Friday, September 22, 2006

Prescription for Competition

Wal Mart says drug prices are too high, and they’re doing something about it. Target doesn’t want to miss the party, and is going to jump on the low-price bandwagon. This will be a fun rivalry to observe, and profit from.

I think competition is healthy for everyone in the fight and those in the stands. Honest, honorable, positive competition makes all participants better for having survived the ordeal, and we’re beginning to see that principle at work in the healthcare field.

Healthcare in America is out of control, and the lack of healthy competition is why. Once the insurance companies figured out that “managed care” meant "managing to squeeze dollars" from both ends of the economic pipeline, health care took a back seat to profits and bottom line results.

The government was complicit in this phenomenon.
Before we were “blessed” with Medicare and Medicaid in 1965, healthcare spending never exceeded 6% of gross domestic product.
Today it is 16%.
A recent MIT study found that half the growth in health care expenditures was due to Medicare.

As the government began to get the public addicted to the economic crack of entitlements and subsidies, we paid less and less for our healthcare—and lost touch with reality. That reality is that most of us pay for only a fraction of our healthcare.

According to a report by the National Center for Policy Analysis:

  • For every $1 worth of hospital care consumed, you pay about three cents out of pocket on average; 97 cents is paid by a third party
  • For every $1 worth of physician services consumed, you're paying less than 10 cents out of pocket on average
  • For the health care system as a whole, for every $1 in services costs only 14-cents out of pocket

And as we pay less and less, we lose more and more control of the process.

As the profits to doctors, hospitals, and pharmaceutical companies shrank, you and I got left out in the cold…and didn’t even realize we had no coat. After all, we were paying only a fraction of the real cost of our healthcare. The insurance companies may have been footing the bill, but we were really getting left with the tab.

The docs and the hospitals and the drugmakers saw the insurance companies as bottomless wells of cash, and as profits diminished, they began to charge more for office visits, adjust pricing schedules for different classes of drugs, and forcing patients to accept procedures that were rushed to enable hospitals to turn rooms more frequently. It was an endless spiral…and because you and I as medical consumers were out of the loop (because we weren’t really paying the true cost of our healthcare) we didn’t know it was happening.

I said to you months ago that only when you and I as medical consumers got directly involved in this pipeline would we be able to effect positive change in pricing and services. And you’re already seeing this phenomenon evolving: ever try to visit a doctor without a healthcare card? It’s not as tough as it might first seem…when you’re paying cash. Cash is still King, and many doctors would rather receive their payment for services rendered—without having to file a messy insurance claim form for you—and even cut you a discount for the priviledge.

Dr. Devon Herrick, Sr. Fellow at the National Center for Policy Analysis, observed in his recent report on the cost of healthcare that "the average increase in prices for medical services from 1992 through 2005 was 77%, while the increase in the price of all goods, as measured by the consumer price index (CPI), was 39%.

It is interesting to note that Cosmetic surgery prices, however, only went up about 22%.

Do the math: while the price of medical services generally rose almost twice as fast as the CPI, the price of cosmetic surgery went up slightly more than half as much. In effect, while the real price of health care paid for by third parties rose, the real price of self-pay medicine fell.

There is another trend developing in this war, and you and I will be the winners, regardless. Wal-Mart is starting to offer prescription drugs for $4 for generics. Target Stores has resonated by announcing a similar pricing plan.

Initial reactions are mixed to ho-hum.

Wall Street analysts and reps for the manufacturers say this is not going to make much difference in the way their businesses operate…but the market’s reaction yesterday belied another sentiment. Shares in both retail and drug manufacturers fell with Wal-Mart's news.

One day does not a trend make, but initial changes for Teva was -3.4% , Watson's stock was - 1.4%, Par Pharmaceuticals -3.2%, and Mylan Laboratories -2%.

Par says its deal with Wal-Mart represents less than 5% of its total net sales, and does not believe the new pricing will have much of an impact on the revenue or profits it derives from such agreements. Does that mean that the drug makers have plenty of headroom in their margins? You do the math. Maybe Wal-Mart's deal won't make that much difference, but with Target joining the low-cost parade, and CVS and Walgreens seeing negative reactions by investors, you don't need a crystal ball to tell there are big changes still to come.

What politicians have promised and promised and still failed to deliver--affordable healthcare--is now begining to become reality thanks to the very company the pols have villified as being an evil empire.

This is the tip of the iceberg, the start of the race, and the cusp of a new age in which Cash will be King, the consumer will rule, and the 800-pound gorilla making it all happen is the low-price leader from Bentonville, Arkansas...not Washington D. C.

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