Healthcare Hijinks and the Affordable Care Act
Depending on who you ask, the Affordable Care Act (AKA Obamacare) has been either a total failure or a great success. Those who remain skeptical of the bill point to ballooning insurance premiums as evidence the act has failed. Conversely proponents of the measure look to increasing insurance rolls as evidence the act has succeeded. Regardless of your views, the act has had a profound impact on the largest sector in the US economy. HiddenLevers recently analyzed the state of US healthcare, and this post will summarize potential good, bad and ugly outcomes for US healthcare over the next couple of years.
Affordable for who? - The Good
This year has marked another sharp increase in insurance premiums despite surprisingly muted healthcare cost inflation. Businesses have responded to rising premiums by raising deductibles and in some cases dropping their group insurance plans. The ACA has enabled business to do this by giving employees another way to get insurance. While this form of cost-shifting may impact individuals, it will raise profitability at many US businesses as they are able to drop the costs of healthcare coverage. Healthcare costs may also moderate as individuals are more directly exposed to the costs of care. This scenario would likely be positive for US equity markets, while having a negative impact on the healthcare sector due to slower revenue growth.
Affordable for everyone – The Bad
Despite muted healthcare inflation over the past couple of years, the sector has enjoyed price increases above inflation for decades. If the government elects to implement price controls to cap healthcare costs the entire healthcare sector – one of the largest areas of our economy, will see a significant decrease in earnings.
The ballooning costs of Medicare and Medicaid make this outcome not as unlikely as it seems. The U.S. is the only country that pays full price for most medications. Changes to our drug policies would be a start to controlling costs and would put significant pressure on the healthcare sector, most notably pharmaceutical companies.
Affordable for no one – The Ugly
If both healthcare costs and insurance premiums skyrocket it would act as a tax on the economy. GDP growth would be muted as well as business and consumer spending. We hope this outcome is unlikely but the inelastic nature of healthcare consumers along with an aging population makes this outcome a possibility. We remain optimistic that healthcare costs will continue to track inflation and hope that insurance premiums will follow suit.
Next Steps
Regardless of the outcomes listed above, the healthcare sector and the legislation associated with it will have a significant effect on the economy going forward. Structural changes in the economy, such as demographic shifts and changing preferences (less smoking, healthier eating etc.) will also play a large role in the amount and types of healthcare consumed. Advisors who want to manage risk around the politics and structural changes in the healthcare industry can utilize stress testing to pinpoint the results of new policies on investment portfolios.
