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Thinking about Life Sciences

http://blog.aesisgroup.com

Monday, April 28, 2008

The connection between the subprime mess and the healthcare

uninsured: Socialized Risk

Ben Stein – the noted New York Times columnist cum Economist wrote an interesting piece “Wall Street, Run Amok” this weekend
which at the time of this writing has become the “most popular” among business articles being e-mailed. In this Web 2.0 era, most
popular either means there is something valuable and substantive or that it is enormously entertaining or crazy. Ben Stein has – in the
past - satisfied both criteria and I’ll leave to you to decide between the two in this respect.

In actuality, though, in this article, Mr. Stein is less a promulgator of ideas than a transmitter. He quotes a fascinating speech by the
hedge fund manager David Einhorn (who runs Greenlight Capital) who – according to Mr. Stein – has put his finger on the underlying
cause of the subprime mess. Many of us are aware of the reasons but the quote below (paraphrased by Stein) seems to encapsulate it
nicely which is probably why the speech was so compelling to begin with:

“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the
taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you
lose. It is a reverse-Robin Hood system.”

This is also – in essence – a key component behind the major problem of the uninsured – namely the 47 million or so Americans
estimated to not have health insurance. Prior to the subprime mess, the main domestic problem crowding the electoral airwaves was
that of healthcare and specifically that of the uninsured problem. The subprime crisis, morphing into a credit crisis and then morphing
into a recession (or not depending on your convenience) has supplanted that. Granted that was bound to be the case anyway.
Healthcare is a tough problem and the credit crisis, however complex it may be, has at least obvious and simple solutions. Lower an
interest rate here, tweak another one there, sprinkle a little sugar and hopefully that should do the trick. I don’t mean this facetiously,
of course, as the rather unprecedented efforts of the Fed – not to be downplayed – may have, if some of the tea leaves are correct,
indeed set the stage for recovery.

This column has occasionally written about healthcare reform and this concept of “socialized risk” – not to be confused with
socialized medicine – is also central to some of the themes written here. For some of these previous articles see:

The Logic of Health Care in Wake of New Obama, Clinton Reform Plans
(2/5/08)

Gov. Blagojevich Announces IllinoisCovered to Insure 1.4 Million in Illinois

(3/5/07)

You might be asking why electronic ink is being expended on healthcare reform in a MedTech Future’s column. Two reasons: one,
the ideas presented here are sufficiently different yet not crazy to hopefully contribute meaningfully to the debate and two, nearly
everytime I discuss medical technology and the prospects thereof, often the “conclusions” strongly depend on projections on what our
future healthcare system will look like. What’s your view on medical tourism? What’s your view on the future of drug-eluting
stents? Where is orthopedic surgery headed? I am often asked. I provide my most reasoned answer but in many cases the largest
unknown (the 800 pound gorilla as the cliché goes) is that of healthcare reform. It’ll have a big impact and for something that has
such an impact it seemed to make little sense and just have the gorilla walk over you silly. Hence the interest in helping to fashion at
least some small part of that debate. It makes it easier for me to answer the questions clients and colleagues ask of me.

So, back to socialized risk. In the February article I pointed out how – despite superficial appearances – there’s a strange logic to
our healthcare system that specifically addresses the different stages of “socialized risk” – namely the risk of getting ill. A brief
quote from that article makes the point:

As a consequence of the wage and price controls instituted during World War II, employer-sponsored health care insurance has
become – at least until recently – the avenue by which the employed have obtained health care coverage. With the 1960s and the
Great Society programs, Medicare and Medicaid were enacted to cover the well-recognized gap that developed among the
non-working elderly and poor (respectively).

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More recently during the 1990s, the State Children’s Health Insurance Program (SCHIP) was brought on board to cover the last
apparent gap (namely that of children). In short, our system is actually quite logical and simple. It consists of two parts: businesses
pay for the health insurance for the employed public while government pays for everyone else. The problem arises that certain
groups – both businesses and individuals alike – choose to “opt-out” of the system. Their risk becomes socialized. Hence the
statement above needs to be rephrased – in the current situation – to:

It consists of two parts: some businesses pay for the health insurance for the employed public while government pays for
everyone else.

The operative term is “some” which encapsulates a complex situation in which younger individuals choose not to get health insurance
(thus socializing their risk) and more broadly and significantly certain companies (such as the well-publicized Wall-Mart) either do
not provide health insurance or significantly underinsure their employees. It is a rational decision for both of these parties and
whether it is right or not, the bottom line is that risk has become socialized. Eventually someone must pay.

In the wake of the tragic CTA accident last Friday here in Chicago, I was struck by one statement taken here from the Chicago
Tribune article of Saturday.

“[Truck driver Don] Wells refused the doctor's advice and asked to be released, in part because he didn't have health
insurance, Howard said. He was handcuffed and escorted by police to a waiting police wagon.”

It’s a fact that Wells killed two people on Friday. Whether he is at fault or not is up to others to determine. It is also a fact that his
healthcare status has now entered the realm of social cost. What if Wells had a small subdural hematoma which over the coming days
would expand? What if he had a heart problem that had him take aspirin which in the absence of medical advice would accelerate the
projection of this small bleed? All conjecture, of course, but it should be noted that he did not leave the hospital treated, he left – as
the formal phrase is called – AMA, or “Against Medical Advice.” So, in a few days, he could grow increasingly somnolent and then
end up in an emergency room. Several tens of thousands of dollars later – which taxpayers will pay, perhaps a couple of brain
surgeries he may or may not even be in a state to show up in a court room or inform the authorities of what happened on that tragic
Friday rush hour.

Of course, this is purely hypothetical. But with nearly 47 million uninsured out there, the hypothetical can become very real.
Statistics do not hide personal tragedies – just ask anyone who’s being forced into foreclosure. March is over, but beware the Ides of
Socialized Risk. It is not just confined to the subprime mortgage sector.

Ogan Gurel, MD, MPhil

gurel@aesisgroup.com
http://blog.aesisgroup.com/

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