Don McDaniel: Health reform death spiral

I gave a speech in early January 2010 to a group of bankers and accountants to discuss the impact of proposed health reform on business. Everyone is nervous about what’s coming down the pike, and the average business owner (or even the average business advisor) doesn’t have the time or the proclivity to dig into reform legislation to understand how it might affect them — it seems our legislative process is geared to obfuscation.

As I thought about health reform and how it might affect business, I started to focus on the impact on one of my favorite small businesses: the physician practice. It seems that even without reform in the offing, the physician-entrepreneur is moving toward extinction — how many businesses can, or want, to operate in an environment where revenue is largely fixed, heavily regulated — sort of like a utility — and highly dependent mostly upon factors outside the control of the entrepreneur, and operating and capital expenses are rising every year.
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So, cash flow is being squeezed from every conceivable angle, the government is mandating purchase of expensive information technology (which mostly benefits others that aren’t contributing to the purchase), and practicing physicians in many states deliver services every day under the specter of being sued.

What else could happen to make things even peachier? How about health reform, which is really insurance reform, which is really focused on expanding coverage for the uninsured?

Here’s one scenario from a particularly contrarian observer (me) that nonetheless has legs. As health reform will be paid for largely on the back of reductions in the Medicare program — almost $700 billion in cuts over the next 10 years — it seems an inevitability that the Medicare program will continue devolving into one of the poorest payers for physicians and hospitals, second only to the Medicaid program.

And, oh by the way, a lot of the proposed coverage expansion in the Senate bill will manifest as new Medicaid enrollees — yes, that’s right, the program that is busting the budgets in states all across the country, will be expanded. So, we’ll have growing public sector programs, at the expense of commercial insurance enrollment, which is today subsidizing the underpayments from Medicare and Medicaid.

Anyway as FFS reimbursement for Medicare (and Medicaid) continues to degrade, physicians, especially primary care physicians, will vote with their pocket books and decide to, in the short run, drop out of public sector programs, and in the longer term, those historically groomed to practice medicine are going to start deciding to choose another career path — one without frivolous malpractice risk, crazy student loans, ever-growing expenses and fixed revenue.

That seismic workforce shift will further drive structural physician shortages, creating a lot of upward pressure on prices (i.e. outsize growth in expenditures) forcing the dreaded r-word – explicit rationing. Get ready to queue-up for that procedure!

Don McDaniel, president and CEO of Sage Growth Partners LLC, is an entrepreneur, economist, technologist, educator, speaker, and writer. He is a skeptical contrarian who writes about the power of free markets, disruption, innovation, and technology in healthcare.