Thinking Things Over   June 24, 2012

Volume II, Number 25:  This Week’s Historic ObamaCare Ruling and What It Means

By John L. Chapman, Ph.D.     Washington, D.C.

The Supreme Court is set this week to announce its decision on the challenges brought by 28 states to the Patient Protection and Affordable Care Act of 2010, otherwise known as ObamaCare.  The consequences of this decision for the economy are as great as any ever rendered in American history, while politically, the decision ranks in influence with landmark decisions including Roe v. Wade and Dred Scott v. Sandford.

On March 21, 2010, the U.S. House of Representatives passed the Affordable Care Act by the narrow margin of 219-212, ratifying the U.S. Senate’s vote (60-39) of three months earlier, leading to the signature legislative accomplishment of the Obama Presidency.  More than 2,400 single-space typed pages in length, the legislation, impossible for any sitting legislator (or the President himself) to fully read and comprehend, called for the creation of at least 159 new bureaucratic decision-making agencies inside the federal government, all with executive authority completely unwritten or delimited within the initial law, and still largely without formal rules authority (an example of one of these is found on Page 668, in Section 3006[b] of the law, describing the new federal bureaucrat who will govern the “Medicare value-based purchasing program for home health agencies”).

The various opposing factions in the American political class agree on little else about the law, except this: ObamaCare will certainly, all assent, fundamentally transform the political economy of the United States.  This was in fact President Obama’s stated intention, and he is to be congratulated in winning a hard-fought battle over 14 months leading to the Act’s successful passage.  The legislative and political battle was itself historic, in that final passage led to not one vote in support of the new law by the minority party in either House of Congress (34 Democrats in the House voted against the Act).  This was a first in American history; all prior rancorous votes, from war declarations to the New Deal and Social Security legislation in the 1930s to the Civil Rights Acts in 1964-65 to the Reagan Revolution’s main vote in 1981 (for the Economic Recovery and Tax Act) had always been bi-partisan, respectably so and comfortably in terms of margin in final tally.

The law, readers will recall, is as sweeping in its impact as it is divisive in the political furies it unleashed.  No aspect of the American healthcare system is left untouched by the Act, from health insurance to pharmaceuticals to medical device manufacturing to pricing to investment.  Or, specifically, from the individual mandate to purchase health insurance, to regulation regarding age of dependent coverage (now 26) or evisceration of pre-existing condition exclusions, to the literally thousands of detailed, subtle, but extensive changes to the health care sector: so much so that then-Speaker of the House, Nancy Pelosi, for example, literally said at the time that “we have to pass the Bill so that you can find out what is in it.”  For example, the new law effectively outlaws physician-owned hospitals, implements subjectively-determined relative-value payments to physicians, deepens the price control scheme for clinical lab work, and levies billions in new excise taxes on pharmaceutical and medical device manufacturers.       

We cannot in this commentary wade into the politics of the matter, controversial though it all is; let us only say that while we strongly disagreed with the President’s approach, so did we with Governor Romney’s earlier state-level analog to ObamaCare.  Both parties, it seem to us, have shown scant intellectual leadership on one of the bigger and more complex set of challenges in our era.  Rather, our purpose in commenting here, on the eve of the historic ruling (which months ago we predicted would result in at least a partial over-turning of the law, if not its entire repeal), is to briefly set forth the principles that would obtain in a modern health care system worthy of an extended commercial republic with a high-octane economy, as well as comment on likely outcomes for investors in the ruling’s aftermath.

How Would an Overturning of ObamaCare Affect U.S. Equities? And What If the Law is Upheld by the Court?

Taking the latter issue first, public polling shows consistent opposition to ObamaCare, by large pluralities (e.g., 55%-39% for complete repeal, per recent Rasmussen data).  Beyond the policy issues and changes themselves, investors have similarly come to believe over time that ObamaCare represents an open-bounded expansion of the welfare state – or said more prosaically, the government’ footprint in the economy – that can only be inimical to economic growth, regardless of shifts in clinical outcomes.  In other words, the very divergent estimates of the law’s impact on total healthcare spending, from the Obama Administration and CBO’s initial estimates touting $20-100 billion in annual savings, to (say) the former Bush 43 economist Douglas Holtz-Eakin’s estimate that the new law added $562 billion to the deficit in its first ten years (an assertion buttressed by the CBO’s revised March 2012 budget projections through 2021 that indicate more than $1 trillion in new gross healthcare costs, while still leaving up to 27 million non-elderly Americans uninsured a decade hence), have in any case been interpreted by the investor class in favor of those who fear fiscal harm and budget-busting from the new law.

Bluntly, we agree with this interpretation, and past history does as well.  The canonical example of a well-intentioned government program gone fiscally awry is of course the Social Security Act of 1965 (viz., Medicare/Medicaid).  In 1967, the House Ways and Means Committee projected the legislative cost of the new Medicare entitlement program would be $12 billion in 1990, 25 years into the law’s existence. Instead, it was $98 billion that year – a program that grew exponentially with baby boom retirement to $489 billion in 2011.  In short, “the market’s” guess on ObamaCare’s economic impact, while empirically indiscernible, is certainly negative, and a drag on U.S. equity prices in general because the law is seen as increasing both the federal budget deficit as well as onerous costs on American businesses and individuals wading through the 2,400 page law and its tens of thousands of new pages’ maze of new administrative law rulings pursuant to the law’s implementation and forced compliance (the impact of the law on health care-related stocks is surely more idiosyncratic; more regulation and federal strictures in the sector is surely offset by larger total volumes of likely spending, and increased subsidization of more patients through the system).

As such, the Court’s overturning of the entirety of the law would lift equity prices in the U.S. – permanently, albeit marginally, due to lack of a coherent program offered in opposition to ObamaCare by either Beltway Republicans or the author of RomneyCare himself.

The opposite effect would ensue in the event ObamaCare is upheld, however unlikely this is in our view.  A decision to cement the law in place as permanent would come as a surprise to markets, and lead to a broad sell-off in the aftermath of its being upheld.  This is, again, because investors have soured on the legislation’s efficacy as a boost to economic growth.

What We Seek in the Health Care System of Tomorrow

And what of the longer term consequences of the Affordable Care Act’s negation by the Court?  Writing in Forbes recently, Andrew Bernstein reminds us of the power of the free market economy, such as it is here in the United States, to create the institutional supports so critical to economic growth and prosperity where health care is concerned:

Americans have a higher survival rate than any other country for thirteen of the sixteen most common cancers. Tens of thousands of international patients travel annually to the U.S. for medical care, including many from Canada’s system of socialized medicine—not in the reverse direction.

If death by motor vehicle accident is subtracted, the American life expectancy is the world’s highest. Half of the major new medicines introduced worldwide were developed by American companies. American researchers—including Maurice Hilleman at Merck, who developed eight of the fourteen vaccines recommended for mumps, pandemic flu, hepatitis B, and others—played a key role in 80 percent of the most important medical advances of the prior thirty years……

The problem is quantitative—its price has become prohibitively expensive. The cost of a hospital bed alone ranges from $1,000.00 to $1,500.00 per day. Nobel Laureate, Milton Friedman, wrote: “…spending on medical care went from 3 percent of the national income in 1919…to a mind-boggling 17 percent (highest in the world by far) in 1997”—and then continued to rise.

…..Which principles (those of capitalism, or socialism) are responsible for American innovations in pharmaceuticals, medical technology, and for overall excellence in healthcare? The same principles responsible for such American advances as the electric light, the telephone, the airplane, the computer, the Internet, the creation of film and music industries, and of a robust body of national literature: the principles of individual rights and free markets that liberate America’s most creative minds to revolutionize every field. Capitalism is responsible for the superb quality of America’s medical care.

In other words, in terms of clinical efficacy, U.S. healthcare has long led the world, and one thing proponents of “socialized medicine” or universal healthcare such as is practiced in Britain, Canada, Japan, or Sweden have never failed to miss is that it is only because of the outstanding devices, pharmacological developments and products, health-related R&D, and even management methods as discovered in the less state-controlled industrial setting in the United States, that these more government-intensive health care systems have prospered to the degree they have.  To say this differently, the finest health care facilities the world over predominantly utilize GE or KCI medical devices, Eli Lilly or Merck medicines, Harvard or Stanford Medical School-developed procedures, and Stryker or J&J surgical instruments.

Mr. Bernstein goes on to advocate the correct solution, that is to say, the one most conducive to both clinical efficacy and prosperity and economic growth, for an economic framework for health care:  total and unrestricted laissez-faire. Such an economy would have a vibrant and dynamic health care sector based on the following, very briefly:

  • Health insurance would be as competitive as the life and property/casualty sectors are. There would be an endless variety of coverages, focused versus general, but certainly high-deductible plans that offered catastrophic coverage for the costly disease states.  Individuals would be rewarded for healthy life habits, and could obtain coverage across state lines. 
  • There would be a wide variety of trial-and-error experimentation in governance, service delivery, and industry structure, too, as some insurers would team up with employers, others with providers. There would be profit and non-profit models, and various types of charities in place to aid the indigent.  There would be a wide variety of provider networks among both producers and insurers to allow for reciprocal coverage across the United States, so a traveler to Cleveland, hailing from Houston, would not be denied coverage or service.
  • Pricing variety would be as, well, variegated as any other industry, and again based on trial and error.  Differing levels of service would spring up, too, from doc-in-the-box “urgi-centers” for treatment of petty ills or injuries on up to fully-integrated teaching hospitals. 
  • No FDA, HIPA, or HHS governing bodies would exist to regulate aspects of the industry, no price controls of any kind would exist, nor would there be a cartelization of doctor supply as run by the American Medical Association’s links to medical schools.  Independent licensing authorities would arise for all aspects of the industry, from medical schooling to device manufacturing to the pharma sector, who would command respect via reputation, such as Underwriters’ Laboratories has for consumer products.    

In short, the level of true competition – capitalistic competition as seen best in the unhampered market economy – would explode, versus what we have today in the United States, let alone the rest of the world.  And competition brought about in free markets always leads to ever-increasing quality of service levels and declining per unit costs of provision, thus resulting in ever-improved consumer prices and outcomes.  To think about this in an obverse way, as Mr. Bernstein opined, would we want to bring the level of government control in U.S. health care as currently practiced into other industries, such as the food sector?  How about high technology?  Of course not: rather than make Fed-Ex more like the U.S. Post Office, of course there is not a sentient being alive who would not prefer that the Post Office learn to operate more like Fed-Ex.  This is what we want in U.S. health care.   

We understand this will not happen anytime soon in the U.S., even in the event of a total over-turn of ObamaCare.  But as Milton Friedman once said, it is the job of a good economist – to which we will add, a perspicacious citizenry – to keep alive the very best solutions to cure social ills in the optimal way, in order to have them ready when the rest of society comes to see their logic.  And hence we remain lonely vigilant, even if searching in vain here inside the Beltway, for the triumphal return of the sublime philosophy embodied in the economics of Adam Smith, J.B. Say, Menger, Mises, Hayek, Friedman, and all the prior greats who well understood the miracle of unfettered markets to cure the most intransigent of social ills, as it can apply to health care.  Eradicating hunger and starvation in the developed world of 200 years ago, this same “miracle of the market” can per force once again work wonders in solving the health care challenges of today. 

May the Supreme Court’s rulings this week be greeted warmly in U.S. equity markets, as a precursor to such greater liberalization in what can then become truly a world-class, 21st century healthcare system, first in America, and then around the globe. 

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at john.chapman@4kb.d43.myftpupload.com. The views expressed here are solely those of the author, and do not necessarily reflect that of colleagues at Alhambra Partners or any of its affiliates.

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