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Peter Crabb: Why Obama's health-insurance plan keeps health-care stocks a good bet

The financial markets don’t know what the doctor will order, but they know it is probably going to hurt.

President Obama asked Congress this week to move on a health-care bill. He is calling for an "up or down" vote in the next few weeks. The financial markets responded promptly.

Health-care companies, including Coventry Health Care, which owns the Altius Health Plans sold in Idaho, saw their stock prices decline dramatically Wednesday after the president’s announcement. These stocks are, of course, very sensitive to the outcome of this debate because the new plan could cut into profits.

Prospects for the health care industry, however, have been looking good while the reform legislation is being debated. The Dow Jones U.S. Health Care Index is up nearly 5 percent, while the overall stock market is unchanged since the start of the year. Meanwhile, the Dow Jones U.S. Insurance Index, which includes health care insurance companies, is up nearly 6 percent.

The plan so far does little to hurt this positive outlook for health care companies.

During an interview with CNBC, Warren Buffett, one of the most widely followed investors, called the current bill in Congress 2000 pages of “nonsense”. He pointed out that the new actions do nothing to control costs because incentives are unchanged.

In economics we know that people respond to incentives. An incentive is anything that induces a person to act. In the economy, that “thing” is price.

When the price of some good or service rises, consumers buy less of it. But at the same time the higher price gives producers an incentive to move more resources to the production of the good or service because the benefits have risen.

Do consumers of health care see the price of health care? No.

In the health-care industry, prices have long been hidden from consumers. Since the 1940s, employer-provided health insurance has been excluded from taxable income.

There may be deductibles, but any consumer who gets health insurance from an employer is unlikely to know what he or she is paying in total for health services. Medicare and Medicaid patients rarely see any part of the price for their services.

What about the producers?

In letter to President Obama printed last fall in The New York Times , 23 prominent economists wrote that any reforms must correct the “distorted incentives associated with paying for volume rather than quality.” Just like consumers, producers in this industry are responding to the incentive of higher prices for more services. The economists recommended the reform bill “provide incentives for physicians and hospitals to focus on quality, such as bundled payments and accountable care organizations, as well as penalties for unnecessary re-admissions and health-facility acquired infections.”

To change behavior and lower costs you have to change the incentives. If whatever comes out of Washington does nothing to change the current incentives to both consumers and producers, health care stocks will continue to rise faster than the rest of market.

There doesn’t appear to be any pain in this new medicine.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.