RIP OBAMACARE: WHAT INVESTORS NEED TO KNOW

It was to be the lasting legacy of a bold visionary, crafted by the better angels of our nature to save the common man from the ravages of an out of control healthcare market. It was conjured by Satan himself, the first step towards an inevitable socialist power grab, destined to turn our freedom loving citizens into government serfs. Or it was simply somewhere in between, a very flawed attempt at modifying an even more flawed healthcare system in a way that would bring the greatest possible good to the largest number of Americans. Whichever origin story you choose to believe, it now seems beyond debate that Obamacare is being slowly dismantled by a combination of market forces, poor implementation, and a new right leaning government.

Make no mistake about it;  Obamacare, at least as it was originally envisioned, is being consigned to the dustbin of American history. The question for us is: What does this mean for investors?   

First we will summarize the basic principles and practices of Obamacare as originally passed into law. Then we will briefly analyze what went wrong, and what went right. Then we will discuss recent political changes that have lead to the law’s downfall. Lastly, we will search for financial opportunities amongst the chaos.

In The Beginning…

Prior to 2008, health insurance was just that, insurance. A private contract between the insurer and insured, based on UNDERWRITING, or a professional estimate of each individual applicant’s risk profile. This means that ten different applicants could have ten different premiums based on their unique health risk profile, and it also meant that any health insurance company could charge whatever they wanted, or even deny coverage altogether. It also means that a health insurer could agree to issue a policy that only covered certain illnesses, but not others, specifically excluding any PRE-EXISTING CONDITIONS that an applicant might have. For example, if you had a history of cancer, an insurer might agree to issue you a health insurance policy, excluding anything to do with cancer. After all, insuring someone who is already sick doesn’t make much business sense, does it?

Obviously, this system left much, much to be desired. In fact, it was a constant national nightmare. The sickest people who needed healthcare couldn’t be insured to get healthcare!  This made life very tough for small business people, unemployed people, and employees whose employers did not offer group coverage (often working class folks with low end jobs). Of course if you were elderly (65+), or very, very poor, you could get either Medicare or Medicaid. But for millions of Americans who did not get insurance coverage through a major corporate employer, any kind of sickness could crush their life savings in an instant.

After many decades of politicians on both sides of the ailes attempting to do something about this tragic scenario, Barack Obama finally managed to pass Obamacare, if just by the most razor thin of margins. The law was controversial from the beginning, and various Red States vowed to resist in any way possible. The law was challenged in every court possible, including the Supreme Court, which eventually upheld the core of the law under the premise that Obamacare is essentially a tax regime, and the United States Constitution allows the Federal Government to levy taxes under certain circumstances.  The pillars of Obamacare, as originally passed, where the following:

1. For the first time ever, no one could be denied healthcare coverage based on pre-existing conditions. Additionally, private health insurers had to follow certain very rigid guidelines about how much they could charge. This effectively meant the end of UNDERWRITING, or the practice of tailoring policies based on individual risks. Even if I had cancer, I could call United Health and demand an insurance policy that would cover my pre-existing cancer, and United Health could not turn me down, and would have only very limited flexibility in what they could charge me.
2. Every American was legally REQUIRED to buy at least minimal insurance, or pay a fine.
3. If a citizen could not afford the insurance premium, then the Federal Government would provide a subsidy, with the goal of everybody getting some kind of insurance.
4. In many states, especially left leaning states, the existing Medicaid program was expanded to cover many more people. Although most people covered by Medicaid under the expansion could easily still be defined as “poor” they were not necessarily the destitute street level people who had medicaid before.
5. The Federal government was obligated to make certain payments to private health insurers based on how many policies were issued to patients with poor risk profiles. In other words, if I had cancer, and I signed up for an insurance policy that United was required to issue me, even though I was already sick, United would receive a certain payment from the Feds to make up for the inevitable financial loss that they would suffer on me.

While all of these pillars of Obamacare were extremely controversial, they mostly survived both court and legislative challenges. With the Democrats in charge, the experiment began.

Seemed Like a Good Idea at the Time

By a lot of measures, Obamacare was a success.  According to an article in the New York Times (May 22, 2017)

The number of Americans without health insurance has fallen drastically in recent years, according to new data from the National  Center for Health Statistics.   In 2016, there were 28.6 million Americans without health insurance, down from more than 48  million in 2010. Some 12.4  percent  of adults aged 18 to 24 were uninsured, 69.2 percent were covered by private plans and 20  percent had public coverage.

Among children under 18, 5.1 percent were uninsured, 43 percent had public insurance and 53.8 percent had private plans . Of  those covered by private insurance in 2016, 11.6 million had purchased their plans through the federal Health Insurance  Marketplace or state-based exchanges established by the Affordable Care Act.

Despite some big technical flubs at the launch of the program, stiff resistance from Republican dominated red states, and never ending court challenges, millions of people received coverage, either through the Medicaid expansion, or through the newly formed Obamacare exchanges.  An indisputable victory, right?

Ummmm, not so much. Sadly, for those not quite poor enough to qualify for the Obamacare exchanges, which would be any family of four with an income of $80,000 or more, premiums sky rocketed from already high rates. A quote from another New York Times article (November 16, 2017)

The Affordable Care Act is working fairly well for people who receive subsidies in the form of tax credits, said Doug Gray, the  executive director of the Virginia Association of Health Plans, which represents insurers. But for many others, especially many  middle-class families, he said, “the premium is outrageous, and it’s unaffordable.

Just how much have insurance premiums risen under Obamacare?  This from Forbes Magazine (May 22, 2017)

It turns out that across the board, for all ages and family sizes, for HMO, PPO, and POS plans, premium increases averaged  about 60 percent from 2013, the last year before ACA reforms took effect, to 2017. In same length of time preceding that, all  groups experienced premium increases of less than 10 percent, and most age groups actually experienced premium  decreases, on average.

Ouch!  And as anyone who has attempted to purchase private insurance also knows, these premium increases are for lousy policies with high deductibles and copays. In fact, most people today with private insurance have a deductible so high that they must become seriously ill before they get anything at all in exchange for those much higher premiums.

So, if we quiet all the shouting and propaganda, and dismiss the gnashing of teeth and pointing of fingers, we must recognize a simple fact: Obamacare worked. Also, Obamacare didn’t work.  Many more people today have insurance, and many more sick people can receive care without worrying about the horrors of being uninsured. However, any family who has even a modestly high income is being crushed alive by premiums that can be as high as $30,000 a year for a family of four (NYT, May 22, 2017).

If you think about it, this makes perfect sense. Under the previous system, you might have lower premiums if you were young and healthy, because you were a better risk profile for a private insurer who is attempting to make a profit. Just the opposite was true if you weren’t a great risk for that same insurer. If they just have to pick a random, “one size fits all” price for everyone who walks in the door, healthy or sick, then they had better choose a high price, since many sick clients will turn out to be expensive. If you were running an insurance company, wouldn’t you do the same?

Enter the Orange Wrecking Ball…

As long as Democrats were in charge, they were likely to emphasize the successful aspects of their experiment, while downplaying or even ignoring all of those middle class families drowning under the weight of $30,000 annual insurance premiums.  After all, no one thinks their own baby is ugly.

But seasons change, tides go out, and political control often vacillates between left and right in America. The surprise election of Donald J. Trump, along with a congressional wave or Red, meant that this ugly baby was suddenly left to be raised by someone other than its own parents.

For the first time in a long time, the Republicans had total control of all branches of government. The first thing they vowed to do was to repeal Obamacare, driving a stake directly through the heart of what they always regarded as an unholy exercise in socialism and abusive taxation. With Republicans in control of all levers of government, you would think it would be fairly easy for them to make good on their long time threat, wouldn’t you?  Well, not so much. Between November 9th, 2016, and July 26, 2017, in a breathtaking display of legislative incompetence, the Republicans failed to muster the votes to repeal Obamacare. How could this be?

When push comes to shove, millions of previously uninsured people achieved insurance for the first time under Obamacare. A benefit, once given, becomes incredibly difficult to take away in our American society. Did the Republicans really want to take the blame for actively taking insurance away from millions of American families?  

Secondly, many health industry heavyweights which had fought the coming of Obamacare tooth and nail now lobbied to keep the once dreaded law. Why?  Well, simply put, health insurance, pharma, and hospitals did much better under the law than they ever expected. From 2010 to 2017, many of the major health insurers saw their share price double or even triple! Same for Big Pharma. Given that stock is the currency in which most high level executives are paid, why would they want anyone to take away the punch bowl?   

But the movement to kill Obamacare has been much like a zombie that just keeps coming, no matter how many times it gets burned, hacked or shot. In fact, it’s possible that the titanic legislative failure just increased the humiliation factor for Trump and friends, and the single minded obsession with attacking the law has only increased amongst certain players in the Republican party.  To quote every 80’s sequel ever created, “This time, it’s personal.”

So Trump and company have set out to use every non-legislative tool at their disposal to continue their relentless assault on socialized medicine in America. For starters, they stopped promoting the law in any way, which immediately damages participation in a newly formed entitlement program that is far from easy to understand.

Most importantly however, the Republicans have attacked the least popular aspects of the law first. The so called Individual Mandate, or the legal requirement for people to buy insurance or face a fine, was never popular. Afterall, who likes to be told that they MUST buy something?  However, for many analysts this requirement was a critical fundamental of the law, because it required younger, healthier people to participate in Obamacare, instead of just older, sicker people who obviously needed insurance. Without some kind of requirement that all people participate, then only older people will sign up, or people will only sign up when they become sick. This would drive premiums even higher, because insurance companies would be facing a risk pool filled disproportionately with sick people who are expensive for the insurer. But regular folks don’t know that. Regular folks just don’t want Uncle Sam forcing them to buy something.

So the Republicans snuck a repeal of just this part of the law into their December, 2017 tax bill.  As Fortune Magazine summed it up:

The entire point of Obamacare’s individual mandate is to make sure that it’s not just sick people who are buying health  insurance  in these markets. By widening insurance risk pools to include a mix of young and old, healthy and sick, premiums  go down in the overall market (and people don’t simply sign up for insurance when they’re sick only to ditch it when they  don’t  need   coverage anymore). Ultimately, repealing Obamacare’s individual mandate would cause 13 million fewer Americans to be insured in 2027 compared with current law, according to the nonpartisan Congressional Budget Office  (CBO). Healthier and  wealthier people may choose to forgo coverage, and even poorer, medically needy people may not        sign  up for insurance   because they don’t know which options are available and there may not be the same sense of urgency  to enroll without the  mandate. The CBO also predicts that premiums in the markets would spike 10% without Obamacare’s  individual mandate as the   exchanges are left with a sicker consumer pool. However, for most Obamacare enrollees (those  making between 100% and  400%  of the Federal Poverty Level), an accompanying increase in federal subsidies will make up for higher premiums. Those  making above that income level (about $48,000 for an individual or $98,000 for a family of four)        will have to face the brunt of  premium increases, though. (Fortune Magazine, December 20, 2017)

So with this blow, hidden amongst the rainbows and unicorns of a larger tax cut, the American Right did not manage to kill Obamacare, but they certainly wounded it.

The next assault on the law came through the courts. Remember those payments that the Feds were supposed to make to compensate private health insurers for taking on lousy risk profiles?  

The Trump administration will freeze key payments to insurers meant to stabilize markets established by the Affordable Care  Act (ACA), officials said Saturday, blaming the move on a recent federal court ruling, but questions have been raised by health  care policy experts and critics about the reasoning behind the move and its repercussions.

“As a result of this litigation, billions of dollars in risk adjustment payments and collections are now on hold,” Centers for  Medicare and Medicaid Services (CMS) Administrator Seema Verma said in a statement Saturday, insisting that officials are  “disappointed” in the ruling and CMS ” hopes for a prompt resolution.(July 9th, 2018, Stephen Loicani, Associated Press)

Ouch!  Does this mean the end of Obamacare? Not exactly, but it’s another spear stuck into an already badly wounded beast.  

Ironically, the tactic that Republicans have chosen to choke off Obamacare is to make an already unaffordable program more unaffordable by removing all of the guarantees and assurances that had originally been provided to private insurers. The results? A 12% average increase in insurance premiums in 2017, followed by an 18% increase in premiums in 2018. (Motleyfool.com, August 20th, 2017).  With so much uncertainty around risk, and a limited pool of insurers who dare to participate in Obamacare, rates just keep surging upwards. All that chaos sure is expensive.

As rates have gone from sky high to extortionary, this has created ever growing pressure for state level governments to do something, anything, to relieve the pain. The Wall Street Journal summarizes:

Across the country, the details vary but the story is the same. The Trump administration has been rolling back sections of the Obama-era health law piece by piece. And states are filling the void, either to buttress or countermand changes from  Washington.

The result is that the country is increasingly returning to a pre-ACA landscape, where the coverage you get, especially for people without employer-provided insurance, is largely determined by where you live.

This is likely to be the driving dynamic of U.S. health care for years to come, as Republicans chip away at the ACA in the  aftermath of a failed attempt to repeal it outright, spurring GOP-led states to do the same, while Democrats battle to preserve it in places where they can. (WSJ, 7/18/18, Stephanie Armour)

Obamacare will crawl on in some form or another, but the dream of a nationwide system by which each American is entitled to healthcare as a basic human right is as out of fashion as polyester bell bottoms.

Show me the Money!  

Here at Sickeconomics.com, we aren’t trying to make the world perfect, or start a social movement, or even give you advice about how to stay healthy. We are trying to make sure your bank account stays healthy!  Given that narrow mission, what can we as investors learn from the 10 year odyssey to nowhere that has been healthcare reform in America?

Here are a few critical takeaways:

1)  Big publicly traded health insurers aren’t going anywhere.

As the reform process began in 2008, fear and panic shook insurance companies to the core. Would America emerge from a reform process with a European or Canadian style socialized system? If healthcare were an enshrined right of American citizens, would this mean a reduced, or even eliminated roll for private health insurers?  It was a reasonable question at the time.

In fact, health insurers have flourished throughout the reform process. From 2013 to 2017, Humana Inc grew annual profit from $2 Billion to $4 Billion. Aetna grew its revenue from $43 billion to $60 billion in the same time. United Health has grown its share price a stunning 578% since its lows in 2008!  

It’s now obvious that Health Insurers are here to stay, in some form or another. The impulse to make money in America just proved stronger than the desire for socialized medicine.

2)  The entire Obamacare debate is largely irrelevant to the demographics driving the healthcare boom.

10,000 people per day turn 65 and gain access to Medicare. Big Pharma survived eight years of deeply unfriendly Democratic rule without ever being forced to negotiate with Medicare. It’s very unlikely that the big business friendly GOP will force Big Pharma to negotiate with  Medicare. So, the gold rush continues.

As long as Medicare is legally forbidden from negotiating drug prices, then us pharmaceutical investors will have an extremely liquid and lucrative market to sell our innovations at high prices. As more and more baby boomers age into Medicare, the pressures to reform the health system for regular folks may actually be reduced, as many of those formerly “screwed” people will get Medicare. However our lucrative Medicare market will only grow and grow.

3) Life saving innovation remains the ultimate guarantor of high prices and stellar returns.

If we think of the last decade as one giant failed attempt at providing universal coverage, then the whole exercise has been a frustrating failure.  However, if we consider the scientific breakthroughs that have emerged from American science, even in the midst of the political chaos of Obamacare, then we understand why lawmakers have been reluctant to gut our current capitalistic leaning system.

In the past ten years, we have begun to harness the body’s own immune system to crush cancer. We have cured Hepatitis C. We have even pioneered prosthesis so powerful that legless amputees can now run marathons. As long as our American system continues to pump out groundbreaking treatments, then a certain number of voters, politicians, and administrators will resist a conversion to deep socialism.  We can’t provide cutting edge medicine to all Americans if we don’t have cutting edge medicine. And right now, capitalism just keeps curing people. Society will continue to pay for those cures.

The decade long saga of Obamacare has been filled with many heroes, villains and plot twists. The cliff hangers never end. But regardless of how you personally feel about healthcare as a universal right, the critical element is to understand where we have been, where we are, and where we are going. Armed with understanding you will be ready to choose the best investments for your hard earned capital. Understanding our healthcare system is the first step towards earning some sick profits!