By Kevin Schulman, M.D.

The policy goals for health care reform are so clear it should be easy: 1) improve access to health care services — defined as access to insurance; 2) improve the quality of health care services — through health IT; and 3) reduce the cost of health care — through competition or structural changes in the system, such as reform of the small group market. From a policy standpoint, we can debate the intricacies of these various issues and use data or theory to support our arguments.

What is happening now in Washington is not health policy, but health politics. Politicians are searching for policies that would gain the most political support (or looking to offer promises to specific members to make the rest of the program more palatable to them). Negotiations are not with the public over the broad agenda, but with specific political interest groups that constitute the Washington lobby core. This is the legislative process of the US at its most transparent. The populist rhetoric has been lost in the tricky business of legislation, lobbying, and politics.

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On June 19, 2009, a premiere economic consulting firm (not to be named) forecasted a job loss of 275,000 in June.

To me, this seemed odd. The May drop of “only” 345,000 jobs (unrevised) seemed like noisy data. There was no substantial change in Initial Claims for unemployment insurance. Initial claims were running more than 600,000. The ADP also remained at an elevated level. The May ADP number showed a job loss of 532,000. Why should a lower reading be repeated in June?

We are in the mode of seizing any piece of good news as evidence of the turning point. So what, if the May Non-Farm Payroll number was inconsistent with Initial Claims and the ADP? A green shoot is a green shoot.

Throughout June, nothing really changed on the employment front. People viewed it as good news that initial claims were running in the 610,000 range rather than the 640,000. We were going to see a much better number for June. As I said, as of June 19, the Non-Farm Payroll loss was pegged at 275,000.

But 610,000 Initial Claims, while better than 640,000, is still terrible news. The ADP on Wednesday completely deflated the unrealistic expectation of a substantial turnaround. The ADP came in at a job loss of 473,000. Economists quickly revised their expectations.

The job loss today of 467,000 was no surprise to me (and to readers of my blog). This is consistent with the forecast made by CFOs in the latest Duke-CFO survey. The CFO survey, conducted in May 2009, suggested that private sector jobs would be scaled back by a staggering 5.6% over the next 12 months. Given the addition of public sector jobs, I estimated the net job loss over the next 12 months to be 4 million (this assumes 2 million public sector jobs are created). We are 1/5th of the way there (May+June losses divided by 4 million).

Perspective

• We have lost 6.46 million jobs in this recession
• We have lost more jobs in this recession than double the sum of the previous two recessions!
• We are 400,000 job losses away from the worst job loss situation since WWII. Technically, the recession of 1948 is still worse. However, it is a weird recession with one amazingly bad month. The percentage loss of jobs in October 1949 would have caused a print of -2.5 million losses today (in a single month).
• This ain’t over yet.

The Main Systemic Risk Factor

My main worry is that policy makers and risk managers at financial institutions have greatly underestimated the impact of unemployment on prime mortgages. Given that housing prices are falling at a 19% annual rate and given that many people with prime mortgages are losing their jobs, it makes sense that more and more people will choose to default on their prime mortgages. Note that 20% of homeowners with mortgages are underwater — what they owe on their mortgages exceeds the value of their houses. The assumption of a 2-4% loss on prime mortgages in the Treasury’s adverse stress test scenario seems unrealistic to me.

Increased defaults on prime mortgages could easily cause a second credit crisis.

Remember when the sub-prime crisis started? People initially said it was no big deal because the size of the market was small. Well, it was a very big deal and, yes, the size of the market was small. The prime market is gigantic and a surge in defaults in that market could quickly wipe out the capital of our financial institutions.

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The following post was written by Kevin Schulman, M.D., Director of Duke’s Health Sector Management Program:

Imagine a country of 1.3 billion people with 100 cities of 1,000,000 or more, a per capita GDP of almost $6,000 (PPP) growing at almost double-digit rates, and an economy ranked in the world’s top 5 and you’ll have a pretty accurate image of China today. While the economic miracle has worked in most areas of the Chinese economy, healthcare has struggled in the transition from communism to capitalism.

The Chinese government has just outlined a new health reform plan. This plan includes the acknowledgement by the government of two new rights for the population: the right to basic medical services and the right to basic medical security. This effort includes an expansion of the basic health plan to rural populations (to 150 RMB per capita in 2011, approximately $22US), construction of 5,000 new grassroots hospitals, 3,000 new regional hospitals, training of 10,000 new doctors for rural areas, reform of public hospitals, and new rules for private hospitals in China. This is clearly a very ambitious agenda, the details of which will be released in 21 specific documents over the coming months. Reform will also address incentives in the public hospital system which currently spurs utilization of imaging, long lengths of stay, and prescription dispensing as a means of generating income.

China is clearly under-spending in the health sector. Currently, healthcare is around 4% of GDP of which only 50% is public spending. If China moves toward the levels of healthcare spending of Japan or the EU, there will be a huge increase in health spending in the Chinese market. Adopting Western IP laws will also force changes in the pharmaceutical industry – which currently is a generic market rather than a research-based product market – and possibly the medical supply market as well. Increases in spending could also drive demand for private health insurance within China. Read the rest of this entry »