Market Analysis

Sector Flash: November Health Care Checkup

The US health care reform law is in the books, but the challenges facing our country's legislature are just beginning.

With the US midterms behind us, focus has already shifted to what a new Republican House majority means for the legislative landscape ahead. If you listened to the rhetoric—and recent campaigns brought plenty of that—a top Republican target may be the health care reform law (formally the Patient Protection and Affordable Care Act). Rhetoric is one thing, but health care is a monster issue, only made more complicated by reform. Anyone wondering why government is ill-suited for business, see below.

Health care funding is of key importance and particularly contentious. But before lawmakers even get to fight over funding the new bill, they have past problems to deal with. Scheduled Medicare reimbursement cuts, for example, are a hangover from before the reform law's passage. In fact, many physicians were furious it wasn't addressed when the dust settled on the debate—evidently, 2,000 pages will only get you so far.

The current reimbursement system, implemented in 1997, pegs doctors' Medicare pay to the health of the economy—a so-called Sustainable Growth Rate (SGR). But Congress has responded to physician outrage over declining reimbursement by blocking pay cuts ten times in the last eight years, skewing the intended "peg" and delaying cuts until they become entirely unpalatable (that's where we are now). If a new extension isn't passed (and this can only be done through legislative action), doctors' reimbursements for treating Medicare patients will be cut 23% on December 1 and an additional 6.5% on January 1.

Cuts may be necessary, but don't expect them to come easily. The head of the American Medical Association (AMA) has characterized rate cuts as a "catastrophe," citing a likely exodus of physicians from the Medicare program and an ensuing shortage of practitioners to meet the demand of the country's seniors. The AMA is therefore seeking a 13-month extension of current reimbursement rates to allow the new Congress time to come up with a longer-term solution. The Congressional Budget Office estimates delaying rate cuts until January 2012 would cost approximately $15 billion, while a longer-term fix (through 2020) would cost over a quarter of a trillion dollars.

This quandary is a great example of health care placing Republicans and Democrats alike between a rock and a hard place. On one side, you have doctors who will undoubtedly be severely impacted if their practices are Medicare-focused—and who will publicize their inability to treat Medicare patients. On the other hand, you have an unsustainable payment formula in an era of "pay-as-you-go." There's no simple answer.

Money isn't the only health care issue facing Congress. A recent attempt to roll out high-risk insurance pools, created and funded by the Affordable Care Act, has met a largely unexpected problem—lack of participation. The health care reform law set aside $5 billion for the immediate establishment of "high-risk" insurance pools—a bridge to the 2014 ban on denying individuals coverage because of pre-existing conditions. Enrollment was originally projected to quickly hit the hundreds of thousands (out of the approximately six million estimated to be eligible)—likely exhausting the allotted $5 billion for the program years before its planned expiration in 2014. In practice? Just over 8,000 Americans have requested coverage in the three months since the pools' establishment.

So what gives? Lack of awareness. The countless complicated provisions in health care reform are too much for most Americans to follow closely. It would be a part-time job (requiring a law degree) to even begin to understand the implications. Which begs the question, will other provisions of the plan be similarly ineffective? Will individuals even know they qualify for subsidized plans through exchanges or are required to buy insurance? Forget political support—the Department of Health and Human Services needs a marketing makeover.

These are just a couple of the many sticky situations plaguing health care in the US—illustrative of how hard it is for politicians, free from market rigors, to do the right thing. Expect plenty of debate, but positive change? We'll see.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.