Medicare's Greatest Enemy Won't Be Defunded

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The most serious threat to Medicare won't be stopped. The money will keep pouring in.

So say prominent researchers in a recent Brookings Institution presentation. This nemesis presents the greatest danger for not only Medicare but the overall U.S. health-care system. What is this clear and present danger? It's not Obamacare. It's not the big insurance companies. It's not a sluggish economy. The greatest enemy that Medicare faces, according to the researchers, is a surprising one: technological innovation.

Behind the cost curve
Harvard University's Amitabh Chandra and Jonathan Holmes, along with Jonathan Skinner from Dartmouth, set out to determine if the recent slowdown in health-care spending is sustainable. The team examined multiple factors that could account for lower increases of spending observed since 2007.

While some have maintained that the Affordable Care Act, commonly known as Obamacare, has helped lower health-care spending, the researchers rejected that view. They observed that cost-saving Obamacare measures such as initial Accountable Care Organizations, or ACOs, have had mixed results. Other components of the law, including allowing dependents to remain on their parents' insurance coverage until age 26, have likely increased costs. The biggest objection, though, was that the slowdown in health-care spending actually began in 2006 -- four years prior to Obamacare's passage.

Chandra and his team found that the recession affected health-care spending, but the economic downturn can't explain around 1% of the decreased spending levels. They also determined that shifts in costs to patients didn't have a significant effect on Medicare spending, but this trend did impact private insurance. 

In a nutshell, the researchers concluded that various factors have held back health-care spending over the past few years -- but they're likely to have only a temporary effect. They say that spending appears destined to rebound in large part because technological innovation will continue to drive costs upward.

Meet the enemy?
That conclusion could be surprising to some. Technology has helped lower overall costs in plenty of other industries. Why would technological innovation then not help reduce costs in health care?

The recent presentation pointed to proton beam therapy as an example of technology run amok. Belgium's Ion Beam Applications, Japanese conglomerate Hitachi, and U.S.-based Varian Medical Systems (NYSE: VAR  ) make proton beam accelerators that cost $100 million-$200 million. Increasingly more hospitals are using the technology to treat patients with prostate cancer. 

Proton beam therapy, though, costs about $50,000 per treatment -- at least twice the cost of conventional approaches such as radiation therapy and prostatectomy. The problem, according to Chandra and his associates, is that there is "no evidence" that outcomes from this much more expensive treatment are better than the alternatives.

The researchers also expressed concerns that increased use of technology including transaortic valve replacements, or TAVRs, could drive up costs. Edwards Lifesciences (NYSE: EW  ) sold $90 million worth of its Sapien transcatheter valves just last quarter. While sales haven't been quite as strong this year as the company had hoped, Edwards' long-term outlook for growth in the U.S. remains very positive -- bolstering the researchers' view that the market could grow much larger. 

"Scooby Doo" ending

I don't doubt for a second that Chandra, Holmes, and Skinner are correct about technology being one of the reasons health-care costs so much. Of course, technology is also one of the reasons the quality of health care that's available is better than it's ever been. Edwards' Sapien valves, for example, help elderly people who aren't good candidates for heart surgery and wouldn't have had a good alternative in the past.

In my view, there's really a "Scooby Doo" ending here. At the end of every Scooby Doo mystery, the villain's mask is ultimately removed -- revealing the person behind the problems to be different than who it seemed to be initially. Similarly, we can unmask the supposed Medicare enemy of technological innovation to find the actual culprit.

Look at what happened last year when Memorial Sloan-Kettering Cancer Center in New York decided it wouldn't pay the high costs of colon cancer drug Zaltrap, developed by Sanofi (NYSE: SNY  ) and Regeneron Pharmaceuticals (NASDAQ: REGN  ) . Sloan-Kettering said it would go with Roche's Avastin instead, because the competing drug was half as expensive. Sanofi's response: The big drugmaker slashed the price tag of Zaltrap by 50%.

Zaltrap wasn't the problem. Its cost was. And the problem was addressed.

Technological innovation doesn't have to be the problem causing higher health-care costs. Technology holds tremendous promise to lower these expenses. Genomic Health (NASDAQ: GHDX  ) , for example, makes genetic tests that screen for several types of cancer. About 90% of low-risk prostate cancer patients receive costly treatment. Genetic testing could help identify the patients who don't require these treatments and help reduce unnecessary surgical and radiation therapy costs.

Medicare and all other parts of the U.S. health-care system need to reward the technology that achieves that goal and not reward technology that merely increases costs without commensurate added value. Technological innovation isn't Medicare's enemy -- how the nation pays for that innovation is the real threat.

Investors have a great opportunity here. Research companies are developing solutions that help reduce overall health spending. Buy the stocks of those with the most promise over the long run. Companies that help their customers (in this case, Medicare and other health payers) save money tend to succeed. Even Scooby Doo would agree that's no mystery. 

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