  Thus, the low cost will primarily be a result of directly and indirectly squeezing biopharma industry and not more efficient healthcare.

With theoretically 49M more people coming onto the insurance rolls, most of them through Medicaid and previously underinsured, we can be guaranteed that the payers and government will be squeezing pharma for existing medications and tx on the market, which will affect future funds for innovation.  No matter how you look at it, pharma will not be benefiting from a shift from low cost/innovation to low cost/access in US policy.

Preventive care may not prevent much

According to a Kaiser article out this mornings, HHS Secretary Sebelius announced that as of 9/23/10 health plans will have to cover services recommended by the U.S. Preventive Care Task Force for free (no copay).   On top of the task force list, Congress added other items like mammograms for women in their 40s and yearly prostate exams for men on Medicare.  A 2003 Duke University Medical Center study estimated that it would take 1,773 hours a year of the average doctor’s time to counsel and facilitate patients for every procedure recommended by the task force.  This does not include the follow-up services should a preventive measure identify a problem.  That comes out to 7.4 hours every working day just for preventive and screening procedures. 

Also, there are many studies that show health costs rise with the widespread adoption of screening tests rather than come down.  Think of it this way: screening thousands of people in order to catch one with cancer is not necessarily economical.  Another potential hazard is the crowding out of really sick patients – if docs spend all day doing preventive work, they may not have time to see the acutely ill patients vying for attention.  Say there is an insurance pool that pays doctors different rates; patients in higher paying plans seeking preventive care may displace the more urgent needs of patients in lower paying plans.  Something to think about…

The Bear Case for ATHN

Our Portfolio Manager, Dean Machado, recently presented the bear case for athenahealth, inc. to our trading desk.  His robust presentation boiled down to one thesis that is detailed below.  To read his entire in-depth report click here.

Athenahealth (ticker: ATHN), ever since its 2007 IPO, has been hyped as a SaaS company with a federal stimulus story on top.  The company earns substantially all of its revenue from its revenue cycle management (RCM) software, yet the street values them as if they will garner significant market share in the electronic health records (EHR) space as the government begins to pay out “meaningful use” bonuses.  We think the street is egregiously overestimating the part that ATHN will play in the EHR narrative.  ATHN has managed to grow their physician client base nicely over the past 3 years (although that growth has slowed), nonetheless, we believe they are targeting the wrong market as it will be hospitals that drive the adoption of EHR going forward.  Once investors realize that, as far as athenahealth is concerned, the EHR story is just a bunch of hot air, its earnings multiple will be cut in half and consensus estimates will come down, resulting in a per share price in the $15-$20 range.

Robbing the poor to give to the poor

The House of Representatives just passed a $26 billion bill intended to help states save teachers’ jobs and to prevent Medicaid cuts.  In a rare case of anti-Robin-Hood-ness, this bill robs the poor AND gives to the poor.  A major portion of the $26 billion spend will be offset by $11.9 billion in cuts to the Supplemental Nutrition Assistance Program, a.k.a. food stamps.  If you’re “poor” you’ll be able to visit the doctor, just make sure to pocket as many lollipops as you can on the way out.  Liberal Democrats are less than thrilled with this outcome, although the food stamp cuts begin in 2014, so they’re hoping they will find an alternative offset by then.  Representative Rosa DeLauro, (D-Connecticut) went so far as to say “As you can imagine, for me personally, it’s like ‘Sophie’s Choice’”.  I wonder how her senior Senator, Joe Lieberman, would respond to that claim; considering Sophie’s actual choice was which child to hand over to the Nazis?

Individual Mandate or Suggestion?

Minutes after Barack Obama signed H.R. 3590 – Patient Protection and Affordable Care Act into law, Virginia’s Attorney General, Ken Cuccinelli, filed a lawsuit to block the law’s mandate that all individuals carry health insurance by 2014.  In a recent development, a federal judge rejected a request by the U.S. Justice Department to throw out the State of Virginia’s lawsuit.  The suit alleges that Congress has overstepped its bounds by instituting a coverage mandate, and the judge feels that the issue of Congress’ power to regulate an individual’s participation in interstate commerce has not been “squarely addressed” by federal courts.  The full hearing is expected to commence in October.  There are 20 other states that have brought challenges to the individual mandate.  Each of those challenges will be heard separately in the appropriate state, but one judge’s ruling on the matter could have a domino effect for other rulings across the country.  Just 3 months before November elections, the GOP will most definitely be hanging their hats on this latest blow to health reform.

Quid Pro Quo

On Wednesday we got the “Slaughter Solution”.  Representative Louise Slaughter (D-NY), the chairwoman of the House Rules Committee set forth the proposal that the House invoke a legislative loophole that would allow the House to pass the Senate bill without even voting on it.  This would save Democrats from listing a “Yea” vote on their voting record.  On Thursday, Republicans won a battle of their own when the Senate Parliamentarian (way to go Frumin) ruled that a reconciliation bill could not be discussed before the House passes, and the president signs, the original Senate bill.  This undoubtedly makes Democrats a little more nervous that the Senate may not actually pass a reconciliation bill that would amend the original Senate bill.     And just to keep it interesting, I am seeing blogs, today, that say the Parliamentarian was misquoted.  On top of all this, Obama has just delayed his trip to Indonesia and Australia (and decided to leave his wife and kids at home), which he was supposed to leave for on Wednesday, to next Sunday.  It appears he has done this to give Nancy Pelosi a couple more days to rally the troops for a pre-Easter recess vote.  I’m still cautious and giving this one 40% probability.

Who the F is Alan Frumin?

Well, he was born in Manhattan in 1946, went to Colgate undergrad and Georgetown law, and his wife is FTC lawyer Jill Meryl (thanks Wikipedia).  More importantly he is your friendly neighborhood Senate parliamentarian – an unelected government official who sits at the dais at the head of the Senate and knows all there is to know about Senate procedures and protocols.  So why should you care?  If all goes as planned, the bipartisan meeting on health reform that I am watching (on CSPAN since CNBC doesn’t think it’s important enough to focus on) will do nothing; nothing except move the Democrats closer to realistically considering passing a bill via budget reconciliation.  And believe it or not, good old Al Frumin plays a pretty pivotal role in how a reconciliation bill would look.

First things first; reconciliation isn’t called budget reconciliation for nothing.  The bill, for the most part, can be passed with a simple majority of 51 votes, but (and this is a big BUT) every provision in a reconciliation bill must affect the budget; it must change government spending or government revenues in some way.  So any legislation aimed at regulating insurance premium increases, individual health insurance mandates, even abortion would likely be disallowed in a reconciliation bill.  The Democrats could expand Medicaid and levy some excise taxes on various healthcare subsectors, but comprehensive health insurance reform is out of the question.  This, however, is not enough when compared with Dems’ promises made on the 2008 campaign trail. 

In the event that Democrats do go down the path of reconciliation it will get ugly.  Reconciliation may pass with a simple majority but this process will certainly not be simple.  If the Democrats want to pass sweeping reform, the House will have to pass the Senate bill that was passed on Christmas Eve.  They will then amend the original Senate bill with the reconciliation bill.  House Democrats are particularly nervous about this.  Who’s to say that the House will pass the original Senate bill, only to be followed by the Senate not passing a reconciliation bill?  Greater schemes have been pulled off in our capitol. 

Even if all does go as planned, reconciliation will be as much of a headache as the Republicans want it to be.  Two Senate committees (Finance and Health) and three House committees (Ways & Means, Education & Labor, Energy & Commerce) would each be required to mark up the provisions in the bill that fall under their jurisdiction, and each committee would have to come up with at least $1B of savings over 5 years.  Furthermore, there is no time limit for committee markups.  Republicans on those committees could offer amendment after amendment until they ran out just to prolong the process.  Once those Republicans get tired and the reconciliation bill finally does come to the floor there are more obstacles to overcome.  In the House of Representatives, reconciliation isn’t as big a deal since the House Rules Committee can waive all opportunities to challenge the bill with a simple majority vote (Democrats should be able to handle this).  In the Senate, however, no such rule exists.  Debate time for the bill is set at 20 hours, but that does not include time for proposed amendments.  Time for amendments is endless.  If Democrats do go the reconciliation route, you can bet that Republican Senators’ aides will be working day and night compiling amendment after amendment for what will amount to a “filibuster: reconciliation style”.   

While all this is going on Alan Frumin will have the last word on which provisions and amendments are actually reconciliation-worthy.  He will comb the initial reconciliation bill himself, and then during debate, Senators will raise “points of order” or challenges to various proposals.  The basis for a point of order comes from the Byrd Rule which defines matters considered to be extraneous to a reconciliation bill.  A provision is considered extraneous if:

  1. It does not produce a change in government spending or revenues,
  2. It produces a change in outlays or revenue, but the change is merely incidental to the non-budgetary components of the proposed provision,
  3. The provision is outside the jurisdiction of the committee that submitted it,
  4. The provision increases spending or revenue, but fails to achieve the Senate committee’s reconciliation instructions,
  5. The Provision increases spending or revenue during a fiscal year outside of the years included in the reconciliation bill, unless the provision remains budget neutral, or
  6. The provision affects the social security trust funds.

So you might think Alan Frumin is walking the streets of Washington D.C. feeling pretty pretty good about himself these days.  Once again, not so simple.  As President of the Senate, Joe Biden can overrule any ruling made by Mr. Frumin.  This, however, hasn’t been done since Norm Rockefeller in 1975.  What has been done, on the other hand, as recently as 2001 is the following… Then-Senate Majority Leader Trent Lott (R-MS) fired the then-Senate parliamentarian Bob Dove after Dove struck a Republican provision for natural disasters from a reconciliation bill!  Dove was replaced by none other than – wait for it - Alan Frumin.