The Looming ObamaCare Market Crash

ghIt is routinely said that the Affordable Care Act, commonly known as ObamaCare, is a takeover of one sixth of the U.S. economy.  That’s true enough, but those who think that ObamaCare will only affect one sixth of the economy are in for a rude awakening.

By this, we are not talking about the various social regulations on smoking, drinking, trans-fats or sweets that may come along with the new health care regime — though that may well happen.

What no one is yet talking about is the fact that the insurance industry is a major player in the capitalization markets in the United States; and ObamaCare significantly changes the way health care is insured in this country.

What happens if trillions of dollars of private investment capital suddenly disappears from banks, lending institutions and investment markets in this already fragile economy?

The Great Depression was a result of deflationary measures undertaken by both Hoover and Roosevelt after the stock market bubble burst; followed by FDR’s war on business.  Obama has inflated the market following the crash of ’08, has instituted a hostile regulations regime on U.S. businesses—and ObamaCare is a huge disincentive to hiring.

More people have lost insurance than have gained it—and the incentives in the law make it likely that will continue, no matter what “fixes” come to the website.

So far, ObamaCare has been the mother of myriad unintended consequences—and it’s still not really in effect yet.

There are many ways in which ObamaCare will impact the economy.  Some of these are easy to see; some are relatively hidden.

Trillions to Disappear from Capital Markets

At their very basic, level insurance companies are giant piles of money that go in different directions at, sometimes, high rates of speed.

When a premium is sent to the company some of that premium is held in what is called reserve.  Insurance companies, in an attempt to lower costs, take some of that reserve and invest it profitably.

The Left hates insurance companies as some great profitable exploiters of the masses.  But because of those investments, some insurance companies return $1.02 in benefits for every $1.00 in premiums.

Now, you may ask, how much money is held in reserve for each insured person?  Well, the answer is: It depends.  It depends on the company, it depends on the policy…in short…it depends.

Let’s do some simple math.  Forecasters say that 50-100 million people are about to lose their insurance — and according to some insurance company executives we spoke to on condition of anonymity that number is very real and perhaps underestimated.  As a result of this loss how much investible capital will no longer be in these reserve accounts?

Let’s look at the range of possibilities.  Let us also assume a $7,500 reserve is held for each customer.  That means something in the area of $375,000,000,000 is no longer able to be invested into the economy.  On the high end of the range being discussed it is $750 billion.

This is, according to some of the same insurance execs we talked to, a very low estimate.  It could be far, far worse.

That is money that would come out of reserve, as those patients no longer hold policies.  That is $750 billion -$2 trillion that would disappear from insurance industry investment in capital markets in the next year or so.

Proponents of the law who read this will probably counter, “Well, sure, but people are going to buy new policies, so there will just be a shift in who is investing the reserve.”

So far that isn’t the case.  People are losing coverage faster than they are buying new coverage.

Thanks to the outlawing of pre-existing condition exclusions, people can now wait until they are sick to purchase insurance.  In fact, many of the people purchasing through the exchange have huge medical issues.  The young and healthy are not showing up.

In short, to expect healthy people to flock to purchase insurance under these conditions rather than pay the much cheaper penalty flies in the face of human nature.  In economics, incentives always win out.

For five years the Federal Reserve, through quantitative easing, has printed money to prop up the stock market while at the same time artificially holding interest rates low.  This cannot go on forever—and the longer it goes, the harder the eventual fall– but every time the Fed even hints at slowing down the presses, the market tanks.

If trillions in real investment leaves the market, are we really going to just fill that gap with more paper money?

Billions Less Consumer Spending

Furthermore, there are now estimates saying that 1/3 of people will see premium increases due to this law.

The number of people with no money going into savings (if they have savings at all) has been shrinking.  According to Money Magazine in June of 2013 that number was 76%.  That means 76% of Americans live paycheck to paycheck.

Let’s make another estimate based on the assumption that the average policy increase will be about $150.  So in that same accounting used above we would have 76% of those who lost coverage having to find somewhere between $5.7-$11.4 billion.

These numbers again represent a low-end number.  Likely this is higher.  The other problem is that this number is just the start.  Once this begins those businesses who would have had the additional patronage have less money to bring in new employees, and may in fact cut back on the hours those employees in their employ work.  These employees in turn have lower incomes and the downward spiral begins.

Also, the 1/3 estimate is only for starters.  Once the pool is filled with mainly those with pre-existing conditions, premiums will skyrocket.  Insurance companies are no longer merely spreading risk, but taking on the certainty of large payouts.

This, Ezekiel Emmanuel, is what you call a “death spiral.”

Even in the unlikely event Republicans can gain enough seats to repeal ObamaCare with veto-proof majorities after the 2014 election, the spiral will have already begun.

And if you think Ben Bernake was a Keynesian nightmare, wait until we get Obama’s Fed Chair nominee, Janet Yellin.  Her job will be to print enough money to inflate the can down the road a ways.

The economic chickens of ObamaCare will come home to roost.  Sooner or later.  Those William Devane gold commercials just may have a point…

Freedom Center pamphlets now available on Kindle: Click here.  

  • cheechakos

    A few more numbers;
    Population 320 million
    People with employee sponsored healthcare plans – 49%
    Individual market 5%
    uninsured – 15%

    58 million people on Medicaid
    49 million on Medicare

    190,000,000 completed eligibility process
    of those 805,000 are medicaid eligible

    More than one million low-income adults currently in the individual market will be newly eligible for Medicaid in 2014 because they live in a state that has decided to expand the program.

    • Petertimber

      What about the illegal aliens, 47% on entitlements and the states of Alaska and Hawaii and Puerto Rico..where do they fit in?

    • alericKong

      Medicaid is horrible. The treatment, if you can find any doctors accepting new Medicaid patients, kills you. The states will lose their subsidies in a few years and be stuck with insuring growing populations, mostly illegal immigrants, indefinitely. Their state governments will go bankrupt. We will see the constitutional implications of that when Illinois goes bankrupt probably next year.

      Employee sponsored is going down already. Part time workers now replace retires and companies find it cheaper to pay a fine and dump employees on the exchanges.

      Missing in this grand big government brainstorm:
      1. The benefits of universal coverage disappear when you realize the vast majority of teenagers and twenty year olds don’t get sick. It turns out robbing the poor to pay for the rich.
      2. Healthcare costs continue to rise and lower in availability because of trial lawyers suing doctors out of business.
      3. The only way healthcare improves is if Americans stop eating themselves to death and killing themselves with drugs and alcohol.

      • Randy Townsend

        Well said. Ultimately, the government will have to nationalize the health care industry and the insurance companies. As you said, Medicare is failing – the Anointed One wants it that way. He has said repeatedly the goal is a single payer system and no place in the world is any single payer system run by anyone other than a government. So, take Medicare, expand it’s performance exponentially and the money that had been going to insurance companies will go to the government. THAT’S the future of “health care” in America (but not for the politicians, of course….)

  • blert

    It’s not possible to get one’s arms around this elephant of error…

    But: reserves are UNTAXED. As they are reduced, pursuant to regulations, then the reserves are vectored into TAXABLE INCOME — pronto.

    This would cause a windfall of tax revenue — right up until the enrollees surge — and the system whipsaws back to square one.

    With doctors boycotting 0-care over ethical reasons… just how are the monies ever going to pass from the insurance pools (Medicaid, Medicare, 0-care) into there hands?

    I smell a staggering cash flow crisis across the medical-pharma cartel — dead ahead. It’s already TOO LATE. The need will go on like clock-work — not so the cash.

  • kentek

    I don’t think your numbers even scratch the surface of the damage to be done by the ACA. With most of the canceled insured going bare ie self-insured, they will simply stop buying “health”. Everything will be postponed from annual checkups to elective surgery. So, what will be the impact of millions not buying needed drugs? Merck and the rest of big pharma are in for a big surprise.
    They reap what they sow.

    Obama’s key accomplishment, the ACA- Affordable Care Act, will go down in history as America’s healthcare famine. It may be only slightly less cruel than Joseph Stalin’s agricultural upheaval in the 1930s which killed millions of Russians.

  • carpe diem 36

    to say that this is one sixth of the economy is obviously wrong. more likely this is going to affect every facet of the economy and will surely destroy it. we have no one who will tell the american people, at least those with a brain not those who voted for obama. that this train wreck is coming and fast.

    • Drakken

      It is far too late, so we should encourage its downfall sooner and then get on rebuilding.

      • MotherGoos3

        Well, hello there, comrade. Welcome to the Let.It.Burn. party.

        • Drakken

          Well unless people are willing to get their hands dirty and do what needs to be done, this is exactly what is going to happen, get the marshmallows.

          • MotherGoos3

            I’ve been working on a local level against our agenda21 loving scumbag of a mayor (she actually wants to tax rain) and the school board implementing the common core curriculum, to no avail.

            I also worked against our sitting senator (Bob Corker) in last year’s primary and gen’l election, but TN re-elected him anyway. He is one that wants to give aid to the Syrian rebels and was one of the gang of 8 for amnesty. Unless a lot more people wake up and pay attention, it WILL burn.

            I’ll bring the hersheys and graham crackers.

          • Drakken

            Frankly speaking, I think it is only a matter of time until the American people say enough is enough and take to the torches and pitchforks against these feckless politicians. Just look how these power mad pols just effed us veterans over, where does it end? I’ll up the anty and bring a couple bottles of Bourbon, we shall need it for medicinal purposes.

  • davidforsmark

    This was written with Timothy Imholt PhD, my coauthor of my new book, The Forest of Assassins, about still classified SEAL operations that led to the escalation of war in Vietnam.

  • A Z

    Remember the L5 Society?

    Most people do not. They are defunct. 35 years ago they were holding meetings and promoting space based solar power to be microwaved back to earth. It was a laudable goal.

    Someone in the audience asked them where they were going to get the money. They said from the insurance companies. Because that is where big pots of money are and of course their argument was very persuasive. At least they though so.

    Along with other people I like the ideal of spaced based solar. But if the ideal did not sell, what was plan B? Have the government make them fork over the money?

    Now the government itself is taking the money from insurance companies or ignorantly wrecking the industry all in the name of progress, envy, and because “that is where the money is”

    • Habbgun

      Was that related to High Frontier? High Frontier is a fun read.

      • A Z

        I don’t know. Now I ‘ll have to check out “High Frontier”

        • Habbgun

          You can get it for free as an e-file. So don’t buy it. It was a study of how space station technology was feasible in the ’70’s and solar energy could pay for it.

          • A Z

            I’ll get it

  • CurmudgyOne

    He said he would fundamentally transform the United States, and he is proceeding through that process. Those who didn’t believe him … surprise! Those who did believe him but didn’t understand him … surprise! Those who did believe him and tried to prevent it, well, nice try. We’re swirling around the drain.

  • A Z

    “At their very basic, level insurance companies are giant piles of money that go in different directions at, sometimes, high rates of speed.”

    Representative Pelosi would beg to disagree. According to her and others unemployment and welfare is better. This money has a higher multiplier effect or more velocity than money that is lent out.

    And many people will believe her.

    And of course they need that money so they will continue to vote Democrat.

    If there is a crash they will just blame evil rich people and republicans for resiting Obama’s enlightened policies. This will become dogma.

    • Drakken

      Well let the chaos, panic and disorder begin, those democrats will be starving and will follow anyone who will feed them.

      • A Z

        Rush Limbaugh, Thomas Sowell and other have point out that if you tax people to give money to other people you have not increased the money supply and have not grown the economy.

        Doctor Sowell has used the analogy of many dipping a bucket in the deep part of the pool, carry the bucket to the shallow end and emptying it.

        Thus Nancy Pelosi’s comeback of money given to poor people generates more activity because they have to spend the money immediately on “needs”.

        She is arguing there is more of a multiplier effect or velocity.

        She herself is very tightfisted and will not let her businesses unionize. Go figure.

  • Jason P

    Forsmark, you’re exaggerating. Obamacare addresses the individual market, not the employer-sponsored market. That means it is not 1/6 of the economy but less than 1% of the economy. Sure, Obamacare is just the beginning but O-care alone won’t tank the economy.

    Sarbox, Dodd-Franks, monetary policy, and a debt-blowup are more important.

    • davidforsmark

      You can’t seriously believe that the employer based insurance market will not be affected. The Democrats certainly don’t believe it, or the employer mandate would not have been extended beyond the next election.

      • Jason P

        But David, that’s the next phase beyond Obamacare. Of course, we all know it isn’t over with Obamacare and the individual market. It’s a domino effect with O’care being the current domino. When it’s done it will be 1/6th of the economy with government nationalization of the health care system.

        And then I’d argue it will be worse than you say. A complete nationalization will double the number of government employees. And the new healthcare employees will want parity with teachers and police when it comes to benefits. Imagine doubling government pensions and benefits! Detroit is our future … down the line.

        But O’care by itself isn’t going to do it … but watch those dominos.

        • blert

          But the budget is ALREADY unfinanceable. (!)
          Even the ancient super powers — Rome and China — blew up their economies by currency debasement — and they were the ONLY game in town!
          The bigger they are, the harder they fall.
          Barry is like the worst tyrants of the 20th Century: he makes unmoderated mistakes… based upon his ideology.
          And, as ever, the worst tyrants spend most of their energies making war on their own polity. So it’s no real surprise that Barry is scarcely able to sustain attention on foreign affairs. He’s focused like a laser beam on increasing Big Government. Too much is never enough.

    • Timothy James Imholt

      The Insurance Executives I spoke with while researching this said these numbers come from employers known to be canceling the coverage they currently offer.

      • Jason P

        I’d like to know the magnitude of employer cancelations. 10% 40% 100% ? What have you heard?

        • Timothy James Imholt

          It is dependent on the size of the employer. The challenge is that it comes from a simple fact. The fine on the employer is far less than the cost of the insurance. Most of the employer cancellations are going to come from small to medium sized companies for the time being, or so the statements i was given said. Small companies are especially conscious of survival and need to be careful with costs. I don’t know the number of employers but 50-100 Million is something like 8-25% of the country. So doing the math the percentage of employers would likely be slightly lower than that range (who knows where in that range it really falls). Could be higher than these numbers as they are estimates. Could be lower, but the result is the same. Money flows out of the capital markets as part of an unintended consequence of the law.

          • Jason P

            That’s leads us to the tough question. What’s the net loss of policy holders. With employers ending their group policies, only some people will replace it with individual policies. The net loss of insured will lead to a disinvestment (I assume long fixed income investments) as you argue (excellent point, btw).

            I understand that current employers will pay the fine instead of establishing insurance. But why again will current employers ending their insurance and why so many at once, in the coming year?

            I understand that the current self-insured will not all replace their policies. It looks like twice as many lose a policy than gain a policy. And I assume there will be a gradual cultural change as (a) it appears that only suckers pay when you can wait until you’re sick (b) low-risk people are subsidizing high-risk people. And this leads to the death spiral. But this takes time. You seem to argue a sudden change of great magnitude on the scale of the short-term cyclical boom-bust cycle and not the long-term structural debt and ruin. Are you sure about both magnitude and timing?

          • Timothy James Imholt

            The magnitude is fairly sure due to conversations with insurers. These are their models. Should their models prove correct this is accurate.

            Timing models depend upon what other policy shifts the administration decide to make. Everything in the news seems to be focused on causing things to shift further out in time (trying to delay the pain) so if nothing changes….This timing is accurate. If things change (my guess is) they will try to push it past the mid term elections…(Self serving of course)

          • Jason P

            Thanks David & Timothy for a thought provoking report about the ominous changes in healthcare economics and the “unintended consequences” for the overall economy.

          • blert

            Hawaii adopted its version of 0-care when 0bama was a teenager at Punahou. As an employer there, at that time, I can assure you that ALL small businesses trimmed hours so that HMSA/ Kaiser payments were no longer mandated.

            France has a variation on 0-care… yet both use 50 employees as the cut-off. In France, there are practically NO employers with 50-200 employees. Everyone stays below the magic numbor — or is so big/protected/exclusive/ patent protected, that they can pass on the cost to their buying customers.

            Any fool trying to “do the right thing” and cover their employees goes under — in pretty short order, too.

            This reality goes back two generations — to the 1970s. It is what is.

  • keyster

    There will be Medicaid/Medicare and there will be consierge/cash only.
    There will be no health care insurance market in 3 years.
    The business model collapses without government bailouts, which won’t happen.

    • dad1927

      give illegals medicaid. No doctor will take it anyway.

  • Ellman48

    “By this, we are not talking about the various social regulations on
    smoking, drinking, trans-fats or sweets that may come along with the new
    health care regime — though that may well happen.”

    How perceptive! Of course this will happen. Orwell’s dystopia will become a reality as the government invades our kitchens, bathrooms and bedrooms, all in the name of making us healthier. We will learn how diabolical and dangerous the Left really is!

  • Ellman48

    Realists and conservatives predict oblivion while liberals and leftists predict nirvana. One of these groups will be profoundly mistaken about what the results of Obamacare will be. Just by virtue of the fact that it is a government regulated and controlled program suggests calamity is more likely than blessing.

  • DinaRehn

    There are only two conclusions to draw from the evidence as presented in the piece:

    1). Our bettors, the “elite” of the national socialist left are incredibly stupid to implement such a utterly disastrous series of actions that will inevitably result in chaos and misery for all – except them.

    2). This is all part of a plan – call it Cloward-Piven if you will.

    I would submit that while option #1 is a possibility, the probably that all of those of the vaunted “elite” of national socialist left are this addled of the mind is quite low.

    Some to be sure, but the majority of them at least made it through some of our finest educational institutions.

    So that leaves US, option #2 – and considering that some of the vaunted “elite” of national socialist left actually penned such a plan should quite insightful as to it’s probably of being true.