Should health care companies pay to reform the system?

As the most visible signs of strain on the financial system have eased, President Barack Obama has turned his focus to more long-term matters, chief among them reforming the nation's health care system. The topic was the focus of his most recent weekend radio address, where he said "the status quo is unsustainable for families, businesses, and government."

According to a fact sheet issued by the White House, the administration proposes to find more than $300 billion in new savings on Medicare and Medicaid over the next decade through methods such as negotiating better prices on Medicare Part D drugs. The release praised the pharmaceutical industry for its dialogue on the issue so far, which Obama said would see "drug makers pay their fair share, [so] we can cut government spending on prescription drugs."

The push for new, additional savings comes after a previously-announced budget plan for 2010 called for allocating $635 billion over ten years to reform healthcare; slightly more than half the money is expected to come from more heavily taxing high wage earners, with the remainder coming from finding savings in existing Medicare and Medicaid spending. Pressure on pharmaceutical companies and private insurers to hold down costs has only increased in recent years, as spending on health care has grown at a rate far exceeding that of inflation. President Obama said "America spends nearly 50 percent more per person on health care than any other country. Health care premiums have doubled over the last decade."

The Obama Administration is not alone in expecting that health care companies can make do with less. At the Ira Sohn Investment Research Conference in May, noted short-seller Jim Chanos of Kynikos Associates said that the extremely high operating margins of many health care companies will be forced down by changing government spending patterns. Lincare Holdings (LNCR), a company that provides home oxygen equipment and has historically had operating margins well in excess of 20 percent, was cited as a stock Chanos is short. A call to Kynikos Associates this afternoon was not returned.

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