Why the US Needs Obamacare

by Elliott Morss, Morss Global Finance


In recent months, Obamacare has become the bête noire of the Tea Party in negotiations to reopen the government and avoid a default. And it has not helped that the web sites for the “heath insurance marketplaces” have not worked well. However, Obamacare has been short changed: in actual fact, it constitutes an excellent, albeit imperfect, first step to rectifying the inefficient and unfair US health care delivery system. It is therefore worth looking again at the key features of the new health legislation. In what follows, the most important features of the new legislation are presented.

Features Mentioned in the Promotion of Obamacare

We have heard a lot about how the new legislation:

  • Moves the US closer to universal coverage;
  • Says nobody can be refused insurance because of pre-existing conditions;
  • Says children can be covered under parents’ insurance until they are 26 years old;
  • Makes it illegal for insurance companies to drop you because you get sick.

But there are far more important benefits to be realized from the 2,409-page Patient Protection and Affordable Care Act than these. To appreciate what is really important about the new legislation, a short primer on what is wrong with US health care is in order.

US Health Care: What Is Wrong?

The US spends far more than any other developed nation on health care, and its health outcomes are the worst among developed nations. Why? The major reasons are:

  • Supply-driven care and price-fixing by the medical industry;
  • Back-office paperwork resulting from so many insurance providers;
  • Keeping old people too long in hospitals;
  • The US overweight/obesity epidemic;
  • Manpower issues;
  • Medical malpractice and fraud;
  • Uninformed patients.

Supply-Driven Care and Hospital Price-Fixing

Dr. John Wennberg is the leading researcher and thinker on needed reforms to the US health care system. Wennberg and colleagues at The Dartmouth Institute for Health Policy and Clinical Practice collected data on the health care patients with chronic illness received in their last two years of life. They found remarkably little correlation between the prevalence of severe chronic

illness and per capita Medicare spending across regions. More specifically, their data showed a near threefold variation across hospitals in dollar spending, average hospital days, and physician visits.

Why would such variations occur? Wennberg concluded: the supply of doctors, hospitals, diagnostic machines, etc. explains variations in use. That means that if you have a pain in the right side of your abdomen, your primary care physician will recommend that you have your appendix out whether you live in Boston or South Dakota. But Wennberg et al said that is where the similarities end. In South Dakota, your doctor would refer you to a surgeon who would remove your appendix with one overnight in the hospital. In Boston, you would see a couple of consulting physicians and have several diagnostic tests before the surgery. You would stay in the hospital after the surgery for upwards of a week.

The Wennberg conclusion:

Whether from the patient’s perspective (satisfaction, technical quality, health outcomes) or from physicians’ perspective (quality of communication among physicians, continuity of care), higher spending and greater use of supply-sensitive care is not associated with better care. Greater per capita use of supply-sensitive care and more spending do not result in lower mortality or improved quality of life; nor do they lead to improvement in the quality of care. Various estimates for the amount the US wastes on overtreatment in this country range between 20 to 30 cents on every health care dollar spent.

In short, having your appendix removed in South Dakota is just as safe and satisfactory as having it out in Boston “with all the bells and whistles.”

For example, at Duke University Hospital, considered one of the best in the country, chronically ill patients dying between 2001 and 2005 spent, on average, only 3.4 days in the ICU in their last six months of life. In contrast, patients at the UCLA Medical Center, also considered one of the nation’s best hospitals, spent, on average, more than 11 days in the ICU during the last six months of life.

Why would such variations occur? Wennberg explains the “variationcannot be explained by illness, medical evidence, or patient preference“. One might think it had to do with the severity of the disease. But Wennberg studied such a large sample that differences in severity would have averaged out. More expensive diseases? No. The 2008 Atlas compared costs across hospitals for patients with similar chronic illnesses.

How does he explain such variations? He argues that health treatment is “supply sensitive“. He quotes Milton Roemer, a health policy researcher: “A built hospital bed is a filled hospital bed“. Wennberg finds that:

  • the supply of hospital beds explains 54% admissions for all medical conditions;
  • the supply of cardiologists explains 49% of cardiac appointments.

In short, Wennberg questions whether patients who receive more supply-sensitive care have better outcomes, live longer, or have a better quality of life. He concludes:1

  • Supply-sensitive care accounts for well over half of Medicare spending, with most going to patients with severe chronic illness;
  • Whether from the patient’s perspective (satisfaction, technical quality, health outcomes) or from physicians’ perspective (quality of communication among physicians, continuity of care), higher spending and greater use of supply-sensitive care is not associated with better care;
  • Greater per capita use of supply-sensitive care and more spending do not result in lower mortality or improved quality of life; nor do they lead to improvement in the quality of care;

If the US modeled its care on efficient providers such as the Mayo Clinic, the Geisinger Clinic, and the Cleveland Clinic, Wennberg believes the US could shave 30% to 40% off the cost of caring for Medicare’s chronically ill patients;

So how will the new legislation try to change this? From supply-driven care to payment for outcomes. The government has real control over Medicare payments. Title III of the legislation is: “Improving the Quality and Efficiency of Health Care” Part I of that Title is

Linking Payment to Quality Outcomes Under the Medicare Program”. A quote from a summary of this section: “to make sure that the quality of care for seniors drives all of our decisions, a group of doctors and health care experts, not Members of Congress, will be tasked with coming up with their best ideas to improve quality and reduce costs for Medicare beneficiaries.”

Increasingly, Medicare payments are intended to be based on the results of the supply-driven research by Wennberg and others: payment for positive health outcomes, not for the number of doctors, diagnostic machines, and beds that a hospital wants to use.

Back Office Paperwork

Because there are so many insurance companies, both public and private, a large number of health care workers do nothing but interact with their insurance company counterparts. There are two problems:

  • insurance companies have different reporting forms;
  • insurance companies offer different packages covering different ailments.

One study estimates the administrative costs in private insurance average 14 percent of benefits or approximately $108 billion. The Congressional Budget Office estimates Medicare administrative costs at 2% and private insurance at 11%. I conclude that if private insurance companies used the same reimbursement forms and standardized what they paid for, like under a single payer system, administrative savings should be at least 5% or more than $100 billion annually.

The state-wide insurance market places offered under Obamacare should cut administrative costs somewhat because the insurance companies must offer the same packages. That means the insurance companies will pay and not pay for the same medical treatments.

Keeping Old People Too Long in Hospitals

One “benefit” of new health technologies is ability to keep people alive almost indefinitely in hospitals. Persons 65 and up made up 12.4% of the US population in 2004 and they “consumed” 34% of all medical expenditures; persons 85 and older were 1.7% of the population and “consumed” 8.1% of medical outlays. Studies have shown that staying in a hospital or nursing home is far more expensive than living at home.

The new legislation places a primary emphasis on getting older people out of hospitals and nursing centers back into their homes. The legislation addresses this issue in Title VIII – Community Living Assistance Services and Supports Act. Under this Title, a health insurance program will be started that will provide Medicare patients with sufficient income so they can live at home rather than in a hospital or nursing home.


In a recent article, I concluded that the most dangerous addiction globally and in the US (most particularly) is overeating. In 2007, US health care spending per adult was:

  • Normal – $4,030;
  • Overweight – $4,260;
  • Obese – $5,560.

Using data on how many of each there are, we can determine that the extra health costs for persons overweight are $14.1 billion and for persons obese are $93.7 billion. This means we spend $107.8 billion, or 4.7% of all health costs/ for people who are overweight and obese.

Title IV of the new legislation should help.

It directs the creation of a national prevention and health promotion strategy that incorporates the most effective and achievable methods to improve the health status of Americans and reduce the incidence of preventable illness and disability in the United States. The Act empowers families by giving them tools to find the best science-based nutrition information….

Manpower Issues

We frequently hear there is a growing shortage of primary care physicians. In part, this is because following medical school, US doctor candidates must do residencies at teaching hospitals. This is a big business and is heavily subsidized by the Federal government. Mullan and Wiley report that in 2007, Medicare paid hospitals almost $9 billion for residency training. Teaching hospitals love this support. They also love the 80 hours a week these students put in working at the hospitals. Teaching hospitals have a lot of clout in getting funding for the students/workers they need. If the manpower needs of the teaching hospitals reflected overall US needs, there would not be a problem. But there is a problem. 99% of people that see doctors are not in hospitals. Training in teaching hospitals reflects their needs: intensive hospital care and more lucrative care associated with specialization.

Wennberg argues that the role of primary care physicians should be enhanced. Rather than being “ticket providers” to specialists, he wants the primary care provider to be the manager of the team dedicated to taking care of America’s chronically ill over time. Wennberg believes unnecessary referrals to specialists are an important reason for why health costs are so high-and why quality is often low.

But there is more to it than this. In Africa, the United Nations is helping to develop referral systems for health care that extend down to the smallest villages. In the US, where delegation of services works so well in other industries, one wonders why it cannot also work in medicine. After all, most people who see doctors would do just as well if they saw a nurse or nurse practitioner….

A major part of Obamacare focuses on manpower. Title V of the Act

funds scholarships and loan repayment programs to increase the number of primary care physicians, nurses, physician assistants, mental health providers, and dentists in the areas of the country that need them most.”

Fraud and Medical Malpractice

It has been estimated that between 44,000 and 98,000 people die in hospitals annually due to preventable medical errors.2 Another estimate: 119,000 deaths annually: 12,000 from unnecessary surgery, 7,000 from medication errors, 20,000 from various other errors in hospitals, and 80,000 from infections acquired in hospitals.3

Title VI of the new legislation: “the Act reins in waste, fraud and abuse by imposing tough new disclosure requirements to identify high-risk providers who have defrauded the American taxpayer. It gives states new authority to prevent providers who have been penalized in one state from setting up in another. And it gives states flexibility to propose and test tort reforms that address several criteria, including reducing health care errors, enhancing patient safety, encouraging efficient resolution of disputes, and improving access to liability insurance.”

Uninformed Patients

People know more about how they feel than any doctor ever will. But 20 years back, only doctors knew what to do about our ailments so we took their advice. Today, with all the medical information available on the Internet, every literate person should be their own best doctor. And before seeing a doctor, they should have read up on what the doctor is likely to suggest and the

trade-offs involved. The new legislation should help with patient information. Both Titles IV and VI call for new actions to provide more and better education to parents.


Obamacare is complex and has not been explained well by the President. It has also been vilified by Tea Party activists. And all this, despite the fact that the US health care delivery system is the most inefficient and unfair among developing countries. One might wonder where the Tea Party support is coming from. I offer Table 1 as a possibility: these figures come from 2009, the year before Obamacare was enacted. These groups like things the way they have been the last 20 years.

Table 1. – Lobbying, 2009

Source: Open Secrets

Investment Implications

Looking ahead, it is worth asking who might benefit the most from the implementation of Obamacare in future years. The clear winners will be the insurance companies. They will get 40 million new clients. And if Obamacare is effective in reducing health costs, their profits will increase as their payments fall.

It is probably worth taking another look at the largest health care insurance companies such as UnitedHealth Group Incorporated (UNH), WellPoint Inc. (WLP), Aetna Inc. (AET), and Humana Inc. (HUM).


1 John Wennberg, Tracking Medicine: A Researcher’s Quest to Understand Health Care, Oxford University Press, 2010.

2 http://www.medicalmalpractice.com/National-Medical-Malpractice-Facts.cfm

3 http://www.resource4surgicalaccidents.com/malpracticestats.html

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5 replies on “Why the US Needs Obamacare”

  1. Great coverage Elliott.
    I’ll take exception to the assumption that the government will handle efficiently – but fully admit that the current gaps in coverage for pre existing conditions, do warrant change.
    My take from my reading and my experience;
    -You’ve underestimated the wrongful deaths from medical ‘care’. Drugs – properly described and taken as directed – sickens over 100,000 U.S. citizens annually. Death from properly prescribed ‘medicines’ is in the 10’s of thousands. At your convenience, view the documentary Food Matters for specifics. the drug/Pharma lobby, as you showed in the table, have the FDA wrapped around its (revolving door) finger.
    -A climate of personal irresponsibility persists – far too many people pick poor lifestyles and think some pill will be a solution. Chronic illness is fostered – by design – by Big Pharma and the medical establishment.
    -Obesity contributes far more cost to the system as chronic illnesses ovetake these individuals.
    -Gov’t is complicit in subsidizing corn (in particular) – cheap use of high fructose corn syrup might be the #1 contributor to poor health in the country – along with Monsanto GMO (Round up resistant) crops that gets into everyones blood streams.
    There are better solutions than the Federal gov;t – matter of fact – if they stopped subsidizing corn, wheat – or at least balanced subsudies with ‘specialty crops’ like broccoli, beans, cauliflower, et al. – affordability of good vege’s and fruit would shift many mothers and eventual eating habits of society to healthy eating. Everything else is just shuffling the deck.

  2. My concern is that Obamacare might not be that “first step” mentioned in paragraph 1.  Because of its imperfections, it might turn out to be the “proof” for right-wingers, that “socialized medicine” doesn’t work, and should be cut back.
    The only real solution to America’s health problems is fully funded, no-deductible, Medicare for every man woman and child.  (See: http://mythfighter.com/2013/08/26/ted-cruzs-alternative-to-obamacare/ )
    Only then will this nation step into the 21st century.
    Not only will be have better health, but it will save us a great deal of money.  Consider society’s costs for illness and emergency room care.

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