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The Economic Ramifications of the Affordable Care Act (Obamacare)

I do not believe that government intervention solves problems. Usually it just adds complexity, inefficiency, bureaucracy and increases costs. But today John Mauldin looks at the effects of Obamacare and the broken medical system that is the current state of affairs in the United States. ~Tim McMahon, editor.

By John Mauldin

 There is no doubt that the single most contentious topic I can bring up in a small group discussion or speech is the Affordable Care Act, otherwise known as Obamacare. You can feel the tension rise, as everyone has an opinion they want to express – most of them based essentially on preconceived philosophical positions, nearly all of which can be can seen through their own eyes as reasonable and consistent with civilized behavior. And the facts that can be trotted out to support their positions, pro and con, could fill up a document almost as long as the original 2,300+ page bill. I have avoided writing about the Affordable Care Act (ACA) for a variety of reasons but primarily because it is so difficult for us to get our heads around the economic implications.

Obamacare, Affordable Care ActToday I will try, though some of my readers may conclude that I have failed, to avoid coming to political conclusions about the ACA. Instead, I will aim to dwell simply on the economic ramifications of the implementation of the bill as it exists today. We are changing the plumbing on 17.9% of the US GDP in profound ways. Many, if not most, of the changes are absolutely necessary.

This letter has grown out of a rather lengthy, ongoing conversation I have had with my very close friend and personal doctor, Mike Roizen, about his perceptions of changes that his institution, the Cleveland Clinic, and others like it have to make concerning the delivery of medicine in the near future, and the Clinic’s expectations regarding the income they will receive for providing their services. The Cleveland Clinic is one of the largest and most respected hospital groups in the world (heck, Obama and Romney even cited it in their first debate as an institution providing great care very efficiently – the only institution so cited). The Clinic has 43,000 employees and a healthcare budget of over $6 billion. Looking at the future budget considerations of the Cleveland Clinic and similar institutions outlined below, there is both reason to be both optimistic and reason to be deeply concerned about the changes that are coming to US society in the immediate future.

The Road to a New Medical Order

We want to make something very clear right at the beginning. The US healthcare system as it stands is dysfunctional and can no longer continue as it currently operates. With or without Obamacare, profound change is required to deal with the dysfunctionality, and that change will happen, one way or another. Obamacare is simply one method for “encouraging” that necessary change.

The US currently spends 17.9% of its total GDP on health services . This figure is projected to rise in the near future by about another 1% due to the population’s aging and a further 3% due to the growing incidence of chronic illnesses. Anticipated increases would raise the nation’s healthcare costs to an unsustainable 22% of GDP, crowding out spending for other goods and services.

By contrast, the Netherlands spends 12% of its GDP on healthcare; Switzerland, Germany, France, and Canada about 11%; New Zealand 10%; Sweden 9.4%; and the United Kingdom 9.3%. As we travel through these countries, there is frequently a clear, if anecdotal, perception that people are healthier than in the US.

And the data backs up that perception. The US spends more money on healthcare because we are in fact far less healthy on average than the rest of the developed world. This difference is in large part due to poor lifestyle choices, but the good news is there are programs that have clearly and conclusively demonstrated that this difference is reversible. Changing behavior, while it will be difficult, can result in significant cost savings. In fact, changing behavior may allow us to spend more on education, social programs, and even defense.

Perhaps the best way to illustrate the problem is by means of a rough analogy. Let’s imagine an older, 50-story office building in a big city. New office buildings have grown up all around it, and  the business tenants are beginning to vacate. Because of the lower rents available to individuals, people have started renting space and converting it into apartments. But as is typical in office buildings, there are very few bathrooms and no showers to speak of, so residents rework the plumbing to provide bathroom and kitchen supply water and drains for their living spaces. On a small scale it works. One floor after another soon converts, until the building is now an apartment complex.

But at some point the plumbing becomes a huge problem. Not everybody can get enough water at the same time; sewage backs up on some floors at inconvenient moments; and if someone flushes a toilet, someone else gets scalded by hot water in the shower. Depending solely on where you live in the building, you may have access to much better service, while others get none. Because of the plumbing problems resulting from poor infrastructure, many of the apartments no longer receive adequate water or get it only on an emergency basis and at great expense and trouble.

The cost of maintaining the system becomes significant, so the residents get together and decide that the building must have a completely new plumbing system. No one wants to keep the old plumbing, but everyone has a different idea about how to go about creating a new system and what it should accomplish and how much it should cost and who will pay for it. Do you do one floor at a time? All the kitchen sinks at once? And can there be different sinks, or must one type fit all? Do you separate the water for the toilets from the potable water?

In a very contentious vote, the occupants of the building narrowly decide on a plan that requires all of the plumbing in the building to be changed simultaneously. Walls will be knocked out, and new pipes and equipment will be installed. The new system is going to be a marvel of technology and efficiency, but the process has the potential to be very messy, as the all-too-human occupants will be going about their day-to-day business in the midst of the construction. They will need fresh water and sewage disposal even as the plumbing is being reworked.

The United States, by analogy, is changing the plumbing of its healthcare system. In describing the plumbing changes, we will focus primarily in this letter on the financial aspects, and specifically on money flows from patients to providers and from providers to their staffs. How do we go about paying the doctors and nurses and covering other hospital costs? As it turns out, a more efficient system will mean that each apartment (hospital) will actually get less water (money) and will have to organize itself to deal with that.

Again, the fundamental changes that are necessary in the US healthcare system are going to happen with or without Obamacare. The system is simply dysfunctional. ACA is just accelerating the process. With a few noncontroversial (we hope) exceptions, we are not going to be making suggestions about what to do to improve the healthcare system or the new healthcare law. The following is simply an analysis of the economic and business challenges that will occur as a result of the Affordable Care Act as it is currently understood. This is the business reality that hospitals all over America face, not just the Cleveland Clinic.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

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© 2013 Mauldin Economics. All Rights Reserved. Reprinted by permission.
Thoughts from the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.

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  1. Michael Obrad says:

    Nothing is perfect and flaws can be found in just about anything. I believe, however, the facts to be as follows:
    1) A health care system at the root of which is corporate maximization of profit (including financial incentives for its executives for doing so) is fundamentally and inevitably engaged in a morally conflicted endeavor and will never produce “affordable” health care for our citizens. I don’t believe in the idea of an insurance industry that operates merely to insure the healthiest of the healthy and, to the extent required by the need to “maximize profitability”, operates by denying and capping coverage, preventive diagnostics, treatment and reimbursement – all of which incidentally costs us no less than 35 cents on the dollar. Competition has simply proven ineffective and our health care system — as ranked by the World Health Organization — is far from being #1 in the world.
    2) There are some myths that seemingly tend to persist for it is generally “easier to enjoy the comfort of opinion without the discomfort of thought” (JFK). Among these myths is the suggestion that bigger government is unconstitutional, unnecessary and invariably inefficient and that smaller government is somehow constitutionally mandated, preferable and more efficient. Neither of these positions is either realistic or supportable nor for that matter the real underlying issue. The fact is that population growth and expansion of economic activity inescapably drives the size of government in areas such as public health, safety and industries key to general welfare which are best left to the government for a number of reasons – only a few of which are cited below. Incidentally, undocumented immigrants will cost us as much if not less with “Obamacare” than without “Obamacare”.
    3) A number of studies including studies by the Congressional Business Office, for instance, indicate that Medicare administrative costs are substantially lower than those of private insurance. Economies of scale, dilution of risk and absence of an underlying drive to maximize profit can be insurmountable advantages that accrue to the benefit of the consumer/citizen. The latter is all I’m interested in when it comes to something as fundamental to life, liberty and the pursuit of happiness. Health care insurance – as we know it today – could disappear tomorrow and I really wouldn’t care for reasons noted here. It’s not a matter of ideology, it’s a matter of pragmatism and self interest — the cornerstone of capitalism.
    4) While budgetary deficits and borrowing by the government can dry up and disrupt capital markets in a “free market” economy (a myth and Libertarian speak for an economy totally devoid of any regulation), it is also inarguably true that there are some undertakings that by virtue of their scope and/or high risk (e.g. infrastructure, health care or basic research) do not lend themselves to pursuit by private enterprise and are best handled by government — certainly in the interest of the “greater good”.
    5) There is an undeniable tendency to compromise public interest by industries that include: health care, education and public transport. In many of these industries profit motive should not necessarily be the primary consideration nor is profit motive likely to improve standards. This is a demonstrable fact most notably in countries such as the UK. Thatcher’s privatization policies (1979-1990) succeeded in imposing a drastic and lasting shift in the balance of social and economic wealth between rich and poor. This shift decidedly proved to the detriment of the poor. More specifically, Thatcher’s privatization efforts produced a dismantling of industries, loss of jobs, a cut in social services and the wholesale undermining of communities. “Trickle Down” (aka “Voodoo”) economics does not work and there are more practical examples to that effect than to the contrary.
    6) It seems ludicrous that roughly 10 percent of the House of Representatives has brought our Constitutional processes to a standstill and has shut down the government. At the root of this problem is a parliamentary rule rather than any kind of a constitutional provision. More specifically, the Hastert rule or the “majority of a majority rule” has been used by Republicans since the 1990’s to obstruct minority party legislation. The idea that some 40 plus individuals can hold the Presidency, the Senate and House of Representatives hostage is absolutely insane!

    It’s high time we get a grip on reality and dispense with demagoguery.

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