TCS Daily

Stock Options and Health Care

By David Charles - August 9, 2004 12:00 AM

At first glance, the connection between preserving employee stock options and expanding the quality of American health care seems elusive at best, but the two issues come together on the common ground of technology.

Technology is the driving force behind the major medical advances of the last 30 years and even more impressive advances coming in the near future. To a great extent, innovative medical technology is often developed by entrepreneurial small companies whose strength lies in the size of their ideas rather than their cash flow.

These companies depend on employee stock options to attract and retain the talented people who make this technology possible. If companies are forced to declare stock options as an expense as soon as they are issued instead of waiting until the options are exercised, it would create a crippling financial burden for the entrepreneurial firms so essential to the next generation of medical science.

While health care funding debates inevitably focus on the cost of new technology, we should think carefully about the results this technology has delivered. I'm talking about fundamental improvements like average life expectancy going from 68 years in 1950 to 77 years and growing today. Deaths from heart disease have fallen by 40 percent since 1970 and breast cancer mortality has been reduced by 20 percent in just the last 13 years.

People are not only living longer, but living better as well. Patients suffering from advanced Parkinson's Disease, for instance, can now get relief from its debilitating tremors through electronic devices implanted in the brain that block the impulses which cause the tremors. In less than a decade medical care will include artificial limbs controlled by the brain, dependable artificial hearts and tissue engineering capable of restoring human vocal cords.

If government makes an arbitrary accounting rules change to require mandatory expensing of stock options, as some in Congress and the regulatory community want, it would be a major disservice to the little firms that supply so much of the energy and creative risk-taking needed to keep new medical technology coming.

I'm thinking of firms like HealthStream Inc. in my hometown of Nashville. Led by CEO Robert A. Frist, Jr., this high-tech start-up has become the national leader in Internet-based electronic learning systems for health care providers. HealthStream has only 150 employees, but almost all of them participate in the company's stock options plan.

As Frist explained in a recent letter to the Financial Accounting Standards Board: "It is not easy to attract high quality employees to an early stage company that, by nature, has very little employment stability. In order to attract this talent, we must make our employees equity owners and provide them a vested opportunity in the outcome of the company."

Employee stock options are simply a promise by a company to let its employees buy stock in the company at today's prices over a period of years. The more the stock price appreciates, the more potential employees have to profit from their options. This is a powerful motivator for employees, but it doesn't cost employers a dime until the options are actually exercised.

Immediate expensing of stock options would require companies to carry phantom expenses on their books for money that hasn't been spent. It would artificially depress their net profit statements and scare away investors, something no high-tech start-up could afford to risk. That would inevitably force a cutback in the stock options that are so crucial to small companies in the vanguard of medical technology.

American health care needs what these companies have to offer. So my hope is that policy makers considering mandatory expensing of stock options will consider the ancient advice to physicians which says: "Above all, do no harm."

Dr. Charles is the Chairman of the National Alliance of Medical Researchers and Teaching Physicians and Director of the Movement Disorders Clinic at Vanderbilt University Medical Center


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