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Third Quarter Investment Outlook

The Patient Protection and Affordable Care Act (PP & ACA), the Election and Its Impact on Healthcare Investments

By: Dennis Fulmer, CFA
Friday, October 14, 2016

The goals of the law were to reduce the number of people without health insurance and to improve health outcomes.  Passed in 2010, it overhauled the healthcare industry by incentivizing insurance coverage, expanding Medicaid and reforming Medicare, and established insurance exchanges in many states. The Medicare reforms probably are the most significant parts of the law, as they wish to move the industry away from the “Fee For Service model” (FFS) and encourage the development of “integrated healthcare providers,” also known as Accountable Care organizations—Medical Homes which are similar to what you may know as “Managed Care Organizations.”  The Medicare reforms also include moving towards “bundled payments,” meaning a provider pays one lump sum per episode of care, such as a hip replacement, and the provider figures out the best way to treat the patient and keep the costs below the lump-sum amount.   In the FFS model, the providers get no reward for good outcomes and bear no risk for bad ones.  This contrasts with the Accountable Care Organizations where doctors, hospitals, and specialists work together to meet quality and cost targets.   Doctors would be salaried and, therefore, would have no financial incentive to order unneeded procedures.


Most of our doctor friends dislike the integrated/Accountable Care model, as it leads to lower productivity, like what is seen at the Veteran’s Administration, arguing that doctors are more productive under the FFS model.  We’ll save this debate for another day, but we acknowledge that our country has huge unfunded liabilities for Medicare and Medicaid that will bankrupt us unless we can move the cost curve down. We will only succeed in taking care of everyone if the cost curve is brought down.  A country with socialized healthcare doesn’t mean you have access to health care when you need it. It means they ration care by making you wait for it.  Medicare is moving forward to implement these changes, and we will examine how we can invest in companies that may benefit from these changes.  We don’t think these Medicare reforms will be repealed based on the election outcomes, but modifications would be likely.  Insurance mandates are more apt to be changed regardless of who wins, but a Clinton victory would possibly mean less change and would likely include more efforts to implement price controls on pharmaceuticals.


The computer software industry is benefiting from these changes as healthcare providers need new products to coordinate the efforts of all the providers.  The first effort for a change in software was a government push, including financial help, to require providers to adopt electronic health records (EHR).  This project is largely complete, so we are on to the next phase of software enhancements to coordinate the efforts of various providers and monitor outcomes and quality so they can handle the shift to bundled payments.


This effort to analyze data, sometimes called “population health” or “evidence-based care,” can be summarized as getting the right treatment to the right patient sooner.  Twenty percent of the patients use about eighty percent of the costs, so identifying and tracking these patients is key to controlling costs.   One example we have seen compares treatments and costs of a patient who doesn’t see his Primary Care Physician (PCP) on a regular basis versus one who does.  The patient who doesn’t see his doctor ends up in the emergency room with a heart attack and later in a nursing home after $45,000 in costs after 12 months.  The patient who does see his doctor regularly gets referred to a cardiologist, and they work with the patient to improve his lifestyle. His cost is only $5,000, and he stays out of the nursing home.  This sounds pretty dramatic, but it is supported by IBM’s artificial intelligence product known as Watson.  Watson concludes that "healthcare accounts for only 10 to 25% of the variance in individual health over time. The remaining variance is shaped by genetic factors (up to 30%), health behaviors (30 to 40%), social and economic factors (15 to 40%), and physical environmental factors (5 to 10%). This illustrates the importance of getting the patient to comply with the doctor’s advice and treatments. 


In summary, we doubt the election will result in wholesale changes in healthcare, but we expect continued changes at the margin regardless of who wins.  A Clinton administration may move towards price controls and a single-payer system, such as putting everyone on Medicare, but that would likely be a gradual process over more than one election cycle.



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