Obama’s Choice to Fix Healthcare — Tom Daschle

President elect Obama has named Tom Daschle as the next head of Health & Human Services (HHS), the agency that oversees Medicare. I was shocked by the choice and in talking with healthcare execs, there is a unanimous belief that this is a disaster for healthcare providers.

I think that any expectation that the Obama administration will move to the center is destroyed with this appointment. There are very few people in this world that I have a visceral reaction to hearing their name — and Tom Daschle is at the top of the list. I can’t think of anyone who is more partisan in his approach, more scorch the earth in his actions than former Senator Daschle. If a Republican proposes something – anything – the idea is horrible. If a Democrat proposes something – anything – the idea walks on water.

Senator Daschle joined Alston & Bird, an excellent international law firm, after leaving the Senate. Former Senator Bob Dole and former Medicare head Tom Scully are also with the firm. Prior to the election Alston & Bird sent out a mailer to clients with comments by both Senator Dole and Senator Daschle about the upcoming election. As one would expect, Senator Dole gave a thoughtful discussion of the issues. Anyone who has even met Senator Dole knows him to be a very bright, insightful man about the process of politics and the workings of government. Senator Daschle’s comments, by contrast, were incredibly partisan, talking of the failures of the current administration and how that administration allowed the current financial crisis. No thought. No insight, just partisan politics as normal.

Expect more of the same at HHS.

What does Daschle know about healthcare? Apparently, quite a lot. He has actually written a book about how to reform healthcare (“Critical: What We Can Do About the Health-Care Crisis“). Much of his thought is similar to the proposal published recently by Senator Bachus, head of the Senate Finance Committee which oversees Medicare. Universal healthcare is a focal point and it is time (or past time) that the USA has a universal system. There really is no good reason for millions of people who can’t afford health insurance not to have access to healthcare. There is also no good reason that healthy people who can afford healthcare to go without insurance. There are lots of healthy 20-somethings that go “naked” and then in a car wreck leave the massive bills up to the hospital to pay. It is time to figure this out — and to figure out who will pay.

Other aspects of Daschle’s agenda cause some great concerns. First, from his writings it appears that he believes that health insurance companies, both Medicare Advantage plans and non-Medicare health plans, are grossly overpaid. Near the top of the agenda is to use the move to universal healthcare to create a federal insurance pool. Americans will be able to keep their existing insurance, if they desire, or move to the federal insurance pool. The rates on the pool will likely be set by the government and the plan administered by managed care companies. Daschle can use the federal rate making policy to lower healthcare insurance costs in non-government plans. How? If someone has a choice and a private plan is $600 and a government plan is $500, which will the person choose? Most likely the lower cost plan, which will shift people into the government plan unless the managed care companies reduce price.

So why is this bad? Two primary reasons. First, as healthcare insurance companies are pressured with lower rates, healthcare providers will in turn be pressured by the insurance companies to lower rates. Physicians, hospitals and other providers will see profitability reduced, and probably reduced quite significantly. Second, the creation of a government pool is the first step in moving towards a single payor system, which is probably the end game. It is tough enough for healthcare providers to survive on what Medicaid and Medicare pay, but to now reduce commercial insurance reimbursement to those levels will eliminate profitability for many providers.

Before the election I sent a presentation discussing the coming changes in healthcare in 2009-2014 — and I’ve updated that since the election. It can be downloaded by clicking on this sentence.

I fully expect a major Medicare bill in 2009 which will be like the Balanced Budget Act of 1997. The new bill will very likely cause a major reduction in payments for healthcare services in 2010.

What I did NOT expect was for commercial insurance companies to be pressured by Washington at the same time. If the Daschle agenda is passed with a national insurance pool and healthcare insurance companies are pressured into lowering rates, healthcare service providers will be SIMULTANEOUSLY pressured by cuts in Medicare and commercial payors.

This “double whammy” could be a disaster for healthcare service providers — hospitals, nursing homes, oxygen, physicians, surgery centers, imaging centers, dialysis, etc.

The Senator is also a big proponent of the British healthcare model. Apparently the Senator has never been sick in Great Britain. Get sick at the end of the year and nothing can be done because the budget has already been spent. Want to get a surgery and not wait months or years, then pay for it in the private healthcare system that is springing up in the UK because of the failure of the government system. Apparently Daschle thinks that’s perfect. He has stated that just as parents should be able to choose private schools for their children that healthcare patients should be able to choose private healthcare over the publicly financed healthcare system. Do we really want a system in the US like this?

Healthcare providers need to begin working today to restructure if they are to survive the coming changes in 2010-2014. The choice of Senator Daschle for HHS, I fear, will hasten the day when it is no longer possible to build equity value in a healthcare service company. The time to exit this industry as an investor is now.