Healthcare Quicksand

July 2, 2017

Last week I looked at the ten year anniversary of the iPhone. This week I’ll take a brief holiday look at a five year anniversary.

In June 2012 the Supreme Court ruled on the constitutionality of Obamacare. As expected, the vote was a close 5-4 decision. Many Republicans expected the five conservative justices to overturn the ACA on the grounds that the Federal government could not force people to buy insurance. John Roberts, the head justice on the court, sided with fellow conservative justices on this position at first, but the arguments of the liberal justices convinced Roberts that, regardless of the language in the ACA, the penalty for not having health insurance was a tax no matter what it was called. Roberts’ vote was the deciding vote in upholding the constitutionality of the act.

This interpretation was not without precedent. In 1937, the cout ruled that the Federal government could force people to pay Social Security insurance premiums. The reasoning was the same. Payments could be called an insurance premium or a penalty or an incentive. No matter the language that legislators used, the payments were a tax and well within the rights of the Federal government.

In 2012, Republicans released a position paper on healthcare legislation. The key features were: Affordable and accessible, no refusal of insurance based on pre-existing conditions, and allow people to keep the plan they have. Five years later, Republicans hold the Presidency, House and Senate, and are discovering the difficulties of implementing those simply stated principles.

Health care is almost 20% of the nation’s economy. There are many stakeholders. They are vocal and well funded. Because Republicans do not have a 60 vote majority in the Senate, the legislation must conform to budget rules that will permit a simple majority vote. In 2009, the Democrats had a 60 seat majority when they began the process of crafting the ACA and found that they had to make a lot of compromises. When Massachusetts Senator Ted Kennedy died in August 2009 and Republican Scott Brown won the special election to replace Kennedy, the Democrats lost their filibuster proof majority and had to make more compromises to get the ACA passed.

For seven years Republicans in both the Senate and House have run quite successfully on repealing Obamacare. Strong and principled opposition to the ACA has become less fervent.  Senators must appeal to a broader constituency than House members.  Some were reluctant to vote for legislation that could jeopardize the availability of health care for vulnerable seniors, children and low income families.

Senate Majority Leader Mitch McConnell had set a deadline for a Senate vote before legislators went to their home districts for the July 4th holiday but could not assemble the votes needed to pass the legislation. McConnell is still committed to the joint task of repeal and replace. He has rejected calls from some in his party to pass a repeal bill now and continue to work on replacement legislation.

There remain more legislative hurdles in the next few months but the most pressing is the raising of the debt limit.  The Treasury is already doing a few accounting tricks to pay bills but has notified Congress that even those tricks will no longer suffice by October.  For now, the market continues to shrug.

Last week I finished up with a teaser and I hope to have that fully developed by next week. For now, Happy Independence Day!

U.S.S. Obamacare Sails On

In March 2000, I cursed myself as I watched the SP500 cross the 1500 mark for the first time. Almost a year earlier, I had given in to my conservative instincts and paid off the mortgage with some savings. In 1999, my choice had been partially driven by a suspicion that the stock market was a bit overvalued. In 2000, I could see I was wrong; that I just didn’t understand the new economy. Had I invested the money in the stock market, I would have made 15% in less than a year.

When I set the time machine to election day 2016, I see that the index stood at about 2130, 40% higher than the 2000 benchmark. But wait. An asset is only worth what I can trade it for. Year by year, inflation erodes the real value of that asset. When I compare real values (BLS inflation calculator), the SP500 index on election day was almost exactly what it was in March 2000.

As the year 2000 passed into 2001 and the stock market fell from its heights, my decision to invest in real estate exemplified a golden word in investing: diversify.

Since the election, the SP500 has risen about 10%, as investors speculated that Republicans will usher in a new era of de-regulation and lower taxes. By mid-March, banking stocks had shot up over 25%. This past Monday, the 20th, the Freedom Caucus confirmed that they had the “no” votes necessary to block Thursday’s scheduled House vote on the Republican health care bill, AHCA. Banking and financial stocks, thought to be the biggest beneficiaries of less regulation, higher interest rates, and infrastructure spending, lost 5% over several days.

The Freedom Caucus is a group of 30-40 Republican House members who came to office in 2010 on the Tea Party wave. Led by North Carolina Representative Mark Meadows, the Caucus adheres strongly to conservative principles as they define them. They are chiefly responsible for driving out the former House Speaker, John Boehner. While strict adherence to principle – “my way or no way” – worked well as an opposition movement when Obama was President, the Caucus’ unwillingness to compromise is problematic under the current one-party rule. Can Republicans govern?

Paul Ryan, the current Speaker of the House, delayed the vote until Friday. House leadership and the White House tried to come to some compromise that would bring the Freedom Caucus on board without alienating the more moderate Republican members. With no support from Democrats, the additional no votes from the Freedom Caucus meant that Ryan could not muster the majority needed to pass the bill. Shortly before the scheduled vote at 4 PM on Friday, Ryan called off the vote.

The stock market is a herd attempt to predict and price what the world will be like in six months. As events catch up with forecasts, stock prices correct. Passage of the bill was supposed to be a key step toward tax reform if the Republicans want to pass a tax bill using Reconciliation rules, which require only a majority in the Senate.

With more than a half hour left in the trading day, the market had time to sell off 2 – 3%. And? Nothing. Did the bulls and bears cancel each other out in a flurry of trading? Nope. There was no unusual surge of volume in stocks. Either the market had already priced in the defeat of the AHCA, or buyers and sellers were left undecided.

Investors take a “risk off” approach during periods of uncertainty, moving toward gold (GLD) and long dated treasuries (TLT). Both have risen a few percent in the past two weeks but each is short of their January and February highs. Since mid-March, the SP500 (SPY) has lost a few percent. This tells me that investors had already adopted a more cautious stance.

President Trump has indicated that he wants to move on to tax reform and an infrastructure bill as well as the building of some type of defense perimeter on the border with Mexico. Perhaps investors hope that the lack of cohesion among Republicans on the health care bill will not sidetrack them from passage of these other bills.
The defeat of this bill is sure to empower the Freedom Caucus on further legislation. They were a thorn in John Boehner’s side and will no doubt frustrate Paul Ryan as well.

/////////////////////////////////

Existing Home Sales

We had a warm February in most of the country. Realtors reported good foot traffic but, but, but…a lack of affordable housing has turned away many first time home buyers. Home prices have been rising at double the growth in wages. While Feb’s numbers declined from a strong January, YTD existing home sales are more than 5% ahead of last year’s pace.

Regional declines varied: the northeast at -14% and the midwest at -7% led the list. The decline in the west was almost -4% but cities in California and Colorado report the fastest turnaround times from listing to sale. The San Jose region reported an average of 23 days.

Here’s February’s report from the National Assn of Realtors

Health Insurance Reform

In a 9/26/09 WSJ article, Janet Adamy breaks down the health care bill that is working its way through the Senate Finance Committee. It will probably be the core of final legislation. Here’s the short and sweet:

Income: Family of four making less than $22K per year, no more than 2% of income for health insurance premiums through state run exchanges. Subsidy decreases with income with a cap of $88K for a family of four, who would pay no more than 12% of income on premiums. Credits not available till 2013.

Individual Mandate: Fines as high as $1900.

Pre-existing Conditions: Can buy plans through high risk pools till 2013.

Young people: Low cost catastrophic and preventive care policy available for those less than 25 years old.

Insurance Companies: Can’t drop people when they get sick. Limits on extra premium charges for age, family size and smoking.

“Cadillac” plans: New taxes on insurers for individual plans more than $8K, family plans more than $21K. Retirees and employees with high risk jobs will be exempt. Insurer will no doubt pass tax on to employers who will pass it on to employees or simply stop offering the plans.

Medicare: No charge for preventative services. New discounts on drugs to offset the so called “doughnut hole” gap in Medicare D coverage. Competitive bidding by insurers for Medicare Advantage programs.

Employers, Large: More uniform insurance packages throughout the states – a plus for large employers. Companies with more than 50 employees pay a fine of $400 if they don’t provide employees with affordable health insurance. Size of fine and other provisions regarding flexible spending accounts may change in future versions.

Employers, Small: Provide at least half the cost of employee’s premiums. Tax credits. State run insurance pools.

Doctors: Conflict of interest rules so that doctors could not refer patients to hospitals that they owned. Comparison reports on doctors’ use of medical resources. Those in the bottom 10% of their category would get lower payments from government programs like Medicare.

Hospitals: Bill patients with no insurance at the same rates as they bill those with insurance as long as the patients qualify for financial assistance. No overly aggressive collections on past due bills.