GDP Shocker: a Drop of 2.9%! Why Healthcare Spending Went Down

focus on something the two major political camps can agree on, even if it is something that will make both of them very angry. Based on the non-partisan, hard numbers, the big winners in Obamacare America are… drumroll please… the insurance companies!

Yes, those greedy, heartless, bureaucratic, and anti-competitive health-insurance companies that President Obama kinda sorta blamed for his mother’s death and Republicans blasted for seeking a bailout, and doctors accused of interfering with their medical judgment are all still alive and kicking in the 2014 world of the ACA.

Of course, insurance companies would simply argue that they’re playing by the rules and that they’re having a really difficult time making profits. Most insurance plans under Obamacare are going to rise significantly in cost later this year or next year.

Again, we find out something about incentives. It should be no surprise that a significant number of people with serious health issues who had no insurance have now signed up for the new healthcare programs. Lanhee Chen on the BloombergView site sees it this way:

At its base, the data show that people insured through the law’s exchanges have higher rates of serious medical conditions. Of the enrollees who have seen a doctor or other health-care provider in the first quarter of this year, 27 percent have significant medical problems, including diabetes, cancer, heart trouble and psychiatric conditions. That rate is substantially higher than that for patients in nonexchange market plans over the same period. And it’s more than double the rate of those who were able to hold onto their existing individual market insurance plans after President Barack Obama was forced to allow them to keep them.

This outcome should not surprise anyone. The law’s one-size-fits-all regulatory regime, which requires insurers to offer coverage to all comers and prohibits pricing of coverage based on an applicant’s health status, was bound to increase the number of relatively sicker people purchasing insurance through the exchanges. Moreover, Obama’s executive action, which effectively allowed many people who had individual market plans to remain in them through at least 2016, bifurcated the insurance markets such that healthier people remained in the plans they already had, while relatively sicker patients were left to acquire coverage through the Affordable Care Act’s exchanges.

Some of the bad risk in the exchanges has been offset by the enrollment of relatively healthy people who acquired coverage because of the law’s generous subsidies. Yet the numbers make clear that the exchanges remain a haven for those who may consume more medical services than others. (Bloomberg)

The ACA is going to be enormously contentious, as the rules are conflicting as to how insurers can make up their losses. President Obama would like to do it one way that he thinks is allowed within the rules, but there are many in Congress who think that’s a bailout for insurance companies and is against the rules. However it plays out, the ACA is going to cost someone, whether it’s taxpayers or those buying insurance, a great deal more money than initially budgeted. And the insurers will continue to be everybody’s favorite whipping boy.

As an aside, I find it an enormously intriguing idea that a healthcare hospital group is seriously thinking about setting up its own insurance company. You gotta love America, 100 different experiments going on at once. Some of them are sure to be game changers.

Why Healthcare Spending Went Down

My contacts in hospitals and elsewhere in the healthcare industry confirm that healthcare spending was down dramatically (though perhaps not quite the 6.4% in the data) in the first quarter. These same sources suggest that healthcare spending has rebounded during the second quarter. The first week of June was actually the best week ever for one major healthcare provider, but the overall trend is still for somewhat lower healthcare spending than last year.

So what happened in the first quarter? Evidently, several things. Number one, if you haven’t noticed, the deductibles for most of the ACA programs were quite high, often running as much as $5000 (which, for what it’s worth, is the deductible on my own insurance program – buying a lower deductible is significantly more expensive than simply paying the higher deductible. Go figure.)

The high deductibles were a shock to many people who were used to more-traditional health insurance. They postponed some services and started looking for transparency of pricing for the more expensive services. It is no longer uncommon for a patient to ask for a prescription for an MRI that they can take to another provider across the street who will charge them half of what the hospital provider will. If you’re paying it out of pocket, you begin to pay attention to what you’re paying. I think we should applaud that increase in transparency.

To those points, Dr. Toby Cosgrove, CEO of Cleveland Clinic, recently noted:

The entire healthcare system will have less money coming into it – we are taking costs out, so will all hospitals…. Obamacare is accelerating the process…. but this is due to transparency of costs and consumer[s] with high-deductible plans. This is a huge social experiment involving almost 18% of GDP and 100% of people… this will take four to five years to shake out.”

Further, there were a lot of people who didn’t get Obamacare insurance in the first few months and had to wait until March or April for their insurance to kick in. Other people have lost their insurance inexplicably because insurers are losing control of their internal management systems amid all the turmoil. People are postponing what they can until their insurance kicks in or gets reinstated. Apparently, some of this has gotten sorted out in the second quarter, and healthcare spending is on a trajectory to the “new normal,” which may eventually be about 20% less than what we spend today.

Muddle Through Economy Redux

I still think the next shoe to drop may be in the third and fourth quarter when hospitals begin to realize that they have significant cash-flow problems. Estimates are that we have about 10% too many hospitals, and the creative destruction of the new healthcare system is going to relieve us of that excess. Only the strong and well-managed will survive. This is of course going to create turmoil in the whole healthcare employment world, etc., etc.

Further, Obamacare is the largest middle-class tax increase in history. Yes, enrollees are getting healthcare for their additional expenditures, but you get extra government services for an increase in regular taxes. Call it a premium or call it a tax, it still amounts to a reduction in disposable income for individuals and families. Tax increases have a negative effect on the economy equal to roughly three times their actual amount. We have gone over that research numerous times.

And that negative effect doesn’t come all at once but is actually spread out over about three years, so the Obamacare taxes will still be creating a headwind to growth this year and next.

Further, although the president has postponed some of the “features” of the ACA, such as the business mandates, they are going to kick in eventually. We’ve already seen a rather large rise in temporary employment as employers shed full-time employees so they don’t have to cover their insurance. We’re going to see more such unintentional consequences, because that’s just where the incentives are. This will of course create even more headwinds for growth and productivity.

We would have to achieve 3% GDP growth in each of the next three quarters simply to average 2% for 2014. If you go back and look at the chart on US real GDP growth, you will notice that we haven’t grown that consistently since the recovery began in 2009. GDP growth has been rather noisy.

We are at best in a slow-growth Muddle Through economy. And the problem is that consumers are getting hammered from all directions: incomes are roughly flat and core expenses are rising.

Returning to the BLS GDP report, we see that inflation was 1.3% in the first quarter as measured by personal consumption expenditures (PCE). One of the “checks and balances” I like to look at when thinking about PCE is what the Dallas Federal Reserve calls the “trimmed mean PCE inflation rate.” Basically they take all the components of inflation in the PCE (which is the Fed’s preferred measure of inflation) and remove the “outliers” (trimming them off, as it were) to smooth out the noise. And sure enough, when you go back and look at the one-month PCE inflation rates for the first quarter, 1.3% seems to be close enough for government work. But then when you look at the chart of what’s happened since then, you see a rather sharp rise in PCE. If that inflation shows up in the BLS statistics next quarter, in their first measure of Q2 GDP (which we will see in late July), it could reduce overall real GDP growth by about 1%. Just saying.

Sidebar: It is all well and good for Janet Yellen to talk about how noisy inflation is and therefore ignore it, but in the things that you and I buy there are what economists call “inelastic” items, which means that we have to buy them no matter what the price – things like food and gas and healthcare. We can talk about whether the overall inflation rate for the entire economy is low, but for the mass of consumers in the middle, inflation is running considerably higher than 1.3%.

All this is to say that while I don’t think the US will fall into an “official recession” next quarter, we are extremely vulnerable to “exogenous shocks.” If either China or Europe has a serious problem, or the price of oil increases dramatically for this or that geopolitical reason, then, with the economy flying barely above stall speed, it wouldn’t take much to push us into a recession. We need to have our antennae up in a world where the biggest bull market seems to be in complacency.

Let’s wrap this session up with a cautionary note from my friend Rich Yamarone (aka Darth Vader)

According to the latest data from the Bureau of Economic Analysis, there has never been a time in history that year-over-year gross domestic income has been at its current pace (2.6 percent) without the U.S. economy ultimately falling into recession. That’s more than 50 years of history, which is about as good as one could ever hope for in an economic indicator.

Stay tuned.

The Frontiers of Life Extension Science

Since we are on the subject of healthcare, let me throw in an additional “bonus note” that my friend Pat Cox, who writes Transformational Technology Alert for Mauldin Economics, sent out to the readers of his free technology updates. Pat and I have regular discussions about the latest discoveries on the very cutting edge of technology and especially biotechnology. This is one of the things that keeps me optimistic, because I think that in 10 to 15 years technology will have totally transformed our healthcare delivery systems and significantly reduced the cost in the system, because we will be healthier and there will be cures for some of the most expensive diseases – we’ll actually be fighting back against the ravages of old age. At least that’s my hope as I approach my 65th birthday in a few months.

So let’s look at this fascinating and rather optimistic piece of research that Pat has come across. (More and more, biotechnology is coming to resemble the science fiction that I read.) By the way, if you like what you read, you can subscribe to get his regular updates for free at this link.

By Patrick Cox

In the article below, I discuss work on the frontiers of life-extension science, including the importance of growth differentiation factor 11 (GDF11), and my friendship with the brilliant writer Robert Heinlein.

There’s an obscure reference to me in Robert Heinlein’s (RAH) book To Sail Beyond the Sunset. It came about due to something I said to him in the home he built in Bonny Doon, California. RAH had asked me to write an article about him and his soon-to-be-published book, The Cat Who Walks Through Walls, for the Wall Street Journal.

So I chose the wine, and his wife Ginny cooked several meals that day as the conversation extended into the morning hours. Pixel, the cat that inspired the book title, was there as well. If you’re interested, I’m pretty sure the article I wrote can be found online if you search for my and his names.

The Cat Who Walks Through Walls is interesting for several reasons. One is that it may be viewed as a sequel to Heinlein’s The Moon Is a Harsh Mistress, though it also continues story lines found in The Number of the Beast. As such, one of the main characters in the book is Lazarus Long, who first appeared in Methuselah’s Children. As the name of that book implies, it involves extremely long-lived characters.

Heinlein gave two explanations for his characters’ longevity. One was selectively bred genetics. The other was periodic blood transfusions from very young donors.

Of course, we’re talking



About the Author

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