Monday, March 22, 2010 13 comments ++[ CLICK TO COMMENT ]++

America passes sweeping healthcare reform



Today is a historic day in America. After many years of putting the problem aside, not to mention aborted attempts by previous administrations, the Obama administration has staked its legacy on reforing the US healthcare system. In what will go down in history as one of the largest government restructuring of an industry, the US government is finally attempting to tackle the spiralling healthcare cost problem. It is a huge gamble for Barack Obama—I would put the risk similar to that of George Bush's gamble on the Invasion of Iraq—and the pay-off can be an absolute disaster; or it can be one of the most important things the US government has carried out in several decades.

I am not a legal expert and haven't followed this issue closely but there is always a possibility of a future government undoing the proposed changes. However, given the highly-complex reform and the difficulty in getting many to agree on any point, I think the current law will largely remain for a long time—probably for my life.


America badly needed to reform its healthcare system. I don't know if I pointed it out before but worker wages have essentially been flat for more than a decade. However, compensation for workers have actually gone up in that time period. What has happened is that healthcare insurance costs sucked up nearly all the wage growth. The lack of socialized healthcare or any comprehensive system also creates a huge social cost. There are many stories of middle-class families ending up bankrupt because they lost their jobs and ran into health problems (for those not familiar, employers generally pay the healthcare insurance in America; furthermore, if you are poor or old, there is government healthcare assistance but if you are working class or middle class, you are on your own and pretty much have to spend all your savings.) The skyrocketing healthcare costs have also made many American industries uncompetitive (it's hard to compete when governments pay for healthcare in other countries while American corporations bear the full brunt of the costs in America—this actually wouldn't have been so bad if the private sector in America didn't end up paying more than the public sector in other countries.)

The following chart from the BBC shows how costs have skyrocketed in the last decade and a half:



Healthcare spending, which was under a trillion in the early 90's, has skyrocketed well past the $2 trillion mark. The growth is far above GDP growth, income growth, or any other relevant economic statistic. Most of the increase has been in private healthcare spending and this goes to show how the current system hasn't been very effective.

It is not clear to me how much of this explosion in health costs is due to the ageing population. I would expect healthcare costs to rise as the population ages. Nevertheless, my guess is that most of the increase is due to inefficient private sector insurance schemes rather than the ageing population (the ageing poulation is a very slow trend and likely won't cause a near-exponential cost increase like here.)

The following charts, also from the BBC story, illustrates how inefficient USA is compared to some developed countries:


USA spends way more than countries like France or Britain. But I will note that services in USA are probably better for those with health coverage. If you include the total population, including 15%+ who don't have any health coverage (and hence will be a health liability for the country in the future,) the numbers don't favour USA at all.


Barack Obama certainly made a gutsy move here with his healthcare reform. It was a key part of his presidential campaign and he is essentially betting the near-term future of the Democratic Party on this policy. It's a bold move, far beyond anything attempted by any other administrations in recent memory, and it remains to be seen if it was the right decision. Like long-term investing in stocks, the consequences won't be known for many years. Your kids are more likely to benefit or lose from what happened today than you are...

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13 Response to America passes sweeping healthcare reform

MrParkerBohn
March 23, 2010 at 9:56 AM

Yay!!!!

As a US liberal, I am pleased with social progress.

The bill represents a much greater focus of resources on health care in the US, especially on health care for poorer people, who have often had no access to health care here.  I personally know several people with no health insurance, and out of pocket expenses are insane (A friend of mine went to the ER because of a problem with her eye, and the doctor looked at her for 5 minutes, told her not to worry it would go away, and then she was billed $400).

Part of the problem is there is no way to incentivize cost savings.  Its like taking your car to a mechanic, and just telling him to bill you whatever he wants afterwards.  For instance, a few years ago, I had to get stitches because of a cut on my hand, which still cost me a few hundred dollars even with the insurance I have.  One of the things they charged me for was an entire roll of bandages, when they used perhaps 5% of a roll at most.  I actually looked at the itemized bill and insisted that they give me the rest of the roll of bandages to take home :P.  Unfortunately I get the impression that this kind of overcharging is routine.

MrParkerBohn
March 23, 2010 at 11:17 AM

In a broader context, I see this reform as part of the endless debate over the division of wealth and resources.

The conservatives represent the interests of those who benefit from a large or growing division between rich and poor.  For instance, George W Bush's tax cuts for wealthy Americans, capital gains tax cuts, his attempts to cut the estate tax to zero, and to privatize social security.

The liberals represent those who want to flatten the division between rich and poor, even if this means greater government involvement in providing services, regulation, or a more progressive tax scale.  For instance, Obama's proposed tax hike on the wealthiest 2% of Americans, support for raising the minimum wage, support of amnesty for illegal immigrants, and of course this health care bill.

Overall, conservatives in the US have been winning this fight for decades, and thus the division between rich and poor is very large in the US, especially when compared to other wealthy nations like Canada, Japan, and European nations.

This health care bill is a rare victory for liberals.

Sivaram
March 23, 2010 at 7:15 PM

The healthcare reform probably isn't quite what most on the left wanted but given the difficulty of getting it past the Senate, I think Obama and other senior leaders of the Democrats (Nancy Pelosi, Harry Reid, etc) did the best they could.

This is definitely a big gamble, especially when America is facing fiscal debt problems, but, often, the most revolutionary actions happen during the worst times. Half of what FDR did, like the creation of the SEC, would have been considered a waste in the 1930's but it was a huge benefit in the long run. Similarly, this healthcare policy is likely to have a bigger impact on America than almost anything that was done in the past 20 years.

If USA can shave 2% off the cost (% of GDP) of healthcare, it would be huge.

Sivaram
March 23, 2010 at 7:24 PM

As for the discrepancy in wealth, it's an issue that could turn serious. The thing though is that America has always had high discrepancy in wealth. There are cities in USA where you could be standing in a wealthy neighbourhood and then walk a few minutes and end up in a drastically different poor neighbourhood. In Toronto (or other parts of Canada), you would be hard-pressed to notice much of a difference between the poor and wealthy neighbourhoods. Certainly the income and health levels of the poor are not that drastically different from the average person.

Because America is more capitalistic, I expect it to have a greater discrepancy in wealth than more socialistic countries (like Canada or most of Europe.) However, as you allude to, the gap has grown quite a bit in the last decade. The situation is really bad if you look at net worth. Many of the heavily indebted are the working class and poor. America is somewhat going to have to face the inequality and the consumer debt problem.

P. W. Dunn
March 24, 2010 at 11:06 AM

Sivram:  Perhaps you know that I am very conservative in my orientation. I am thus extremely skeptical about Obamacare.  First, it is being forced on a majority who do not want it.  That does not bode well for the future.  But many also believe that it is a doubling down of the problem rather than a fix. This is to say that it doesn't solve the problem of healthcare in the US, as you have shown, but just doubles down on all the aspects that make healthcare so bad.  But my deepest scepticism of all is based upon its centralization of power:  there is a provision now to have 16,500 IRS agents to enforce the tax provisions of the bill.  They know that it is going to require the force of law and threat of violence and prison to enforce this legislation.

I think that many Canadians are saying, Finally, Americans are going to get their health care like us.  But Canadian healthcare with all its benefits and faults is not at all like what they've just passed in the US.  Canadian healthcare is decentralized and run by provinces under federal guidelines.  For me it is bad enough dealing with OHIP here in Ontario.  But imagine now that you have to deal with a bureaucracy in Washington DC for your healthcare, or if you are a physician, dealing with DC to get paid (many doctors are already refusing Medicare patients because the US Federal Government is the worst payer for them to deal with).  So it isn't going to solve anything, it will just make a lot of citizens very angry.  I don't know where this is going to end up, but I just hope it will not lead to chaos because the US Federal Government has finally tested the patience of the people and the states beyond what they will accept--it may be the last straw violation of the 10th amendment.  Already several states have filed law suits claiming that the legislation is a violation of state's rights.  In the past, states have allowed themselves to be bribed into letting the Federal government violate their rights--everything not explicitly given to the US government is the exclusive right of the states and the people.  The US Federal government has no explicit purview over healthcare and thus Obamacare is a clear violation of the 10th Amendment.

I appreciate your honest instincts--probably due to your savvy as investment blogger--that right now might not be the best time, fiscally, to have tried to pass such a sweeping measure.   You call it a huge gamble and you are absolutely correct. You mention FDR, and his measures, but there are economists (including a friend of mine) and historians who say that FDR only perpetuated the depression with his socialist New Deal.  Finally, I'm not sure that the US is more capitalist than Canada anymore.  I'm an American, and I've decided to become a Canadian and renounce my US citizenship because I need to get the IRS off my back.

Sivaram Velauthapillai
March 25, 2010 at 11:23 AM

The IRS is powerful and draconian at times, but I think you ran off to the wrong country  ;)  In Canada, the government doesn't come after you for taxes; it just charges you much higher taxes :-D  You probably pay more taxes in Canada than what anything the IRS would have made you do in USA.


Conservatives such as yourself probably will never agree to any universal healthcare system--too socialist for your taste I imagine--but you have to admit that the US system is very inefficient. As far as I could tell, conservatives haven't come up with any meaningful solution to the spiralling costs in America. The George Bush administration tried a big prescription drug strategy (or something like that) and it seemed to have done little.

Every person that you don't take care of (from a health point of view) is going to be a huge burden in the future--just like how every uneducated person will be long-term burden. There is no way around this problem. Burying your head in the sand and hoping the millions that aren't taken care of don't cause problems in the future is asking for trouble.


I don't know about state rights but I wouldn't be surprised if the federal government law is accepted by the courts. The federal government can probably pass something that doesn't force the states to implement. I'm not a lawyer and not familiar with USA but I don't see why the federal government can's reimburse or subsidize states that implement the policy, while leaving others alone. Those that don't want to, should be allowed to be left on their. A national plan requires economies of scale but as long key states such as California and New York accept the plan (they are liberal and will likely be ok) the cost savings will still be there.

P. W. Dunn
March 25, 2010 at 11:56 AM

There are some good ideas coming from conservatives that make sense:  (1) health savings accounts; (2) tax breaks for health insurance to individuals, not just companies, etc.  They make more sense than the monstrosity of Obamacare bill that is misnamed as Obamacare because he didn't have much to do with writing it.  It is too complicated, too draconian; heard a lady on the radio yesterday who is an employee of an insurance company who says that private health insurance will last under this legislation perhaps 1-2 years before going broke; the not-so hidden agenda is the desire for a single-payer system (i.e., government), despite Obama's continued mantra that if you like your health insurance you can keep it.  If that's so, then why is he trying to break the back of private insurance with legislation intended to make them go broke. 

My family goes back at least four generations Republican, back to the Civil War.  We still believe strongly in self-reliance.

As for states rights, I'm not sure what will happen.  Apparently a lot of states are now filing lawsuits. But the question of state rights hasn't yet been this testy since, I think, the war against Britain and the formation of the USA.  The states needed each other to fight Britain but they didn't really trust each nor did they want another power to take the place of King George; hence the 10th amendment.  Not being an historian though, I can't be sure, but I don't think the US has ever had a Congress and president that had so little regard for the 10th Amendment.

As for chosing between Canada and US, I'm here because I married a Canadian.  Then, her family has a company, so she stayed and worked for them while did charitable, volunteer work, and also worked for the company part time.  So I've been here since 1994.  But what I can't take any more, especially as my net worth increases, is filing in two countries.  The other thing is that the IRS could throw me in jail anytime they want for no reason other than I've failed to comply with some aspect of the US tax code.  This puts me into a situation of double jeopardy, which I can no longer abide.  It is very rare that US citizens renounce their citizenship, but it is most often caused by a desire to get the IRS off their backs.

I've written about it here: http://righteousinvestor.wordpress.com/2010/02/25/the-new-berlin-wall-heroes-earnings-assistance-and-relief-tax-act-2008/

blog on!

Sivaram Velauthapillai
March 25, 2010 at 11:57 AM

I think FDR is a controversial case and conservatives probably won't agree with my view. Like most of the left, I think FDR accomplished a lot. Even if we limit our views to economics, I think criticism seems misplaced. FDR prevented the situation from getting out of control. All you need to do is to look at the GDP chart from that period (refer to attached image or following URL).

The US economy basically started recovering during FDR's tenure. Some may argue that the economy "would have recovered anyway," or that FDR "made it worse," but the reality is anything but. The economy did start to recover in late 1932 but I think FDR played a big role in what kept it going.

Many economists on the right don't buy any of this because, well, it doesn't fit into their theories. For instance, printing money like crazy (accomplished by removing the gold standard) or hiring workers to build roads for the sake of getting people to work actually worked but it doesn't fit theory.

Sivaram Velauthapillai
March 25, 2010 at 1:55 PM

The few states complaining now is nothing like what happened in the last century in America. I am pretty sure that some states had even greater problem during the Civil Rights era, when the federal government pursued equality against some state desires. This healthcare problem will look minor compared to state rights issues of the past.

The problem with healthcare is that the consumer can't make a decision properly. The vast majority of people, including me, have no clue what medical procedures/drugs/etc are needed, what may be cheaper/better, and so on. To make matters worse, my view, a controversial one, is that the medical profession, particularly doctors, get away with charging "too much." The fact that the medical industry is a self-regulated monopoly (i.e. they only graduate a certain number of medical students; some basic tasks aren't even allowed to be carried out by nurses; etc) is an indication of that.

A free market, with little regulation, works when the buyer and seller have knowledge. I don't feel the medical industry is like that. This is one reason governments--even inefficient ones--appear to provide health services at a lower cost. For instance, France is considered by many to be inefficient, bureaucratic, and costly, yet its healthcare costs (refer to chart in the blog post or elsewhere) are not that much worse than Britain.

One thing that will happen will government-influenced healthcare is that innovation may slow somewhat. But I would argue that it is a small price to pay.

One of the bizarre things, in my view, is why the insurers in America, who are private and should be more efficient than the government, appear to be mispricing healthcare. Maybe they don't have the clout of large governments but whatever it is, their performance hasn't been very good.

Sivaram Velauthapillai
March 25, 2010 at 1:55 PM

CONTINUED...

As for your suggestions...

I think the health savings account idea would help but wouldn't really solve the key problems. First of all, savings accounts haven't worked as well as many proponents claim. For instance, the tax-shielded retirement acccounts (like RRSP in Canada or 401K in USA) haven't worked as they were initially envisioned. If my understanding is correct, those plans were enacted to get people to save for retirement. Yet, after 30+ years, what we see is that people haven't save much, let alone enough to retire. Many studies appear to show that most Canadians and Americans haven't saved enough for retirement.

In my view, those tax-shields have simply benefitted the upper classes (say, upper middle class and higher.) Those citizens are precisely the ones that don't need to be induced to save (they usually have "excess" cash flow and automatically save anyway.) The ones that really need to save, the lower classes as well as the vulnerable ones (say single parents,) are the ones that haven't saved enough. I know some people who don't even contribute to their RRSP plans (and they don't have employer pensions either.) It wouldn't surprise me if the bottom 30% of the Canadian population have RRSP contribution room of $500 billion or more.

Many would looke at RRSPs or 401Ks and consider it a success. But the reality is, if you strictly look at them as something that was to be used for retirement savings, the plans haven't done their job. Those plans have ended up simply as a tax-lowering policy for those who don't need to be told to save.

I think a health savings plan will probably end up with similar results. Namely, those who can afford to pay a lot for healthcare (the upper income citizens) will take full advantage of it. While those who really need help with healthcare (hte lower income ones) may not save enough.

On top of all this, spiralling costs may still outstrip the amount saved by a typical person. Remember, one of the core problems is the seemingly out-of-control increase in medical expenses.


As for your second suggestion of tax break for health insurance, again, I'm not sure it will lower costs. It will improve affordability, which is the other core problem, but it won't help with spiralling costs, the second problem.


I think most on the right will have a hard time swallowing this but I think you need government intervention in this market. Just like how you need a strong electricity regulator to influence the electricity market, a natural monopoly, I htink some intervention is required here. Perhaps one day medical procedures and drugs will become a commodity market, or one that consumers understand reasonably well; but until then, it's hard to see the status quo succeeding.

Sivaram Velauthapillai
March 25, 2010 at 2:14 PM

Your site keeps crashing...could be my browser :(  ... anyway, I think you should seriously re-consider renouncing your citizenship. If you have kids, being a dual-citizen is likely to be benefitial.

In any case, I think you are thinking too much about money (no offense.) I guess this is where liberals and conservatives often part, but paying taxes is fine with me. In fact, the more taxes I pay, the better! It means I'm making more money and the money is going to society (although I would prefer to spend it on my own.)

I feel like you are making mistake that, I think it was, Charlie Munger once said of investments. I'm paraphrasing but he basically said don't look for companies that avoid paying taxes. Sure, companies should minimize taxes but I would rather they spend time trying to increase revenue rather than trying to avoid taxes.

Same thing here...but for the individual... Barring a scenario where there is some issue with estate taxes or some one-time issues, I see no reason for giving up US citizenship.

Lastly, who knows if Canada has similar laws... or what if Canada has some law allowing you to credit taxes paid to USA? I don't know anything about taxes but you may wnat to investigate.

P. W. Dunn
March 26, 2010 at 10:23 AM

Thanks for this advice.  I will keep it in mind.  But the problem is the unnecessary filing of tax returns and other more unsettling types of declarations to the US government that make it increasingly more difficult for the high net-worth individual living abroad to desire to maintain the relationship.  It's not that I am too worried about money--it is the anal retentive IRS--I am not the one who is requiring the trivial tax returns--I consider that trivial tax returns are returns that the IRS requires that will never result in any revenue, because as you have noted well, there are foreign tax credits, as well as a $70,000 foreign earned tax exemption.  I've filed for the last few years, or so, returns, that often take hours of work, and not one of them ever resulted in even one red cent of revenue for the IRS--trivial, nitpicky returns (the threshold is $2000 income for the married person filing a separate return!).  Now, as I blogged, the high net worth person can't leave because they become a covered-expatriate, which means that they have to pay 45% tax on capital gains above $600K on a mark to market basis.  Well, all I can say is that I better leave my citizenship behind before my net worth is over 2 million, and at my current rate of success as an investor, and the current devaluation of the loonie vis-a-vis the dollar, that probably won't be very long.  Indeed, I hope hyperinflation doesn't set in because if it does, I will have to become a stateless person because it could happen before the Canadian government finishes the paperwork for my citizenship.

Canada is a wonderful country, as is the US.  I would be proud to be mono-citizen of either country. But I am oppressed as an American living in Canada, and I need to escape this tyranny before it is too late.  It is the oppression of paperwork without purpose under threat of fines and imprisonment if I don't do it.

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