Obamacare Will Cut Costs? The Market Shows Otherwise
By Randall Holcombe • Monday March 22, 2010 9:59 AM PDT • 16 Comments
One of the promises of Obamacare has been that it would reduce health care costs. The day after the House passed the Senate’s version of health care reform, this headline says “Health Care Companies Pull Stock Market Higher.” Clearly, money is being bet on health care costs increasing, putting more money, not less, into the health care sector.
That should not be surprising. In a free market setting, individuals decide how much they want to spend on various services, including health care. With increasing government control, spending on health care will increasingly be a political decision, not the aggregation of individual decisions. Health care companies already have their lobbyists, who pull for more generous reimbursements. Consumers (the elderly on Medicare, the poor (and increasingly middle class) on Medicaid, etc.) will exert political pressures for more benefits. Political allocation of resources will surely increase costs.
Taxpayers won’t like the idea of higher taxes, already a part of Obamacare, so expect the bulk of the increased cost to push the budget deficit higher. Essentially, Congress has looked around the world and decided they’d like to shape our public sector to be more like Greece. At least, by not being on the leading edge here, we can see what’s coming.
Tags: Budget and Tax Policy, Healthcare 
I think its a combination of factors. 1. Silly liberals who actually believe the rhetoric that more customers mean more profits for the insurance companies. 2. Smart people who know that there are silly liberals who will fall for this idea and want to make money off of them. 3. The inbetweeners who know that some of the provisions that kick-in right away will force the insurance companies to dump individual policies and increase their profits in the short-run.
Anybody who makes health insurers a long-term play is a fool though.
SillyInvestors | Mar 22, 2010 | Reply
I was thinking about this too, along these lines; If the progressives could have replaced the private sector insurers with a public plan they would have. They didn’t, so they can’t. The reason they can’t is that they can’t afford to give up the tax revenue from one of the few remaining profitable sectors of the economy. In short, the private sector insurers are not only safe, but they are... wait for it... TOO BIG TO FAIL!!! So, they will not only be receiving revenue from an additional however many million mandatory customers, but they will also be allowed to price as they wish, and they will be bailed out it they fail. Sweet deal if you can get it.
Randy | Mar 22, 2010 | Reply
Health care is a government hand maiden industry in that a staggering amount of health care spending is from the government and that proportion will only get larger with this legislation and things like Medicare. Expanding and further entrenching our current system, which everyone admits is broken, is not a recipe for reducing costs, but increasing them. And we’ll all be poorer for it in that it isn’t likely that we’ll get better care. The care we are getting is simply going to get more expensive that is a negative wealth effect and makes us all worse off.
Steve Verdon | Mar 22, 2010 | Reply
Uhhmm actually this is why health insurance companies opposed the legislation. You see, the penalties for not having insurance aren’t that big. So, if you are healthy and the cost of not having health insurance is lower than the cost of buying health insurance then people might opt out. With fewer healthy peopel in the system that means premiums have to rise as more people with pre-existing conditions enter the system (another part of the legislation). This could induce another round of healthy people dropping out which would further push up premiums. The term for this is “death spiral”.
One way out is to subsidize the health insurance industry. Another would be to increase the penalty for not having insurance.
The latter is more disturbing in that it is the U.S. government trying out a power it hasn’t tried to appropriate before. Typically the U.S. government limits actions that have an impact on interstate commerce. Now they are trying to control inaction. Now the government is saying they can regulate not only what you do, but what you don’t do. I’m sure it will make it past the SCOTUS if it is challenged legally because this is the way of things...more intrusive and invasive government not less.
Steve Verdon | Mar 22, 2010 | Reply
Steve,
The bottom line is that they are sitting pretty. That’s why the stock is going up.
Randy | Mar 22, 2010 | Reply
Today’s Wall Street Journal has an overview of the costs and benefits to insurers, drug makers, hospitals and doctors, here, that is enlightening. It points out that insurers will get 20 million new customers, many of whom will be subsidized buyers, with the new health-insurance exchanges providing an easy way to reach them. Meanwhile, the penalty on people who don’t buy was higher in the final bill than in earlier drafts. Thus, while insurance companies were generally against the legislation, they’re big winners from it.
Taxes on the industry, originally planned to go into effect next year, have been pushed back to 2014. The upshot:
Premiums for younger Americans will especially rise, since there’s a 3-to-1 limit on how much plans can charge older vs. younger people. Blue Cross Blue Shield says this could push prices for a 20-year-old up by 50%.
So much for “reform”!
Mary Theroux | Mar 22, 2010 | Reply
The “death-spiral” is a rhetorical ploy. Insurance works because you are pooling like risks, not because you are cross subsidizing risks. If the insurance company can charge the healthy more than the competitive rate for their risk, why cannot they do they same for the already ill?
Stewart Dompe | Mar 23, 2010 | Reply
Did you even read what I wrote? The insurance companies opposed the legislation because they see it could be very bad for them. How does that make them “sitting pretty”? Serioulsy, the penalties for not having insurance for the young healthy people in the popultion are pretty light. Suppose you have an option to spend:
$3,000 on insurance
$650 in a penalty for not having insurance.
And you are young and healthy, what do you do? Add on that hospitals and doctors are required by law to treat you if you do become ill irrespective of ability to pay and once you do become sick you can then go buy insurance. You’d be a moron to buy insurance until after you get sick.
If this happens enough, then you could get the death spiral for insurance companies. Now, maybe those 20 million new subsidized customers will be mostly young and healthy, but I’m skepitcal. With all these increases in premiums I’m thinking the young and healthy are going to be less likley to sign up and it will likely be those with pre-existing conditions. While they will be subsidized the problem with people with pre-existing condition is that their “true” premium is equal to their cost of care, and the subsidy wont cover all of that.
Steve Verdon | Mar 23, 2010 | Reply
If anyone wants a glimpse of what awaits us from government-run health care, take a tour of a VA hospital in your area. It’s not a pretty sight.
No doubt, the politicians and the union thugs that got them elected will be exempted from the disastrous system that the peons will be forced to use. Health care is going to suck, but hey, we’ll all be covered!
Steve Hogan | Mar 23, 2010 | Reply
Steve,
I hear you, but then why is the stock going up?
Randy | Mar 24, 2010 | Reply
Don’t confuse a stock going up due to the mood meter to mean that the underlying company actually has a brighter future. Anyone can find numerous companies, especially financial firms that trade on the stock market, that are in BIG trouble, yet have risen hundreds of percent since the mood meter turned up last March. That doesn’t mean those companies are truly doing well, or will even survive. All it means is that the overall mood of the people has been shifting over the last year from more pessimistic to less pessimistic. That mood changes as humans herd to deal with uncertainty – when the overall social mood is becoming more optimistic/less pessimistic, people buy stocks and prices go up, and waning optimism/waxing pessimism brings the reverse. Robert Prechter, President of Elliott Wave, made 100 predictions back in October of 2003 for a large-degree downtrend in social mood. Note these:
The U.S. and state governments will finish their takeover and demolition of the medical industry.
Government will ration goods and services in which it is or becomes involved (such as gasoline, vaccines, medical care, electricity, water, food, etc.)
The U.S. will accelerate its trend toward socialism. Opposition to that trend will be vigorous.
Terrible secret activities that we could not even imagine will take place, some to be revealed only years or decades later. (Examples given were the Tuskegee syphilis experiments started in 1932, revealed in the 1970′s, and the revelation in 2003 that Nazi Germany (allegedly for the greater good) systematically used its government-run and controlled health care system to kill hospital patients to unburden the state and “cleanse the gene pool”.)
A search for “Elliott Wave October 2003″ should allow you to see all the predictions.
Robert | Mar 24, 2010 | Reply
Robert,
Mood swing is certainly possible. But I think that investors are seeing that a huge amount of money is going to be thrown at the insurers, and that they have been legislated “too big to fail” status. This doesn’t mean that they are not really too big to really fail in time, just big enough that the investors can count on a series of bailouts if they start to have problems. This makes for an attractive stock, at least for the next few years.
Randy | Mar 25, 2010 | Reply