The last time major healthcare reform was on the table, Bill Clinton was less than halfway through his first term in office. Although a speech in September 1993 garnered widespread support for an overhauling of our healthcare system, Republicans stalled efforts to conjure long term support for change. About fifteen years later, the same problems Clinton addressed in his speech (increasing rate of uninsured, rising premiums, medical errors and lack of updated information technology) have intensified, threatening the prosperity of our nation. US health spending rose from 8.9% of GDP in 1980 to 13.6% in 1993 to 16% in 2008. Without a way to control costs, healthcare spending is expected to double from $2.2 trillion today to over $4 trillion by 2025.
Universal Reform
To Democrats, major healthcare reform seems not only logical, but necessary to keeping the U.S. automakers competitive. The lion’s share of healthcare spending for the Big Three are legacy costs which support pensions and health care benefits for retired workers. According to former Health and Human Services Secretary Tom Daschle, Ford (F), GM (GM) and Chrysler spend about $1,500 per car on healthcare while BMW spends $450 in Germany and Honda spends about $150 in Japan. Multiply that by the roughly 800,000 American retirees, and the Big Three has an even bigger problem. Controlling legacy costs is a critical part of the industry’s restructuring. Even if our automakers start making better products that consumers will buy, they will still compete at a disadvantage if healthcare costs are not addressed.
Recently, Ford and the United Auto Workers agreed to restructure retiree healthcare benefits. Instead of paying retiree’s $10 billion in cash, Ford is making half of the contributions in Ford stock. The new terms will dilute Ford’s share price and hurt current shareholders. Also, this type of payment would be worthless if the company files for bankruptcy.
It seems serious discussions on healthcare reform only take place during recessions, because the employed lose coverage when they are laid off. During the late 1990’s, the economy was growing rapidly and healthcare reform was irrelevant. Ten years and two recessions later, reform is back on the table. According to their annual reports, GM and Ford spent $4.6 billion and $2.2 billion respectively on healthcare for current and retired workers last year. Some believe government subsidized insurance would make it easier for the Big Three to compete and would be more effective in the long run than a loan.
Free Market
Obviously free market advocates are against a universal healthcare system that would expand the role of government. Long lines, higher taxes, and reduced efficiency are some of the main concerns of free marketers. With politics playing such a large role in discussions of foreign healthcare systems, it is difficult to forecast what a universal healthcare system would look like in the United States.
Some of the most obvious drawbacks include the upfront costs. Subsidizing healthcare for a country with the demographic trends of the United States would cost trillions of dollars. According to PRB.org there were 76 million baby boomers born between 1946 and 1964. The automakers are a microcosm of the American population. The costs of taking care of the retired are becoming too expensive for working aged citizens.
Obama’s Budget
President Barack Obama’s speech on Friday outlined his budget which includes setting aside $634 billion to reform healthcare. The money, he said, will come from reducing itemized deductions from families with incomes greater than $250,000. The healthcare sector reacted poorly to this news, with the Healthcare Spyder, (XLV), down 4.14% on the day. The sell-off started earlier in the week as investors began taking profits.
Healthcare has outperformed the broader market indices since November 20, but Obama’s budget and profit taking should bring valuations back down. During the Clinton’s push for major healthcare reform, drug makers and managed care companies were heavily shorted and represented excellent opportunities for investors who were willing to take the risk. While this recession has already discounted the growth of the healthcare sector, Obama’s push for a universal healthcare system will certainly make some companies excellent investments. More than likely, this will not include the automakers.
Final Thoughts
While universal healthcare may have been considered irrelevant as recently as two years ago, market downturns always lead to significant policy changes. The Treasury and the Federal Reserve have spent an unprecedented amount of money to hold up our banks and insurance companies. They stated the problems that would arise from doing nothing would be catastrophic. Healthcare costs have been skyrocketing ahead of GDP growth and it threatens to consume our economy if we don’t make some serious changes. A government subsidized healthcare system may not be the answer, but serious changes must be made so that healthcare costs do not consume our economy.
-Allen Lutz
Disclosure: None
