Prepare for the Obamacare Blues

03/05/2013 7:00 am EST

Focus: HEALTHCARE

John Mauldin

Chairman, Mauldin Economics

There’s no easy solution to health-care changes, and the plan the government has come up with will probably leave more people further away from proper care than before, writes John Mauldin in Thoughts from the Frontline.

A recent issue of Time magazine included the cover story, "Bitter Pill: Why Medical Bills Are Killing Us," by Steven Brill. He does a marvelous job of giving us the picture on just how broken the American health-care system is in terms of costs.

For one, the billing system is out of control: $1.50 for a 1.5-cent acetaminophen pill (Tylenol). Routine products like gauze are marked up ten times. Billing for a lamp shade? Double and triple billing for routine items that no insurance company or government agency will pay for, but that you will be billed for if you are on your own? You have read the stories or heard them from friends, but Brill makes it real.

I could quote at length from the article, but let me just excerpt these items:

"In the US, people spend almost 20% of gross domestic product on health care, compared with about half that in most developed countries. Yet in every measurable way, the results our health-care system produces are no better and often worse than the outcomes in those countries.

"According to the McKinsey & Co. consulting firm, we spend more on health care than the next ten biggest spenders combined: Japan, Germany, France, China, the UK, Italy, Canada, Brazil, Spain, and Australia.

"We may be shocked at the $60 billion price tag for cleaning up after Hurricane Sandy. We spent almost that much last week on health care. We spend more every year on artificial knees and hips than what Hollywood collects at the box office. We spend two or three times that much on durable medical devices like canes and wheelchairs, in part because a heavily lobbied Congress forces Medicare to pay 25% to 75% more for this equipment than it would cost at Walmart.

"According to the Center for Responsive Politics, the pharmaceutical and health-care-product industries, combined with organizations representing doctors, hospitals, nursing homes, health services, and HMOs, have spent $5.36 billion since 1998 on lobbying in Washington. That dwarfs the $1.53 billion spent by the defense and aerospace industries and the $1.3 billion spent by oil and gas interests over the same period.

"The big picture looks like this: We’re likely to spend $2.8 trillion this year on health care. That is likely to be $750 billion, or 27%, more than we would spend if we spent the same per capita as other developed countries, even after adjusting for the relatively high per capita income in the US vs. those other countries. Of the total, $2.8 trillion that will be spent on healthcare, about $800 billion will be paid by the federal government through Medicare and Medicaid."

Let’s be clear: the US has the best medical care on the planet. Expensive, yes, but our best is truly the best.

Now, we are getting ready to dramatically change how we pay for 20% of our economy. I fear Obamacare is going to be a bureaucratic nightmare, but let me quickly state that any necessary reform is going to be disruptive and expensive.

Having to cover pre-existing conditions is going to raise the costs of private insurers. Under Obamacare, businesses may have sufficient incentive to drop insurance coverage and pay a $2,000-per-employee penalty.

Insurance companies are going to lose business customers as they raise prices. If your employees can get government health care, then from a financial perspective you are better off paying the penalty. When insurance costs rise, the pressure to drop coverage will rise as well, which will mean those still covered have to pay more. It will be an ugly trap until things get sorted out.

After President Lyndon B. Johnson signed Medicare into law in 1965, the House Ways and Means Committee predicted the program would cost $12 billion in 1990. Its actual cost by then was $110 billion. It is likely to be nearly $600 billion this year.

Obamacare may have brought forward the crisis that we all knew was coming. Medicare and Medicaid costs could quickly rise by 5% to 10%, which would blow a hole a mile deep in our national budget.

I don’t have an answer, or at least not an easy one. Should we treat health care as a utility? That is anathema to my free-market sensibilities. Should people be without basic health care? That is also not acceptable. Can we afford universal health care? Not as costs are currently structured.

Can we change? Sure, we will have to. But I expect a bumpy ride.

Read the rest of this Thoughts from the Frontline here...

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