While the debate continues to rage in Washington over the best / most efficient / most affordable system, the survey suggests that the type of system seen across the OECD doesn’t have much impact on the outcome. State-run systems appear to do as well as private systems in the survey. However, the critical elements that do appear to have an impact include:

• Consumers need to have financial “skin in the game”
• Coordination of care between providers does make a difference
• Providers need incentives to improve outcomes
• Transparency of pricing and service quality is important

Whether you are a proponent of ObamaCare, the Ryan plan or a differentiated solution, these four elements appear to have the highest correlation to controlling costs and improving outcomes. Let’s stop debating “single payor vs. the market” and move on to the elements of the health care system that actually matter.

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OPINION APRIL 1, 2011
We’ve Become a Nation of Takers, Not Makers
More Americans work for the government than in manufacturing, farming, fishing, forestry, mining and utilities combined.

By STEPHEN MOORE
If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida’s ratio is more than 3 to 1. So is New York’s.

Even Michigan, at one time the auto capital of the world, and Pennsylvania, once the steel capital, have more government bureaucrats than people making things. The leaders in government hiring are Wyoming and New Mexico, which have hired more than six government workers for every manufacturing worker.

Now it is certainly true that many states have not typically been home to traditional manufacturing operations. Iowa and Nebraska are farm states, for example. But in those states, there are at least five times more government workers than farmers. West Virginia is the mining capital of the world, yet it has at least three times more government workers than miners. New York is the financial capital of the world—at least for now. That sector employs roughly 670,000 New Yorkers. That’s less than half of the state’s 1.48 million government employees.

Don’t expect a reversal of this trend anytime soon. Surveys of college graduates are finding that more and more of our top minds want to work for the government. Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. When 23-year-olds aren’t willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.

The employment trends described here are explained in part by hugely beneficial productivity improvements in such traditional industries as farming, manufacturing, financial services and telecommunications. These produce far more output per worker than in the past. The typical farmer, for example, is today at least three times more productive than in 1950.

Where are the productivity gains in government? Consider a core function of state and local governments: schools. Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.

But education is an industry where we measure performance backwards: We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn’t pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores.

The same is true of almost all other government services. Mass transit spends more and more every year and yet a much smaller share of Americans use trains and buses today than in past decades. One way that private companies spur productivity is by firing underperforming employees and rewarding excellence. In government employment, tenure for teachers and near lifetime employment for other civil servants shields workers from this basic system of reward and punishment. It is a system that breeds mediocrity, which is what we’ve gotten.

Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.

President Obama says we have to retool our economy to “win the future.” The only way to do that is to grow the economy that makes things, not the sector that takes things.

Mr. Moore is senior economics writer for The Wall Street Journal editorial page.

Please review the abstract of Epsilon’s Medical Contract Manufacturing & Engineering Observations. Inside the full Spotlight you will find:

An industry overview and state of the market
Public comparables & precedent transactions
A competitive landscape of private equity backed players

For the full report, please click here.

As it relates to Obamacare, the Senate acted in bipartisan fashion earlier this month to repeal a provision that requires small businesses to file a 1099 for any vendor who receives $600 or more. The original intent of this provision was to improve tax collections in order to offset the cost of the legislation, but became increasingly unpopular as the paperwork and costs were estimated to affect at least 40 million small businesses. President Obama appeared to give the green light for repealing this provision in his State of the Union address on January 25. So why hasn’t it been repealed by the House yet? The Pay-As-You-Go Act requires legislators to identify “offsets” that would result in a revenue-neutral budget, and the repeal is estimated to reduce collections. Gotta love government in-action.

The good news is that a combination of regulatory clarity, a more robust financing environment and improving economic fortunes are resulting in a more favorable environment for transactions and financings for selected industries and companies. Feel free to contact us if you’d like to discuss a specific situation.

Today’s Wall Street Journal has a nice layout of the next steps in the judicial process, which is expected to eventually end up at the U.S. Supreme Court, although the time required for the decisions to wend their way through the Federal appeals court will likely delay any Supreme Court hearing for another year or so. Given that full implementation of the provisions of the law is not expected until 2014, we expect a final decision well ahead of this time frame. In addition, the Florida judge did not issue an injunction against implementation of the law, which will likely allow the administration to continue “full steam ahead”. Given that twenty-six states were plaintiffs in the latest lawsuit, it remains unclear how these states will react to continued implementation of the law pending appeal.

While the Obama administration decried the ruling and remains confident that adverse rulings will be overturned on appeal, the legislative effort to repeal PPAC has passed the House and failed in the Senate. The next likely step that the Republicans in the House are expected to take is to include language in every appropriations bill to prevent federal funds to enforce or implement any of the law’s provisions. Recent opinion polls indicate a significant portion of the country continues to favor either a “repeal and replace” strategy or significant changes to PPAC. The question remains: replace with what? Both proponents and opponents of PPAC recognize the fact that the old system was broken. In the meantime, expect radio silence on the judicial front until later this year when the appeals courts weigh in.

Unlike 2009 and 2010, there was clearly a renewed enthusiasm that hasn’t been seen for some time around opportunities in healthcare. There are a number of factors that appear to contribute to this sentiment, including the current state and trajectory of the economy, more regulatory certainty regarding federal healthcare legislation (and identifiable trends as a result), and the availability of capital to private equity and venture capital firms, many of whom have been considering raising new funds (or have been successful in doing so). This renewed enthusiasm has led to conversations that start off with “what are you working on?” rather than “we can’t invest right now, get back to us later.”

Specifically, many areas of the country are seeing significant provider consolidation, both across segments (such as hospitals) or between segments (such as between hospitals and ambulatory centers), largely in order to strengthen their hand relative to what appears to be a stronger negotiating position on the payor side. This is creating some compelling opportunities within healthcare services, as well as opportunities for companies to replace inefficient systems with better and / or more efficient IT solutions.

If you are an investor or company considering a transaction in the healthcare space amidst these opportunities, please contact us to see what we can do for you.

A number of factors contributed to slowing growth in 2009, most notably a difficult employment environment and its corresponding impact on employer-based private insurance coverage, as well as a decline in average household income. The Wall Street Journal highlighted some months ago a decline in consumption of medical services that appears to be correlated to an increased cost burden by the patient. Offsetting these declines was an increase in Medicaid enrollment, increased Medicaid funds directed from the stimulus package and increased spending on prescription drugs.

With increasing budget pressures, we expect a number of states to take meaningful action to reform their Medicaid programs. New York’s Governor Cuomo has recently announced a “Medicaid Redesign Team” to make recommendations for fundamental reform by March 1. A number of other states, most notably Texas, have floated the (unlikely) idea of dropping out of the Medicaid program altogether.

Regardless of the outcome, investors and companies in the healthcare field will need to be nimble and opportunistic in these challenging times. Please feel free to contact us if you have any questions or would like to discuss ways to work together.

All the best from us to you this holiday season!

Last week, The Bureau of Labor Statistics released its November 2010 report, and the news was not good. According to the report, the civilian unemployment rate rose to 9.8% from 9.6%, with the long-term unemployed rising to over 6.3 million people, or 42% of those unemployed, a modern record. Adding 9.0 million “involuntary part time” employees (assumed to be working at 50% of desired employment level) and 2.5 million “marginally attached” employees (i.e., those not seeking employment) to the 15.1 million official total results in an effective pool of those seeking work equal to 22.1 million people. That’s a lot of jobs that need to be created.

Now we don’t expect unemployment to fall to zero, but even reducing unemployment to 7% would require effectively creating over 11 million jobs, when you take into account the involuntary part timers and marginally attached — and that’s completely ignoring the net influx of new potential employees to the jobs pool, which some economists estimate at 100,000 per month. When the U.S. economy is growing at a robust rate, we have seen monthly increases of 300,000 jobs, sometimes more. If we could return to that rate of job creation, it would take us over four years to get unemployment back to 7%.

As a historical reference point, I found a great chart profiling modern presidents on jobs created during their tenure. Some of the best periods include FDR (22 million jobs created over 20 years), Clinton (19 million jobs created over 8 years) and Reagan (16 million jobs created over 8 years). Particularly given the significant decline in manufacturing jobs in the U.S., there are serious concerns about where these new jobs might come from to get us back on our feet.

Another factor weighing on the economy is the current real estate market, where a recent study indicated that over 11 million properties are in a “negative equity” position, with an additional 2.4 million properties in a tenuous 5% equity position or smaller. (Note: after I published this post, Marketwatch noted Corelogic’s most recent data indicates a decline of 500,000 in the homes with negative equity, which now currently stands at 10.8 million). With home prices nationally headed in the wrong direction, real estate is currently acting as a drag on the economy, with properties in or near a negative equity situation continuing to put negative pressure on the market as a whole.

And this is why I love healthcare. Healthcare is a non-cyclical industry, which strives to provide care and deliver solutions for the acute and chronically ill, as well as assisting those who are seeking ways to improve their health. The industry employs thousands of service professionals, and is one of the few sectors creating jobs today. Every day significant breakthroughs are being developed which address a host of issues, including heart disease, cancer and diabetes. And just yesterday, two major public companies were put “in play”: Tenet Healthcare, which reportedly received a bid from Community Health, and Beckman Coulter, which is reportedly in talks with financial sponsors about a sale of the company.

In this challenging environment, a thoughtful approach is not only preferred, it is critical. Please feel free to contact us if you have any questions or would like to explore ways for us to bring our capabilities to bear for you or your clients.