It 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…
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