Why Your Health Care Is in Jeopardy

Feb. 19, 2009— -- If 24 months ago, someone had predicted a catastrophic real estate price collapse, auto company bankruptcy, stock market decline, bank failures and rising unemployment, that person would have been called alarmist. At risk of being called histrionic, we are predicting that health care in the United States is in danger of collapsing within 24 months.

Eighty years ago, in 1929, as hospitals tried to find a way to stay in business in the face of a failing economy, Blue Cross was founded by a group of Dallas teachers who agreed to pay about 12 cents a week for up to 21 days of hospitalization a year at Baylor University Hospital. The American Hospital Association supported the origination of Blue Cross because it was a way to guarantee regular revenue during hard times.

For the schoolteachers, paying $6 per year for insurance was a way to assure they would receive at least minimal care if they became gravely ill. Since then, expectations and costs for payer-provided health care have grown dramatically.

In our current period of reduced expectations, most Americans continue to expect high-quality healthcare at affordable prices when they walk into a doctor's office or if they are admitted to a hospital. But that is changing.

Hospitals in Trouble

More and more, Americans have to wait for insurance company permission before receiving life-saving medical treatment or, if they are on Medicaid, they have to go to specific city and county hospitals to be treated. Hospitals are in financial jeopardy, reimbursements to doctors discourage preventive medicine and there is a severe and growing shortage of nurses.

The U.S. Food and Drug Administration, which has the responsibility to assure that drugs are safe and effective, is in disarray, and pharmaceutical research and development has become a singularly focused quest for blockbuster drugs, those that create $1 billion or more of revenue per year.

The U.S. hospital system is currently the weakest link in the health care chain. The total number of hospital beds in the U.S. has dropped since 1981and the number of beds per 1,000 people has declined from more than four per 1,000 to a little over 2.5 per 1,000 in 2006.

Hospital finances are precarious. More than half of hospitals are technically insolvent or at risk of insolvency. According to the American Hospital Association, in 2007, uncompensated care costs were $34 billion, with an additional $31.9 billion gap between costs and payments to hospitals for Medicaid and Medicare patients. In addition to philanthropy, some hospitals are forced to rely on unpredictable sources of funding, such as gift shop revenue or parking fees.

Hospitals now spend nearly $100 billion per year to provide uninsured patients with health services. During the 2008 election, the total number of uninsured in the U.S. was between 40 million and 50 million people. That number is growing, and uncompensated hospital care continues to increase as the number of uninsured goes up.

Money Woes

For every percentage of increase in the unemployment rate, 2.5 million people become uninsured. With the unemployment rate jumping about 3 percent since mid-2007, that translates to another 7.5 million uninsured.

Even without unemployment problems, fewer employers are paying for health insurance, and even among those that do, plans are transferring more cost to the patients through increasing co-payments, larger deductibles and changing rules on what is covered and what is not. Two groups of Americans are experiencing growing insurance coverage gaps -- children who reach the age when they are no longer eligible for their parents' insurance coverage and older workers, who lose their jobs and are not yet eligible for Medicare.

The medical system pays more for treating sick patients than for preventing disease. Doctors in preventive specialties are reimbursed much less than those who attempt to reverse the consequences of years of neglect. For example, cardiac and thoracic surgeons, who perform surgery to limit damage from high cholesterol, earn on average, two-and-a-half times more than family medicine and internal medicine specialists, who monitor patients and prescribe medicines to prevent the need for such surgeries.

People who suffer from largely preventable diseases, such as heart disease, stroke and diabetes, incur more medical costs than healthy people their age and die at higher rates than the healthy population. One disease, diabetes, kills more than 75,000 people in the U.S. annually, and is closely linked to the national epidemic of obesity, which is clearly preventable.

It is estimated that by 2020, the shortage of nurses will reach 1 million. Nurses perform most of the patient care in the country's 4,897 community hospitals. Nurses monitor patients, track vital signs and administer drugs. If a hospital patient takes a turn for the worse, it is the nurse who will be first to respond and take action. Yet, staff nurses earn less on average than a real estate property manager, who isn't exposed to deadly diseases, doesn't have to make life-or-death decisions and isn't required to regularly work nights and weekends. It is not surprising that there is a growing gap between the need and availability of registered nurses.

The Drug Problem

The FDA, and other agencies, which have responsibility for ensuring the efficacy of drugs and the safety of food we consume, are on the verge of collapse. The current problem with peanut product purity is only the most recent in a long line of failures to protect the food Americans consume. These failures frequently lead to illness, and in some instances, death. There was an even more dramatic failure this past summer when heparin, a life-saving blood thinner, was found to have been made with adulterated ingredients. As a consequence, as many as 62 people are believed to have died.

For a half-century, most pharmaceutical research and development has been carried out by large pharmaceutical corporations. But R&D has been hammered by decreasing profits and increasing corporate bureaucracy.

Though large pharma is focused on blockbuster drugs, the need for mundane cures is more necessary than ever. As early as 2005, more people died from antibiotic-resistant infections than from HIV/AIDS, and the threat of these so-called superbugs increases every year. R&D on new antibiotics is at a virtual standstill because, according to the prevailing large-pharma model, developing yet another antibiotic doesn't pay.

In 2008, only 21 first-of-a-kind drugs were approved by the FDA, but 46 new or updated black-box warnings (the highest level warning) were issued in the first nine months of the year, which indicates problems that were identified only after the drugs were approved. At the same time, development-stage biotechnology companies, where most of the really innovative R&D takes place, are finding it almost impossible to raise the cash they need to keep their doors open.

Consumers Hindered by Lack of Information

All these problems are enhanced by lack of information. The average patient knows more about the cost of a brake job on an automobile than the cost of medical care. Patients are finding it harder and harder to make informed choices. Ask a physician about the cost of a procedure or diagnostic test and you are liable to get a non-answer. Charges and reimbursements vary by insurance carrier and individual plan to the point where there can be a wide variety of differences among them. Explanation of Benefit reports are often confusing and lack critical information, so it is difficult for patients to identify which procedure or examination is being reported.

The U.S. health care system is sick. We can wait until the patient needs heroic intervention before taking action, or we can treat the patient now, before the cost goes higher and before thousands of people suffer needlessly.

Today, 80 years after the first Blue Cross plan was created, we need a new mechanism that will enable Americans to continue receiving the medical care that will keep us healthy and provide for us in the event of disaster. Based upon the experience of Great Britain and Canada, it is clear that such a mechanism should not be purely governmental. It is equally clear that our present system, which is largely based on private funding, is inadequate. What is required is a uniquely American solution to the health care challenge that melds private and public funding in a way that benefits the patient and provides economic continuity for caregivers.

Steve Brozak is president of WBB Securities, an independent broker-dealer and investment bank specializing in biotechnology, medical devices and pharmaceutical research.