Michael Chandler's  Instablog

This is the first of four articles on the impact of the Patient Protection and Affordable Care Act, which I will refer to as the "Act" or "ACA" for the sake of brevity. My intent is to present not only the perspective of providers and insurance companies, but also to look at the issues from the standpoint of individuals. The last piece will give an overview of the governmental perspectives on the Act, both state and federal, and outline the goals at those two levels of government. I will begin each article by identifying the primary source(s) of the information on which my analysis is based.

This first article addresses the impact on individuals. We will discuss how the Act will affect your wallet, identifying those persons it will help, as well as those likely to experience "sticker shock."

My analysis will draw heavily on a study sponsored by the Society of Actuaries, published in March 2013 ("Cost of the Future Newly Insured under the Affordable Care Act"). Please keep in mind that actuaries are number-crunchers who generally work for insurance companies and focus on risk management. In other words, actuarial research is used in setting prices for all types of insurance.

The first finding of the study seems somewhat encouraging. Finding #1 projects that, after three years of exchanges and insurer restrictions, the percentage of uninsured nationally will decrease from 16.6 percent to between 6.8 and 6.6 percent, compared to pre-ACA projections, although the exact percentage will vary substantially between states. This variation is primarily due to the fact that Medicaid will expand to 138% of the federal poverty level. This expansion will impose additional costs on our State Governments, many of which are already struggling financially, because the states are obligated to pay part of the cost of Medicaid. See my article from December, 2012 ("The Next Major Bailout Is the State Pensions"). Still, from a societal viewpoint, lowering the percentage of uninsured persons is encouraging news.

Finding #2 is more concerning: under the ACA, the individual non-group market will grow 115 percent, from 11.9 million to 25.6 million persons, and 80 percent of that enrollment will be in exchanges. People will gravitate to this option, because only through these exchanges will refundable tax credits --- subsidies, in effect --- be given. Company health plans will probably shift to the exchange model or something similar, since the cost of a group plan independent of the exchanges cannot be more than 9.5% of an employee's income. Under certain conditions, small businesses may receive incentives such as tax credits and subsidies.

And this brings us to the study's Finding #3: the non-group cost per month will increase by around 31.5%. Ouch! In some states, such as Ohio and Wisconsin, the cost will increase by 80%. A handful of states, including Virginia, Massachusetts, and New York, are expected to see a cost decrease of around 13%. I have independently confirmed these projections with a couple of major insurance companies. And it stands to reason that, if insurance companies can no longer underwrite their risk --- and since as of January 1, 2014 pre-existing conditions cannot be used in pricing insurance coverage --- the risk is higher, and the cost of insuring against that risk must go up. That's right, folks --- get ready for big increases in your premiums.

But what about those tax credits? If you make less than $15,000 per year as an individual, you will be eligible for Medicaid. That number is 138% of the Federal Poverty Level ("FPL"). Tax credits will be given up to 400% of the FPL. For individuals, that number would be around $45,960 of modified gross income; and for a family of two, the number goes up to around $62,040. For a family of three, it would be $78,120; and for a family of four, $94,200.

These numbers, remember, establish eligibility for tax credits. The numbers are based on the current Federal Poverty Level, but they would move upward if the FPL were adjusted higher. And of course, if you have more than four family members, the number would also go up. These tax credits or equivalents go from 100% to around 33% on a sliding scale.

***For those aged 55-65, premiums cannot exceed three times that of a 22 year old. This middle-age group might actually see a drop in their premiums because of this rule. Such a drop would offset some of the overall increase in premiums that we will face on January 1, 2014.

Now we take a look at the business rules. If a business has fewer than 50 employees, it is not required to offer Health Insurance. Unless the business sees a way to qualify for tax credits, it will probably opt out. If the business has fewer than 25 employees, and their average annual wage is less than $50,000, the employer can qualify for up to a 35% tax credit --- and in later years, this credit rises to 50%. If the employer is a non-profit, the credit starts out at 25% and later goes up to 35%.

Those companies with more than 50 fulltime employees must provide a healthcare plan or be fined up to $3000 per employee. The key here is to qualify as "fulltime," you must work a minimum of 30 hours. Sounds like there may be more part-time employees in our future. There is one small glitch, however --- if you have 100 employees working 15 hours per week, you must still provide healthcare. And remember, an employee's share cannot exceed 9.5% of salary.

As you can see, the ACA's impact differs according to age and employment status. It appears to me that individuals younger than 55 with income over $45,960, and families of two making over $78,120, are really going to get hit hard with the rising cost of healthcare premiums. The middle class and the wealthy will be expected to pay the freight for the rest.

Now, recall the actuaries' projection that the individual non-group market will increase in size by 115%. This group will be going into the exchanges, and many will pay a much higher premium. And as a result, the average cost nationally will rise from $314.00 to $413.00 per month for this group, according to the Society of Actuaries.

As I am sure you have figured out by now ACA is rather complex. Just to think these 3 pages are intended to do justice to a 2700 page document that most government officials still haven't read would be crazy. I do think it will give you a pretty good idea how staggering this could be for individuals as well as small businesses.

From an economic perspective there could certainly be some negative impact to consumption and it does appear that the middle to high income brackets will be most affected. I'm sure as much as possible the insurance carriers will benefit because they are able to hand pick the exchanges they participate even with the restrictions on their pricing structures. The providers I suspect will negatively be impacted as the goal of the government as well as the insurance companies is to drive down healthcare cost.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Well here we are one week post election and what is different? Not a thing except the market has been down almost every day since the election. You might ask is it because of the election? No I don't think so. It's about the ability of our government to get anything passed and of course the onslaught of the Fiscal Cliff. Congress convenes today and top of the agenda is how to avert the budget cuts and tax increases facing us on January 1rst and of course the continuing resolution need to keep government functioning beyond February. I am convinced that we have already developed the plan back in 2010. It's called the Bowles-Simpson plan. Remember The National Commission on Fiscal Responsibility and Reform? President Obama commissioned this study and if I seem to recall this bi partisan committee would release its findings and there would be a vote up or down and if up it would be implemented. It never received the vote. The President and Congress walked away because the pain was too great. As I have written in the past this was one of many commissions over the last 20 years hired to identify the same old issues. Like the rest it appears that this too, for the most part, will unfortunately find the grave yard were the others rest. What a shame.

I spent some time dusting off the Bowles-Simpson Plan and drilled down to see if this could possibly be revived as an answer to our Cliff dilemma. Here again it depends how serious all branches of government are about fixing our countries long term deficit issues. The plan called for 2.6 trillion in revenue increases (taxes) and 2.9 trillion in spending cuts. They also proposed a long term fix to Social Security separate from the Fiscal Budget. Did you know back under the Clinton Administration the government balanced the budget and claimed to have a surplus only to find they had included the Social Security Trust deposits in with the general budget? That my friend was as close as we have come to being fiscally responsible in a long time. It's important to point this out because the Bowles-Simpson keeps them separated. Congress in years past has used the trust fund to mask the real shortfalls in the budget.

The Bowles-Simpson combines the spending cuts and revenue increases over a 10 year period 2013-2022. The interesting thing to note is that Congress has enacted 70% of the spending cuts in discretionary programs outlined in Bowles-Simpson. That could be interpreted that 70% of the 2.9 trillion in spending cuts is already in place. The remaining cuts are going to be the tough ones. It does however seem to be a start in the right direction. Congress has picked the low hanging fruit and further cuts will be painful. The 2.6 trillion in tax increases has not been touched at all which brings us to where we are today. If the Bush tax cuts were to expire on January 1, the 2.6 trillion would be taken care of, but at the expense of a recession in 2013let alone the $3500 in new taxes on every household in America.

Congress at this point is telling the President there will be no tax increases and of course the President is saying he will veto any plan that does not include a tax increase on those that earn $200k or better. Now it seems there may be a move to some middle ground which may very well be a resolution to this good ole fashion stand down. Congress is considering adjusting deductions and eliminating loopholes in the tax code prorated according to income. I have even heard of further reduction in the mortgage interest deduction. They seem to propose this in lieu of an increase in the marginal tax rates the President proposes. Whether you move the marginal tax rate or the effective tax rate it's still a tax increase. Do they really think we are that dumb? That's like saying if we extend the time in which you can start drawing your Social Security , say by 2 years, we have not increased your taxes. The loss of 2 years of benefits isn't a tax? Of course it is. I know you have heard this saying before "If it Quacks like a duck it is a Duck". Well "if it takes money out of your pocket, it's a Tax."

I expect something along these lines to be the basis of a compromise reached between the President and Congress. This should allow the government to avoid the so called Fiscal Cliff. They will extend the remaining Bush Tax cuts out for maybe another year but once again fall short of fixing the long term viability of Social Security, Medicare and of course other entitlement programs. Then they can write home to their constituents and say we were able to work together and avoid the inevitable recession of 2013. They will put a little duct tape on it then kick it down the road once again. Next year this time we will be having the same discussion.

By not putting our fiscal house in order we risk a protracted recession, probably a 15-20% fall in equity markets and worse yet the potential for double digit unemployment again.

It is beyond me why they will not just implement Bowles-Simpson. This plan would fix many of the issues on a permanent basis. We have the solutions and have had them for many years. Come on Congress, do the right thing.

It seems as the old Elvis Presley song goes, " Were caught in a trap and we can't go back" We are not fools. We understand " Austerity Hurts". We simply want the ability to feed, shelter and protect our families. We live within our means we think the government should also. We are tired of partisan politics, and all the drama that goes with it. We simply want you to do the job we hired you to do and that is fix this broken economy and don't put all this debt burden on the backs of our children and grand children. Its time to stop the trickery, smoke and mirrors, and all the political demagoguery and do the right thing to put our country back where it belongs as the true leader of the free world and not a third world country depending on others for our economic survival.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

A systematic war is being waged on Corporate America by the current "Chicago" administration and its allies in the Big Union industry (for that's exactly what it is).

Before I take that point any further, however, let me state up front that Corporate America is not without blame. Recently there has been deplorable malfeasance in the banking arena, and in other corporate areas, too. An excessively ideological approach to deregulation was bound to create problems, and the investment world should never have been commingled with the banking world. And this needs to be said, too --- a criminal is a criminal and should be prosecuted to the max. Period.

But we can recognize defects in the corporate environment, and still be completely appalled at the duplicity, arrogance, and naiveté of those whose dealings with Corporate America are characterized by unthinking, gut-level hatred.

Consider the war being waged on two of the greatest companies of our time --- JP Morgan (JPM) and Wal-Mart (WMT). JP Morgan is the subject of a legal attack by the federal government. The campaign against Wal-Mart is an ideological and cultural assault by Big Unionists, often aided and abetted by gullible theorists in the PC Media.

Let's start with JP Morgan. The 2008 financial crisis took the shine off some sparkling reputations in the financial world. One name, however, shone even brighter amid the rubble, that of Jamie Dimon of JP Morgan, one of the finest CEO's of our time. His company came out of the crisis pretty much unscathed, establishing a reputation as one of the best financial firms around. Morgan was forced to take "bailout" money --- they didn't ask for it, and they didn't need it, and they promptly and fully repaid it.

Recall that, in the dark days after Lehman Brothers fell, it appeared Bear Sterns was heading down the same treacherous path as Lehman. The Federal Reserve and the Treasury Department went to Jamie Dimon and asked him to buy Bear Stearns, just to keep from having another meltdown by a major financial firm. Dimon could have walked away. But he didn't. He stepped up for the good of the nation and its financial stability --- and he bought a company that everyone knew was going to fail. In many ways the mortgage mess at Bear Stearns turned out to be even worse than the one at Lehman Brothers.

But now, the Obama-Holder Justice Department is suing JP Morgan because of that very same mortgage mess at Bear Stearns --- the company JP Morgan absorbed at the request of the Administration, the very mess created in part by the government .

The Administration's conduct in this matter is brazenly cynical, self-serving, duplicitous, and unethical . . . not to mention shortsighted. Even Congressman Barney Frank, one of the founders and creators of the whole nationwide mortgage mess, has stated that the Justice Department should not be suing JP Morgan over this issue. Shame on you Mr. President!

If we turn to Wal-Mart, we see a similar war being waged against the company by labor union hacks and San Francisco ideologues.

Wal-Mart has had a positive influence on this country from the very beginning. Back in August 2012, IBD reported that "Everyone knows Wal-Mart has been a positive influence on inflation. A few years back, the highly respected National Bureau of Economic Research even estimated that the government's consumer inflation data were overstated by about 15%, due largely to the unrecognized impact of Wal-Mart's everyday low prices on the economy."

The implication seems to be that Wal-Mart's prices should not be included in the calculation of the consumer price index, apparently because Wal-Mart is so large it would skew the numbers.

The same IBD article goes on to say that "a separate study by the investment advisory and forecasting firm Global Insight estimated in 2006, Wal-Mart's low prices saved consumers roughly $287 billion or about $2501 per household. The impact especially on low-income consumers has been enormous." John Tierney, a New York Times columnist, even suggested Wal-Mart receive a Nobel prize for helping pull so many people out of poverty according to IBD. Wal-Mart has 1.2 million employees here in the United States. It is by far this country's largest civilian employer, hiring 600,000 new employees per year.

As a big box retailer with many part time and seasonal employees, Wal-Mart has an annual turnover rate of 44%, which is in line with the industry average. The company has been accused of reducing living standards, hurting retail trade, disrupting communities, and relying on government programs to provide healthcare for its employees --- not to mention paying lower wages.

These accusations are simply naïve. Or is that putting it too bluntly? Perhaps I should say the accusers are . . . ah, uninformed.

To begin with, the individual skill level is not very high in the retail sector. Pay is around $10-$11 per hour, as an industry average. Is Wal-Mart "disruptive"? Does it cause other retailers to close? Probably so, at least in some well-publicized cases. Yet, from a "net" perspective, Wal-Mart is still adding to the total number of regular paychecks in the local community. And remember, Wal-Mart saves the average family an estimated $2501 every year, because Wal-Mart competes primarily on price --- it is not in competition with specialty shops or other "niche" sellers.

But what about the claim that Wal-Mart doesn't provide healthcare for its employees? Actually, statistics show that 40-50% of all Wal-Mart employees participate in the company- sponsored healthcare plan. It's been estimated that fewer than 10% of Wal-Mart employees have zero healthcare coverage. Some have alternative healthcare through a spouse's employment. Some are on Medicare and over 65.

True, the plan at Wal-Mart is not 100% paid by the employer, and employees have to pay some of the premium. It is also true the plan is generally not a "Cadillac" plan, but at least it is paid for without government bailouts --- unlike the auto industry.

Oh, those unions! They have lost their way, wandering far from their original purposes, which were generally laudable.

And today, one of the major reasons America can no longer compete globally in the automotive industry is those very same unions . . . now led by white-collar, college-educated "militants" making good salaries. The incredible legacy commitments (Healthcare and Pensions) forced by the unions have crippled our auto industry and soon enough --- mark my words --- the automakers will need another bailout.

By their very nature, unions have limited incentives to help a company live within its means --- they are parasites feeding on a host company. And that goes far to explain why, unlike Wal-Mart, the automakers cannot live within their means, and why they cannot compete globally with companies that can . . . and do.

Do you remember the movie "Network"? There was an old guy who runs to the window and screams, "I'm mad as hell, and I'm not going to take it anymore." That would describe me to a T.

A political, legal, ideological, and cultural war has been declared on the very companies that drive our economy. These companies are great companies with great leaders. We need to put aside the noise, drill down and support these companies and many more. I would be proud to own both of these companies in any portfolio and I suspect they will survive the current onslaught on their reputations.

We cannot keep this up much longer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.