"Kee Points" with Jim Kee, Ph.D.

So much for “repealing and replacing” the Affordable Care Act (i.e. Obamacare) of 2010. Republicans pulled the bill to do so, the American Health Care Act, on Friday due to lack of support. Obamacare was passed without a single Republican vote, and President Trump was unable to muster a single Democrat vote (or 100% Republican support) for its repeal. It is in that sense that the bill’s failure is perceived as a Trump failure, and in response the President has argued that “The best thing we can do politically speaking is let Obamacare explode. It is exploding right now.”

What does he mean by that? Well, the shortest explanation of this starts with the recognition that the Affordable Care Act (ACA, which remains law) walks a pretty thin line by mandating that insurance plans cover certain essential benefits and by forbidding explicit exclusion of individuals with pre-existing health problems (Analysis Group). In order for an insurance company to make a profit, those customers with diseases like cancer and HIV whose annual costs exceed the annual premiums they pay, must be offset by healthy customers whose annual premiums exceed their annual costs. This creates what economists call “adverse selection,” meaning the system attracts fewer healthy individuals and more unhealthy individuals, and that makes the system less sustainable. It is why you need the individual mandate, which requires healthy individuals who might not buy insurance to “opt in” and purchase health insurance (whether the government is legally allowed to compel people to purchasing something was part of the controversy resulting in the 2012 Supreme Court decision upholding the mandate as a “valid tax”). But the mandate has exemptions, which has led even Republican commentators like Wharton’s Kent Smetters to argue that the problem with the Act right now is that the individual mandate isn’t stringent enough.

This leads to challenges for insurance company profitability (which is why they are charging higher premiums), and is causing many insurers to exit ACA markets. It is one thing to tell people that they are covered, and quite another to provide the resources to serve them. Markets either equilibrate the supply/demand imbalances (more people demanding care than is being supplied) by price rationing (paying higher prices) or non-price rationing (i.e. waiting in line). We are seeing some of each, which will probably continue. I wrote some years ago in Kee Points that the Affordable Care Act will probably morph into something more sustainable, but in a way that allows both Democrats and Republicans to claim some victory, and I think that is what we are witnessing right now. Once a benefit is promised (guaranteed healthcare coverage) it is very hard to take it away – we just saw that – which makes modification more politically viable than repeal.

And how are markets reacting? Not well right now, partially because this episode calls into question Trump’s ability to push through regulatory reform (e.g. Dodd-Frank) and tax reform, and partially because the market was already pricing in the elimination of the Obamacare surtax on capital gains for high income earners. I don’t think a pullback after such a huge post-election run-up in stocks is very surprising at this point, particularly with the coming uncertainty around tax reform and budget constraints, which are next on the agenda. Stocks in the short-term are riskier than a 3 month t-bill, which of course is one of the reasons why investors can achieve higher returns by investing in them. But the key lesson of last year (and of 50+ years of peer-reviewed research) still applies, and that is that you jeopardize long-term gains when you view markets through a short-term lens.