Heath Care Legislation - The Impact on Businesses

* Health Care Legislation - the impact on businesses – This came out yesterday, and represents announcements from just 3 companies, of the hundreds of large companies which are likely affected:


John Deere and Company is going to take a $150 million charge this year, while Caterpillar will take a $100 million write-off. The press releases cite the elimination of government subsidies for retiree prescription drug benefits. With the ending of government subsidies for this benefit, the companies are now on the hook for these expenses, and they need to book this loss today. A reader who has a relative working for Caterpillar has told me that the head of the company has told workers that the $100 million write-off will result in more job losses, to offset this new cost. The Bloomberg story on this mentioned that the new health care legislation is going to cost American business $14 billion. AK steel has come out and said that the change in tax breaks for employee drug benefits will cost them $31 million right away.


The reason why this tax break existed is because if companies provided a prescription drug benefit to their retirees, then this would take some of the burden away from medicare. Now that this subsidy is being eliminated, companies might decide to suspend this retiree benefit, putting a greater burden back on the government. For now, Caterpillar is announcing more job layoffs as a result.


* Following my Health care piece on Wednesday, I received many comments and criticism about what I wrote. Here is a summary of what some folks sent in:


The first point I wrote about was that it costs $15,000 for an individual to buy insurance, or $20,000 for a family. The point being is that would be less expensive for families to not buy insurance and just pay the government a penalty of 2.5% of their income. At the time they needed insurance due to a catastrophic illness, they will just sign up for it, since the insurance companies will not be able to reject them due to pre-existing conditions. Based on my research, I have discovered that the cost of health insurance for a family will be approximately 10% of their income. There is a complicated formula which moves up and down according to a families income, but 10% is a good estimate to use for this expense. If insurance costs more, then the government would give people vouchers, which allows them to buy insurance at a cost which equates to 10% of their income. Still, if a family chooses not to buy insurance, then the approximate savings will be 7.5% of their income. Depending on their exact circumstances, a family might choose to wait for a catastrophic illness, putting the insurance companies at a loss when they buy insurance before a major operation, or once they are in the hhospital. Even though my math was wrong on the cost of insurance, the same consequence applies. This will likely cost the insurance companies plenty.


I was challenged on the idea that the government will decide on what health care benefits you will be able to receive. There are numerous mentions in the legislation which says that the government will determine what procedures are covered and which are not. Even today, with private insurance, there are various services which private insurance companies cover, and many they do not. I am not sure why the reader thought I was wrong on this aspect, but the research I did supports my original statement.


I was challenged on the fact that the government could go into your bank account to take fees and penalties from you, if you do not pay up. Specifically, this is what I wrote:


“The government will be able to go into your bank account to take out fees, or penalties. Welcome to the era of Big Brother.”


In reality, the legislation reads as follows (on page 58-59): 


“Government will have real-time access to individual’s finances & a ‘National ID Health card’s will be issued! The Government will have direct access to your bank accounts for elective funds transfer.”


I mis-stated what the rights the health care legislation gives the government. If you do not pay taxes or other fees, the government already has the ability to take money out of your bank account. So I am not sure if they need special legislation to take taxes or fines from the bank accounts of it’s citizens. Perhaps I over-reacted to the parts of the legislation quoted above. But the fact remains that the legislation puts the government one step closer to your finances, and this IS a step towards an era of Big Brother.


* In support of the legislation, a reader writes in with the following:


“Here is the thing to think about on the health care bill, flawed is it may be. The 32 million who are presently uninsured use the emergency room (ER) care as the primary source of medical care. That strain will be alleviated somewhat by providing coverage. The cost of not removing this population from ER care has not been quantified. In addition, the bill pushes hard for preventative medical care, a notable absence from most insurance coverage. The old adage, an ounce of prevention is worth a pound of cure is apt. In any case, the bill will cost us and some businesses directly more, but hopefully less as the spread costs of covering these uninsured is reduced.


In addition, as Groucho said, whatever it is, I’m against it. If the carriers are so hostile to the bill, then there must be some merit to it since the carriers are a large part of the problem (putting aside the fact that physicians ceded control a long time ago to health care decisions and can’t seem to wrest it back).” End of readers comments.


Lastly, I made this comment about the current health care situation in the US:


The US spends 50% more on health care than other countries, and has worse health statistics than these same countries with lower costs. Something really needs to be done on a fundamental basis to fix our system. Making health care available for everyone is not the right answer until we can bring down the cost and improve the results.


To this, a reader writes in with this: “This statistic gets thrown around a lot without a lot of thought going into it. First, the US subsidizes the medical research and development that the rest of the world won’t do. We have to pay extremely dearly in order to innovate, while the rest of the world “free-rides” because they only need to be able to cover the marginal cost to produce the service after we paid to have it invented. Once we stop innovating, we’ll all be worse off, even if the US is paying less as a percentage of GDP than before. Also, we take much worse care of ourselves than the rest of the world (particularly the developed world). We eat more, exercise less, and abuse our bodies to the max. It is no wonder that we die earlier and suffer from more health problems, and it is no wonder that it costs us a lot. Access to health care is only a small part of the problem.


Encouraging preventative maintenance is a good thing (which this reform will do) but it only addresses a fraction of the runaway costs and “quality of care.” In other words, until we start exercising and taking better care of ourselves, we may end up spending more money and dying earlier, but it isn’t the health care system’s fault, it is a direct result of the lifestyle of most Americans. How you attack that problem is important. Educating kids might be a pretty good place for the role of government, but having the wealthy pick up the tab for health care is more likely to make it worse than better. I suppose we’ll do that for a while and then we’ll get in our Soviet exercise routines to keep the proletariat in shape.” (End of readers comment)


* US military benefits for the entire world – I want to spend the last part of this section on a concept the reader touches on, which revolves around the US as a leader and innovator for the world. The same concept applies to the US as a protector of the world via our massive military. This insures that oil flows from the Middle East, which supports all mercantile operations of the entire world. Without the US’s presence in support of world trade, could China ever have grown into the economic power it is today? Same with Japan! I will admit that it is a bit self-serving for the US to act as a cop for the world, which in turn enables free trade for the entire world. Nonetheless, there is a certain benefit which the rest of the world receives by virtue of a benevolent super-power, like the US. And, while the US is digging itself into a financial hole, at some point, our creditors will have to get together and decide if they want to continue to fund the US, and our international military operations.


One possible scenario I play out in my head goes something like this:


The US is having a hard time funding its debt, and interest rates are up to 10%. With that type of interest cost, on top of a $10+ trillion of external debt, which is what our external debt will be in 2 years time, we will be between a rock and hard place. With this predicament, with the prospect of a trillion of debt service a year as far as the eye can see, I can see the US selling military time shares, in exchange for debt forgiveness. In other words, we will demand that our creditors contribute to support the cause. Do I see China ponying up their $2 trillion of US dollar reserves in support of the US as the world’s primary super-power? I do not, because I think the Chinese see themselves as the worlds primary super-power. Yet at some point in time the situation will get very sticky, and I can see some horse trading going on when the US debt grows to un-tenable levels in a higher rate environment. More on this in the future.


* Ambac – yesterday the insurance commissioner (IC) of the state of Wisconsin took control of the $35 billion of mortgage insurance policies which Ambac is paying claims on. Specifically, the IC has told Ambac to stop making payments on policies issued by Ambac to insure a variety of MBS, because the IC is concerned that Ambac would run out of money to make good on the rest of their MBS wrap policies. This amounts to a managed liquidation of Ambac’s business, instead of a bankruptcy when they run out of money in a few years. A client of mine used to tell me that they figured that Ambac had enough capital to make good on their policies through 2012-2013, and that Ambac wraps should be good until then. The latest action changes this math and should do the same forMBIA which is still paying claims on its MBS insurance policies.