Medicare, Obamacare, and Washington Dysfunction Could Make Apple Billions

Apple's rumored new product could revolutionize the health care industry.

Aug 2, 2014 at 8:36AM

Medicare got a bit of reprieve from the normal bad news that's been plaguing the program. The 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds document -- which unfortunately hasn't gotten the Washington acronym treatment yet -- reported that Medicare's finances have improved in the last year.

But before you crack that bottle of champagne, the program is still in seriously bad shape, with the fund to pay hospital costs expected to remain solvent only through 2030. The short-term reason for Medicare's improving finances, Obamacare, is a program many are looking to repeal.

Washington's dysfunction is hitting a fevered pitch, with the cacophony about entitlement spending growing louder everyday. But investors in Apple (NASDAQ:AAPL) could make billions from Washington's deterioration. More on that in a bit.

Obamacare's stuck in the 20th century
Obamacare is a wide-reaching law that focuses on two things: expanding access to insurance and lowering the cost of health care, the so-called "bending of the cost curve." Unfortunately, the prevention aspect -- perhaps the most effective way to lower health-care costs -- is still stuck in the 20th century. And that was not a great time for health care in the United States as far as costs are concerned.

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Loved or hated, Obamacare was an attempt to reform a broken market. Prevention and monitoring could be more up to date. President Barack Obama Source: Wikimedia Commons

For perspective, although they've moderated a bit, over the last three-plus decades, medical-care inflation has exceeded the long-term inflation rate of 3%. The early '80s were characterized by excessive inflation, and although former Fed Chairman Paul Volcker was eventually able to "slay the inflation beast," health care inflation control proved more elusive.

The '90s brought moderation in terms of health-care inflation, but costs continued to climb: only one time during the '90s did medical-care inflation come in lower than the long-term inflation run rate of 3%, clocking in at 2.8% in 1997. Moving into the new century, even as late as 2013, health-care inflation still exceeded overall inflation -- as measured by the CPI, which came in at 1.4% last year -- by nearly 200%.

Republican's plan? Well, there really isn't really one...
Say what you will about Obamacare, but at least Democrats have a plan. Republicans, for better or worse, haven't put forth any specific plan to control health-care costs since deriding Hillarycare. And why should they? The previous two election cycles have been rather favorable for the party -- sans the 2012 presidential election -- even though it essentially put forth no ideas on this subject. Its strategy, for the most part, of talking in broad, abstract terms with no specificity and letting outside groups go on the attack has proven to be a formidable strategy. Of course, this isn't a plan.

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Paul Ryan's been one of the few Republicans willing to present health-care solutions. He favors a premium support, market-based approach. Source: Wikimedia Commons

One of the more intriguing ideas that's been floated, but not coalesced around, is to turn Medicare into a grant of sorts -- what's called "premium support." That essentially turns the program from a defined benefit program -- think pension -- to more of a defined-contribution program -- similar to, but not exactly like, a 401(k) plan.

This saves the federal government money, but much like a 401(k) plan, it puts the onus on the individual for outcomes. If future health-care inflation exceeds any increases/benefits, the individual will be forced to either forgo treatment or pay for those costs out of his or her own pocket. Although supporters argue that by forcing health-care consumers to pay for any increases -- commonly referred to as having "skin in the game" -- it will result in lower prices by price-conscious shoppers.

Perhaps a more market-based approach will lower costs somewhat, but many who depend on essential, life-saving treatments may be in a poor position to negotiate with providers and insurance companies.

Here's how Apple investors could profit
The biggest drivers of health-care spending aren't acute conditions. They are chronic, long-term conditions. Matter of fact, conditions like heart disease, cancer, stroke, chronic obstructive pulmonary disease, and diabetes make up nearly 75% of our medical costs.

A large percentage of these cases -- and health-care spending -- can be significantly moderated/prevented by effective monitoring and lifestyle changes. Although treatment of these conditions has gotten better, the prevention and monitoring of these conditions are still stuck in the past.

If the rumors are true, Apple's expected smart watch has the potential to perform many of those monitoring features. The rumored biometric features have the potential to monitor both heartbeat and blood pressure, providing valuable data for individuals to share with their health-care professionals – and that's just scratching the surface.

It appears many analysts are also missing this opportunity. One of the most bullish analysts -- by a long shot -- in regards to Apple's new smart watch is Katy Huberty, who predicts that 30 million-60 million units will be sold. However, if Apple can bring a game-changing watch to market that monitors these conditions, you can bet that Washington, insurance companies, and Apple fans are going to buy it. Even better, if Apple can convince insurance companies to subsidize the watch, an iPhone-like product success awaits.


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