The First Returns Are In – Mar. 29, 2010

Obamacare is just over a week old, and the first returns are not encouraging: wealth obliteration and job destruction.

Last week, in the very first days under the new regime, no fewer than five companies announced that they were taking charges in the hundreds of millions of dollars, capped by AT&T which took a clean $1 billion,  to account for the cost of Obamacare.  This particular charge – doubtless only the beginning – is to recognize how much these companies’ tax bills will go up because of a loss of a deduction on the drug benefits they provide their retirees.  That’s right, pensioners, who no longer provide a dime’s worth of value to companies like AT&T, John Deere, Caterpillar, and many others with heavily unionized workforces, will now cost them billions of dollars more to support in their retirement.
Now, if you were the CEO of a company in a highly competitive industry (which industry isn’t?) and your tax bill just went up by hundreds of millions if not billions of dollars, which of the following would you be likely to do?
a.  Cut back on hiring and business investment to maintain the profits of your company and your access to new capital
b.  Keep the same level of hiring and business investment, figuring your investors and financers will accept lower returns as the cost of your company being a good corporate citizen and paying your “fair” share for national health coverage (while at the same time hoping those investors and financers will not dump your company’s securities for better returns from other, perhaps non-US, companies).
c.  Actually increase your hiring and business investment because higher taxes don’t matter to the financial success of your business
Three points if you guess A.
Next item of evidence: Also in Week One of the Age of Obamacare, Medtronic, one of our great innovators, has announced that the new law will force them to cut 1,000 jobs.  Medtronic is one of the companies that makes the highly technological medical devices which now face an arbitrary surcharge to help pay for the bill.  Again – costs go up, jobs go down.  How many more medical device makers will respond the same way?  Bear in mind, these are not the dinosaur companies that make old industrial things that will soon be obsolete.  These are the cutting edge of science-meets-commerce.  Well, consider that edge a bit blunted.
The Obama folks are fond of saying that when people start to see the benefits that have been mandated by Obamacare, they will come around to support the law.  Of course, the first of the benefits are the ones the government can produce without spending anything – by forcing insurance companies to change their policies.  These are very popular measures like ending the practice of denial of coverage for pre-existing conditions and annual or lifetime caps on payouts.  It does not take more than a nanosecond’s reflection to realize that every one of these forced changes will make insurance companies’ costs skyrocket.  “Good!” many will say, “Make them pay for their years of abuses!”  Except the insurance companies won’t pay – you will. You, and everyone else that pays insurance premiums.  Insurance companies, not the most profitable in the world to begin with, despite the conventional wisdom of the Democratic Party, will react the same way any private, profit-oriented company would to a sudden deleterious change to its business model: seek to recover higher costs through higher revenues.
And of course, the knock-on effects are obvious.  More expensive insurance leads to more companies canceling their employee programs, or charging employees more.  Those on their own have to pay up more.  In short, the same problem we have now, except on steroids.
Now, the grand bargain was supposed to be that insurance companies would swallow these added costs in exchange for a large and profitable pool of new customers paying premiums but not actually calling for treatment: the young and healthy.  The problem is, simple personal financial logic runs directly opposite to this happy ending.  Suppose you are a 25 year old young professional just getting started, paying off student loans, having trouble making ends meet.  You have a choice: be a good citizen like Mr. Obama wants you to and pay $2,000 – 5,000 for an insurance policy you wouldn’t otherwise buy, or protect your cash flow and (reluctantly) pay the fine.  In the first year, the fine is $95, rising to a prodigious $795 by 2014.  What would your choice be?  Especially since, under the no-previous-condition rule, if you develop Type II diabetes, you can buy a policy on the way home from the diagnosis, and for the same price as Michael Phelps.  Even when the fines get fully loaded, they will not equalize the cost of the insurance you have to buy to avoid the fine.  So you don’t do it – you and millions of other young and healthy’s.  Too bad, insurance company: your business model just went in the crapper.
The government will of course respond with more regulation – they will force insurance companies to limit their premium increases (although the mechanism to enforce that will be some years before it’s functional).  But again, will insurance companies stick out their collective chins and patiently wait for the haymaker?  Of course not – they will either find some way to improve the bottom line or they will start to return capital to their investors who can put it to work in a more productive way.  Ultimately they will leave the business.  Voila – the single payer system that Obama wanted all along: as the only one left standing, the government becomes insurer of first as well as last resort.  And you thought “Socialization of health care” was a Republican scare tactic.  It is in fact inexorable, under the logic of the current legislation.
Before we leave this unhappy subject, let’s stop to shed a tear for the small businessman.  The one to whom Obama devotes paeans of admiration and support, and the one he undercuts with every turn of real policy.  As insurance premiums go up and up, as they inevitably will, the businessman gets squeezed more and more, until he can afford it no more, and has to terminate the program.  Competitive pressures argue that he will devote the money erstwhile spent on employee health care to higher salaries, so his folks are more or less even (except they have to buy their own policies, and the subsidies and “exchanges” won’t be operative until the middle of the decade).  But the businessman finds himself facing a fine of $2,000 – $10,000 per employee for having the effrontery of trying to remain profitable.  It is probably still a good deal, depending on circumstances, except that his tax bill will just have skyrocketed (see AT&T, above), meaning  he will start with the pink slips.  Not only that, but to the extent that this businessman has the good fortune of being “wealthy” – meaning his business, the income of which is reported as personal income, nets over $250,000 before taxes (believe me, that is not a big business) – he gets to pay a marginal tax rate of as high as SIXTY PERCENT, depending on what state taxes he gets socked with.  Weren’t we just saying that higher taxes and higher costs lead to layoffs?  AT&T, Medtronic, insurance companies, millions of small businesses…
On top of a severe recession, from which we are only now beginning to crawl free, this legislation will cut through employment like a scythe.
Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s