Obamacare: Ed’s Daily Notes for November 1st   5 comments

Obamacare_It's_only_money(hat tip to Jay’s Tee Vee for the pic)

What can be said about President Obama’s healthcare plan, aka “Obamacare”, at this point in time? One month after the roll-out, here is what we know:

1. Out of 4.7 million visitors to the Obamacare website on it’s first day, there were 6 enrollees. That is not a typo. 6, as in “six geese-a-laying”, but this is no Christmas present.

2. The Obamacare website is so bad that experts have been brought in from Google, Oracle, and Red Hat to fix it. Unfortunately, anyone who was ever involved with any kind of computer programming project will tell you that bringing in outside experts to fix a broken program takes longer than having the original programmers fix it, because the outside experts have to go through all of the millions of lines of code to figure out what is broken.

3. Top hospitals in the U.S. may NOT be accepting insurance coverage that is offered through Obamacare. Basically, because of the payment limits on some of these policies, the top hospitals in the country, which offer the best healthcare at the highest prices, have decided not to accept certain Obamacare insurance.

4. The early numbers show an overwhelming number of Medicaid signups, instead of private insurance. Whether a Medicaid expansion is good or bad from a social perspective is arguable. But from a federal budget perspective, it would be bad. While the government’s budget deficit has been falling, it still hasn’t reached any of the levels of the Bush administration.

5. Hundreds of thousands, if not millions, of existing health insurance policies have been cancelled across the country. This has happened because these policies don’t comply with Obamacare’s coverage mandates. Where this creates a problem is if a large number of these people don’t buy new insurance, either going to Medicaid or choosing to do without insurance. Remember, without healthy young people buying insurance, this could create an insurance “death spiral”, whereby only the sickest people buy insurance, which would force the insurance companies to raise their rates next year. The higher the insurance rates go, the less affordable insurance becomes for the healthiest people, making them more likely to just pay the tax penalty for going uninsured. Needless to say, this could eventually lead to the death of the health insurance industry.

6. The Wall Street Journal’s James Taranto picks up on one oddity of Obamamcare: Everyone over 30, including men and women beyond childbearing age, are required to have maternity coverage. However, in Health and Human Services Secretary Kathleen Sebelius’s own words, “For the young and healthy…under 30-year-olds will have a choice also of a catastrophic plan that has no maternity coverage.” Taranto puts it best: “That’s right, the geniuses who wrote ObamaCare are forcing everyone to buy maternity care except the age cohort that includes women at peak fertility.” Considering the complexity of Obamacare, I doubt this is the only donut hole in it.

7. Speaking of Obamacare’s complexity, the legal challenges to it aren’t over yet:

The Affordable Care Act proposes to make health insurance affordable to millions of low-income Americans by offering them tax credits to help cover the cost. To receive the credit, the law twice says they must buy insurance “through an exchange established by the state.”

But 36 states have decided against opening exchanges for now. Although the law permits the federal government to open exchanges instead, it does not say tax credits may be given to those who buy insurance through a federally run exchange.

According to the LA Times, there are currently 4 legal challenges to this in the courts. While I would be surprised if the Supreme Court decides to toss Obamacare over this in light of their last review of it, it is possible. I would rate this as a low probability risk at this point.

8. Be careful looking at stories reporting health insurance premium increases. When they report about things like average premium increases, keep in mind that health insurance has been rising every year for as long as I can remember. That said, stories like this one reporting 64-146% increases in California are significant, since average increases of that magnitude are beyond anything we have seen under our previous system.

9. There has been an economic impact caused by Obamacare, as pointed out by the Federal Reserve’s Beige Book report from mid-October.

On a related note, in spite of the Federal Reserve leaving a potential QE taper on the table for their December meeting, does anyone honestly believe that both Obamacare’s problems will be fixed AND employers will start hiring by the Fed’s mid-December meeting? I would rate that as unlikely in the extreme. Keep in mind that economic weakness makes the insurance “death spiral” mentioned in #5 above even more likely. Best case for Obamacare to work in the face of economic weakness: More Medicaid enrollments, which increases the federal budget and the deficit, making it even harder for the Federal Reserve to taper, because it would risk raising the rates on U.S. debt, thereby making it harder for the U.S. government to afford all the new Medicaid recipients. The way I see it, this is just my opinion, the Fed will be unable to taper for the near future without risking an economic collapse. I also think if Obamacare has a strongly negative impact on the economy (which remains to be seen), we could actually see increased QE from the Fed.

Can Obamacare work? I will say it can never work as promised, mostly because the promises were either lies or optimistic. Third party payer systems never work, due to the “tragedy of the commons“.

Even though the health insurance industry was on board with it, they saw the potential dollar signs from the individual mandate and conveniently overlooked the run-off to Medicaid, as well as the economic impacts, such as companies dropping health insurance plans and cutting employee hours (when they haven’t cut employees or just quit hiring). This is a classic case of “be careful what you wish for”. By putting themselves in the hands of a government-run program, the health insurance companies put their futures at the mercy of how well the government runs the program.

Which brings us to the Obama administration. They are walking a fine line right now. Any misstep, and they risk killing the private health insurance industry. A bad enough misstep, and the 2014 mid-term elections could create a Republican-controlled Congress AND Senate (while the voters may hate the Republicans for the shutdown now, a miserable overall Obamacare failure could change the political winds significantly). This begs the speculative question: Can the Obama administration fix Obamacare? I offer this editorial cartoon as an answer:

iknownothing(hat tip to Michael Ramirez at Investor’s Business Daily)

President Obama is either lying and completely incompetent, or else he is a totally hands-off manager, leaving all the details to his staff. It is also possible he could be both of these things, but the results would be the same: failure. Even the best case scenario, he is just a hands-off manager, only works if his staff is competent. As we have seen, and is displayed by the cartoon above, that isn’t the case.

From an investment standpoint, what does all this mean? The high probability play is Obamamcare failure, a weak (if not recessionary) economy, and continued QE from the Fed. Avoid health insurance companies, and gravitate towards companies with safe or growing revenue, as well as solid dividend plays.

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5 responses to “Obamacare: Ed’s Daily Notes for November 1st

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  1. Bill Gross to 1%: We must pay more in taxes

    http://money.cnn.com/2013/10/31/investing/bill-gross-pimco/

    Ed, what can I say? You just hate the underprivileged…
    Like your grandfathers and anyone before that.
    It is in your blood. It is in your genes.
    (Obamacare is just a petty detail.)

    • bsdgv,
      On the contrary. I would support a socialized catastrophic healthcare insurance plan (with deductibles equivalent to the full amount of your previous year’s income, including capital gains), with Medicaid limited to the unemployed. Health insurance would be for medical costs under your previous year’s income, and would be voluntary. An alternative to health insurance in that situation could be an HSA, which could cover all of an individual’s routine healthcare costs. (Ben Carson has some good ideas on the HSA)

      You have a problem with this?

      Obamamcare is no benefit to the poor, unless you consider the Medicaid signups as a benefit. I personally don’t, because doctors don’t have to accept Medicaid (and many don’t), which creates an uneven level of treatment quality based on a person’s financial situation. Truth be told, I think you only see “government benefits for the poor”, without any consideration to the inherent unfairness of those benefits.

      As for Bill Gross’s idea, I have an alternative to that: We need to fix our campaign finance system that is tilted towards big corporations and the 1%. As long as people and groups of people with the most money can influence our political system, as well as our tax code, nothing will ever change. You can tax the 1% at 99% of their income, and they will still get enough deductions put into the tax code to weasel out of paying most of it. Get the politicians out of bed with the 1% first, and then we can have an honest discussion on what the taxes should be.

      • I am not quite sure how your proposed catastrophic insurance plan, Medicaid limitation, health insurance and/or HSA would actually help. I am not sure what problems those suggestions would actually solve.

        As for the “death” of the health insurance industry and the “death spiral” neither has any likelihood of occurring but they sure sound scary. The fact of the matter is that Obamacare impacts a small group of people. Will that group of people rise in the future? Who knows, companies were already eliminating health insurance for their employees in an effort to get leaner, meaner and more profitable before ACA was even a glimmer in Obama’s eyes.

        The Obamacare website is a disaster and a significant black eye for the administration (they seem to have a lot of those unfortunately). As for bringing in outside experts it all depends on what the underlying problem is. I am one of those experts that companies and government agencies bring in after the shit hits the fan. I don’t comb through millions of lines of code (that would be pointless). I review the implementation, understand the architecture, diagnose the root cause(s) of the issue(s) and propose short and long term solutions. I get the job done faster and better than the original developers because I am an expert. I understand the software or language they are using better than them and come up with solutions to the problems they created. Will that work with this particular web site? Who knows, most people do not have even a rudimentary understanding of how complicated the healthcare and insurance rules are (I unfortunately do). Building this site was always going to be very challenging and had almost no chance of going off without issues. Unfortunately the issues it did have were catastrophic. The failure of the Identity Management component due to performance issues tells me that the technical architects had no voice in the process (any senior IdM architect would have told management the site would not scale). Personally I do not believe things with the website will be smooth come 11/30 and wonder why they painted themselves into a corner from a time perspective like that.

        I have read the quotes from the monthly progress reports and status reports and they sound like the typical CYA managerial-ease from government contractors that these things always have (I am involved with a lot of government projects). The contractor had a responsibility to inform the government that the solution should not go live and from everything I have read did not. All of these projects have a PRR (production readiness review) and the prime contractor, as well as the test group, information assurance group, etc say we concur with production deployment. In the end HHS is still responsible but the people building this site for them failed miserably.

        As for your can it work comment. What promises specifically are you referring to? For me the promise of Obamacare is that I will be able to buy individual insurance and be charged premiums similar to what I would pay if I worked for a company with a health insurance plan. From what I have seen so far this is true. The plans I have seen are 1/2 what I currently pay for my individual health insurance plan.

        I do find it interesting that when we have one entire political party devoting all their attention to making something fail (ACA) it really isn’t much of a surprise that it probably will fail. The law needs some updates/changes (mandatory coverage items; grandfathering in previous plans; etc) but Republicans in the House will never pass a piece of legislation that increases the chances the ACA might be successful. They will invariably include other “changes” in any legislation they do pass that will try and cut out the heart of the ACA.

        Robb

      • Robb,
        Thanks for your input! Especially your project development description, which was quite informative.

        As for what my proposal for healthcare does, it places more of the routine healthcare decisions in the hands of the healthcare consumer, which is a necessary component to getting healthcare costs to drop, without necessarily dropping quality.

        As for the GOP fighting Obamacare, what did you expect? When it was passed on a partisan basis, that was political suicide. Passing it without knowing what was in it (per Nancy Pelosi’s infamous quote) was Russian roulette with all the chambers loaded. The Democrats showed both a lack of foresight (did they think they would rule the government forever?) plus a blind faith in the legislative process (is it ever a good idea to approve a bill that is far too long to read entirely?). If wishes were horses, Democrats would ride…

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