A year and a day of high drama came to an end (or at least nearly an end) Sunday night when the House passed the Senate version of Health Care Reform along with a separate bill of fixes to some of the more obnoxious aspects of the Senate bill, such as the separate carve-outs for individual states (the so-called Louisiana Purchase and Cornhusker Kickback).
Since only 50 votes are needed to pass of the package of fixes (the reconciliation bill), barring a very anti-bill ruling from the Senate Parliamentarian (the non-partisan referee on the rules) it is highly likely that it will pass.
The underlying bill will be signed into law before the fixes can be voted on. The bill does many things, but it is not a government take-over of the health care system, any more than the new credit card reforms are a take over of the retail system (both involve regulation of how the goods and services are paid for). It will eventually lead to 31 million more people getting access to health care insurance. That is 31 million more customers for the health insurance industry, and 31 million more people for which prescriptions might be written.
There are a lot of pilot programs that have the potential to significantly reduce the growth in health care costs in the bill. However, most of the provisions of the bill do not go into effect until 2014, so we should not expect dramatic changes right away.
Among the more immediate changes, parents will be able to keep their kids on the family policy up to age 26. As a group, these are relatively low-cost people to insure, since they tend to be healthy; but individually, accidents do happen, and there are diseases that do strike 20-somethings. This is good news for these younger people, many of whom are having a hard time getting a job, and thus employer-based health care coverage.
A Glance at the Scorecard
There are some losers in the bill as well as winners. The Medicare Advantage program will be cut back, so some seniors will lose the extra benefits that those provide. The Medicare Advantage program costs the government substantially more per person than regular Medicare does. For the health insurance companies that relied heavily on this area, such as Humana (HUM) it is bad news.
Not all the health insurance companies were big players in that arena, though. For many, the prospect of more customers (and customers that are legally required to buy the product) will out weigh the loss of the Medicare Advantage subsidy program. On the other hand, all seniors will see the closing of the “donut hole” in their drug coverage.
Medicare taxes will for the first time include capital (or unearned) income for high-income people. This will effectively raise dividend and capital gains tax rates for high-income people, but only for high-income people. However, at the margin, this might be a negative for stocks overall. Still there is a big differential between capital income and income from paychecks, so I don’t think the effect will be all that significant.
The market is taking the news of passage in stride, and the health care sector is leading the market higher today. Some of the biggest gainers are the hospital companies like Tenet Health Care (THC) and the drug companies like Pfizer (PFE) and Merck (MRK), while the health insurance companies like Aetna (AET) and WellPoint (WLP) are mixed.
Like It or Not, History Is Made
This was a historic accomplishment, something that has eluded presidents of both parties for a century. It is not, however, a particularly radical program. In broad outline it is basically the same program that Mitt Romney pushed and passed in Massachusetts.
There is no public option, let alone Medicare for all. If there were Medicare for all, then the charge of a government takeover of the health insurance industry would be justified. But the bill does not do that. It eliminates the ability of insurance companies to discriminate based on pre-existing conditions, and prevents them from dropping coverage on people when they get sick.
If you are going to have those conditions in place, then you have to have everyone in the insurance pool. If you didn’t then lots of people — the healthiest — would decide it is not worth their while to get health insurance while they are healthy, and just decide to sign up after they scheduled the operation.
Only the sickest people, or the ones who considered themselves most likely to get sick would buy insurance. That would have quickly set off an insurance death spiral (one could argue that the death spiral was already underway in the individual market, which resulted in those big premium increases in California ). If everyone is going to be required to have health insurance, then you are going to have to subsidize those who cannot afford it.
Changes in Store?
Those who have employer-based coverage are not likely to see much of a change, certainly not right away, and even after the reforms are fully phased in by 2014. There will be a bit more security though, since if you lose your job, you will still be able to get insurance through the new exchanges — even if you have, or someone in your family has, a pre-existing condition. I don’t know how many people in the country would love to strike out on their own and form their own entrepreneurial company, but are afraid to leave the safety of a regular W-2 type job because they know that they and their family would have to go without health insurance, but it is definitely more than a handful.
The bill is far from perfect, but it is a major improvement over the status quo. It will also start to address the long-term structural budget deficit. The Congressional Budget Office (CBO) estimates that it will lower the cumulative deficit by $138 billion over the next decade, and by $1.2 trillion in the decade after that.
The path that we were on was not sustainable. The U.S. spends almost 17% of GDP on health care; most of our major competitors spend less than 10%, and have better overall public health statistics than we do. That has put the country at a serious long-term competitive disadvantage.
The health care reform package will start to cut away at that disadvantage, but the process will be very slow, especially considering that most of the key provisions don’t take effect until 2014. Still, a start is a start, and a journey of a 1000 miles must begin with a single step.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
More about Zacks Strategic Investor >>
Read the full analyst report on “HUM”
Read the full analyst report on “THC”
Read the full analyst report on “PFE”
Read the full analyst report on “MRK”
Read the full analyst report on “AET”
Read the full analyst report on “WLP”
Zacks Investment Research
