The Future of our Healthcare System

Featuring Lutts' Logic:

The Most Popular Column I've Ever Written ...

The Future of our Healthcare System

Letters from Readers


The most popular column I've written (judging by the volume of your responses) was published nearly three months ago (March 13).  The topic was health care, a subject of increasing attention by President Barack Obama these days.  So today I'm going to tackle it again.

(I'm also including a couple more letters from readers that came in too late to be included in the original reader-response issue.)

But first I want to take you back in time to 1951, the year when:

Harry S Truman was President of the United States.

General Douglas MacArthur was relieved of his Far Eastern commands.

"I Love Lucy" marked its début on CBS.

And "The Shot Heard 'Round the World" occurred when the New York Giants' Bobby Thomson hit a home run in the bottom of the ninth inning off of Brooklyn Dodgers pitcher Ralph Branca, to win the National League pennant after being down 14 games.

1951 was also the year my father began keeping a little brown notebook that recorded his household expenses.  Millions of us have started such an effort, full of good intentions.  But my father kept it up for more than 11 years.

Among the entries are these:

$15 for a new muffler and tailpipe for the Studebaker,

$15 for 12 months of Barrons,

$72 for a leather chair.

And (a few years into the book) $425.35 for me.  That's right; 11 days after I was born, my father paid $155.35 to Salem Hospital, $150 to a Dr. Haywood for the delivery and $20 to Richardson Associates for anesthesia.  General Electric, my father's employer at the time, kicked in $100.  I presume the bill was paid in full and that all parties were satisfied with the outcome.

When I was four years old, there was a return visit to Salem Hospital to treat a cut lip.  For that my father paid $3.00.

Now fast-forward to June 5, 2008, just over one year ago.  It was a quiet Thursday afternoon.  My wife called me saying she had accidentally sliced her thumb with a utility knife and wondered whether she should go to the hospital to have it treated or just disinfect it and put a bandage on it.  

I reasoned that on a quiet weekday afternoon, the hospital would be well staffed and we could be in and out fairly quickly, so off we went to Salem Hospital, where after filling out forms and answering questions--including, "Was it an accident?"--we spent a lot of time waiting in the so-called "Fast-Track" room.  Eventually, a doctor showed up, and proceeded to apply Super-Glue (cyanoacrylate) to the wound, which was still seeping blood at a healthy rate.  The whole site still looked a mess to me, but he wrapped the thumb in a big bandage and sent us on our way, saying the bandage could be removed in a few days.

Days later, we followed instructions, and were not entirely surprised to find, after removing the bandage, that the wound began bleeding again.  Perhaps the surface had not been dry enough for the Super-Glue; perhaps the wound was too deep.  I don't know.

At that point, we had no appetite for a return visit to the hospital, which might entail not only a near-guaranteed wait but also a question about whether my wife had purposefully reopened the wound ... so we disinfected and re-bandaged right at home.  A few days later her thumb was fine.

And then, a month after the accident, the bill arrived.  Now just for fun, make your own guess here.  One emergency room, one doctor, a tube of Super Glue (apparently the exact same stuff you can buy at CVS but tailored for doctors), and basic bandaging materials.  How much could it cost?

The answer is below.

A little farther ...

A little farther ...

The cost was $840.

That's $445 for the use of the room, and other "services," which would include the processing and paperwork and the obligation to tolerate bad TV while waiting.

And $395 for the doctor, for "suturing" a 2.5 cm wound.

But nobody paid $840.  And I wonder if anybody ever does.  In fact, Blue Cross Blue Shield knocked off $533.58 right off the bat because I was insured and in-network.  And then they "withheld" $25.80, for reasons unknown.  

So Blue Cross Blue Shield paid $180.62, and the hospital asked me to pay $100, which was our deductible.  So I did.  After all, the doctor had done his job (though not well), and the thumb was healed.


That's my story.  I'd be happy to hear yours.  But I'd be even happier to hear a sensible non-partisan solution to our big healthcare mess that would give consumers more choice, give doctors more control, and wrest control from the insurance companies.

Our healthcare system has come a long way since the 1950s, but it's bankrupting us.  We spend more than 15% of GDP on health care--more than any other industrialized country.  We have the highest cost per person, as well.  Yet some 45 million people in the U.S. are uninsured.  And the total quality of healthcare in the U.S. is abysmal, no doubt in part because of those uninsured, a large number of whom are illegal immigrants.

President Barack Obama hopes to improve the system, and I dare say most Americans are willing to let him; they fail to see how it could be much worse.  

Here are a few of my own thoughts.

The advances of the past decades have been wonderful, for the most part, but they've come with an increasing price.  At the same time, our lifestyles have become less healthy.  Yes, we've given up smoking, but we've become sedentary; three-fourths of us are overweight.

By far, the simplest path to good health is healthy living.  We tax alcohol and cigarettes and I think we should tax Snickers bars, Twinkies and Coke and all similar nutrition-negative foods and drinks as well.

I'd love to have a clause in my health insurance policy that says if I use less than a certain amount of health care this year they'll reimburse me the difference ... perhaps on a sliding scale.  But we're just not good at rewarding health; the profits are in the medical and insurance industry!

So I'll focus on the medical and insurance industries, just as the folks in Washington will.

Back in the '50s the doctor was in charge.  Today the insurance companies are in charge.  They make a very nice profit.  I'd like it to be less.  In fact, I'd like the right to deal directly with a doctor, and pay cash for something simple like getting a thumb sutured.

But today, if I want to circumvent the insurance company and pay cash for a Super-Glued thumb, I've got to pay $840.

This seems backwards to me. So backwards, in fact, that despite my distaste for growing federal power, I look forward to seeing the insurance companies lose some of their power.

Now, I recognize that the insurance companies aren't going to give an inch without a fight.  But I do think government influence over the healthcare industry will continue to increase.  At one time it was zero.  Now, government sources (federal, state, and local) account for 45% of U.S. healthcare expenditures.  I'm not saying I like it, but it's a trend I recognize.

I do think that the Obama administration is likely to get some sort of drug price control mechanism implemented, the result of which would be shrinking profit margins for drug manufacturers and thus shrinking P/E ratios.  Shrinking margins would also shrink drug pipelines, which would also shrink payrolls.   And all of it would shrink drug stock prices in a way no one has imagined yet.

I look at the charts of the pharmaceuticals group and I see a great bull market in the 1980s and 1990s.  Remember the fun of investing in Pfizer and Bristol-Myers back then?  But in the past decade the group's charts have flattened out, and technical analysis says this long top could well set the stage for a long decline.

If so, beware of those big well-respected winners, including Pfizer (PF), Bristol-Myers Squibb (BMY), Novartis (NVS), GlaxoSmithKline (GSK), Merck (MRK), Lilly (LLY), Sanofi Aventis (SNY), Wyeth (WYE) etc. The bigger they are, the harder they fall.

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Now, those two letters from readers:

"I found your email (and responses) about healthcare very interesting. I have been a group health plan broker in Colorado for 25 years. Grew up in Jersey and went to school in VT (Castleton). I could not agree with you more on nutrition and even taxing junk food. (I have not had a soda in four years.) I might go so far as to eliminate prescription drug commercials. My doctor should be recommending my prescriptions, not my radio or TV.
"From my perspective our number one healthcare problem is that we CONSUME too much healthcare because we are in such lousy shape and do stupid things. For example, with all we know about cigarettes people still smoke. Amazing. (Although it does reduce Medicare payments due to early deaths.)  
"Whenever I see a news item involving shootings I think there goes another $500,000 or $1,000,000 or more on healthcare expenses.
"I ski at Vail a lot and am guessing that there are one or two or more torn ACL's on a typical day. At a cost of $25,000 apiece, I suspect that Vail generates well over $1,000,000/month in medical claims due to skier accidents. Just two weeks ago a guy broke both his femurs and messed up a knee. That's easily $150,000 at Vail prices. I certainly don't want to give up skiing (or have a Government body restrict it) but it does cost.
"Prices are ridiculous. Titanium screws used in back surgery are commonly billed out at $1,500 to $2,000. Per screw! My titanium bike frame cost less than two screws. Perhaps we should be buying stock in the companies that make these screws?
"Tort reform is needed. I couldn't believe people wanted John Edwards for president. Here is a guy who made millions off the healthcare system. He is who tort reform should be geared towards.
"I personally like the HSA plans. The only way to change behavior is to hit people in their pockets. (When the government wants to change our behavior they modify tax policy.) If someone has to pay the first several thousand dollars for their healthcare they will start to pay attention, and maybe alter their (bad) habits. And if they won't alter them at least they will pay for them.
"One of my pet peeves in insurance is the drug class of proton pump inhibitors, otherwise known as Nexium, Protonics etc. Nexium  (40mg-the most common dose) costs about $140/month. Prilosec is now over the counter (OTC) in the 20mg strength but oddly not in the 40mg strength. Go figure. You can get Prilosec OTC (or its generic) for about $15/month ($30 for 40mg by taking two 20mg pills). Save $1,320/year by using the OTC. But most don't since insurance doesn't cover it. Ridiculous. Oh, the difference between Nexium and Prilosec OTC? In practice, nothing. All the manufacturer did was flip-flop isomers three and four. And for that they got a patent. Amazing. Of course most people wouldn't need this drug if they ate better and got some exercise.
"And let's look at Lipitor. 20mg costs exactly the same as 40mg. 10mg costs about $5 less and 80mg about $5 more than the 20mg or 40mg, which runs about $120/month. So annual cost for 20mg is $1,440. Or I could buy 80mg for $125/month and split it into fours. Now my cost is $375/year. Or I could diet and exercise and maybe not need it at all.
"Enough rambling.  Cheers!"

B.D.  Denver, Colorado


"Hi Tim:

"You're based in Healthcare Heaven in Massachusetts. You have some of the most extraordinary, highest quality and highest cost health care in the world. Yet with an $11 trillion national debt, a near bankrupt Medicare, Medicaid and transfer payment system, private sector cost shifts for non-government payments to cost of care, we must get out of our "self interest thinking," and now look at health care first as a privilege versus a right.

"We cannot afford the 'retirement bubbles health care' in this economy. We should effectively freeze all transfer payments in and out from health care for a period of three years with a maximum target of 2% increase per annum, and use this time for the development of acceptable reforms, which will be very unpopular, yet keep American industry and jobs in America and assure its prosperity, growth and competitiveness with emerging economies. Healthcare and real wage costs are a continual cost /product--production/pricing disadvantage and should be reformed to achieve a high quality, high value added state to our economy and its healthy living state as a great nation of example.   

"Forget Obama's Universal dream of healthcare, we can't afford to do any more, only fix what we have and get America's healthcare insurance system up to world standards, not what the media-biased middle class wants versus needs.  Taiwan, Korea and Japan are better models.

"Great investment ideas will come forth on healthcare redesign, transfer payments and populace healthcare improvement steps, as we go on a national debt reduction plan, diet and lead simplified lives, which will be longer, healthier, more productive and an international model if we accomplish this properly.

"The lawyers, MDs and professionals will complain loudly, and for this type of reform, we must consider, Washington politics will be difficult to make this work, yet like the mortgage mess, this one will emerge in the next few years as a crisis we must address."

T.R.  St Paul, Minnesota

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

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