Healthcare is one of the biggest businesses in America.
We spend roughly $6 trillion a year on it, nearly 20% of the entire economy. For years, that enormous pool of money has supported insurers, hospitals, drug companies and just about everyone else attached to the system.
Starting January 1, something changes.
Roughly $100 billion in federal support is set to disappear, shifting more of the financial burden onto states, employers and individuals. And once people actually start seeing those costs show up in premiums and local budgets, I think the political and economic response could become much larger than Wall Street expects.
That matters if you own healthcare stocks.
In today’s Moneyball Economics, I’ll show you why I believe healthcare spending may have finally reached a turning point, where the pressure is likely to show up first and why I’m steering my own investments away from the sector before the new rules hit.
Click below to start watching:
Video Transcript:
I’m Andrew Zatlin. This is Moneyball Economics.
Did you know that in a couple of months, specifically starting January 1st, the healthcare industry is going to take a major economic hit?
It’s a body blow that’s so big, it has me steering my investments way clear of this sector.
Well, right off the bat, as soon as I said American healthcare system, it probably dredged up some pretty negative thoughts, right? Because we’re constantly hearing in the popular press just how bad our system is, and yet nothing could be further from the truth.
The reality is that the American healthcare system is the most amazing system on the face of the planet. We’ve got the best cutting edge treatments, the highest quality of care, the highest level of availability, but that’s because, well, quite frankly, it better be. We’re spending $6 trillion a year on it. And yet that’s not what you hear in the popular press, not at all.
In fact, during this election cycle, you’re hearing that, well, quite frankly, our system is terrible and we need to do more, so let’s elect officials who are going to do more. What you’re really hearing is the voice of big business. $6 trillion of vested interests buys a lot of friends in the popular press. The last thing they want is anyone pushing back on the fact that we’re spending $6 trillion a year or almost 20% of our GDP.
The last thing they want someone to do is start pushing back and asking questions like, “Hey, before Obamacare, costs were a lot lower and only a fraction of our GDP. If we’re going to spend 20% of our GDP on healthcare, what are we getting for our money?” That’s not what the $6 trillion healthcare industry wants to have. Instead, what they want are officials who are elected that will push back on regulations that are about to kick in on January 1st.
I want to talk about the economics of healthcare because it’s kind of eye-opening…
First of all though, let’s share some common ground here. We want public healthcare. It’s good. It’s a good thing. It kills me when a Robert F. Kennedy gets out there and says, “Don’t get vaccinated.” Then measles suddenly is spreading throughout the community. This is stupid. We want healthcare. But the problem is under Obamacare, a blank check was presented. And when you give businesses a blank check, an open wallet, they’re going to jump in.
As a result, spending on healthcare has just surged, right? It’s gone from being a noble cause to being just another racket. Let’s talk numbers here for a second. So before Obamacare, less money was spent.
As soon as Obamacare was passed, insurance premiums surged almost 140%. The spending on healthcare, well, it surged because basically two things. Under Obamacare, more treatments were going to be covered. That was mandated. So you basically have not just more things happening, but also under Obamacare, you had more people getting access. Eligibility was expanded.
I mean, what could go wrong if you have 10, 20 million more people coming in to get the services and the number of services has expanded? As a result, costs have surged. Since Obamacare 2010, the amount of spending on healthcare is up 121%. And during that time, inflation’s up only 54%. This has all come down to one basic thing, more people getting access to more treatments.
And the thing is, someone’s got to pay. Under Obamacare, it was a federalized type of system. It wasn’t individual burden, it was more federal burden. And yet that’s only part of the story. As we moved from having about 50 million people on Medicaid and Medicare to now 70 million people, someone has to pay.
And not only did insurance premiums go up, but the burden also shifted onto the employee from the employer. There was a time when employers were picking up almost all of the healthcare. Instead, as soon as Obamacare kicked in and insurance premiums were rocketing up 10% a year, employers started picking up a lot less or they changed the structure of employer subsidized healthcare so that deductibles, the amount that you had to pay before the insurance kicked in, those shot up 34% because again, someone’s got to pay.
Under the big beautiful bill that was passed last year, there’s a shift, I should say, that’s going to come into place January 1st, just two months from now. And that shift is to take the federal subsidy and reduce it and push the cost down to the local level. Let me be clear.
So under Obamacare, eligibility surged. Under the big beautiful bill, eligibility is going to contract.
So for example, if you’re not a US citizen, you don’t get free healthcare. You don’t get access to Medicaid, Medi-Cal. If you are of working age, you have to prove that you’re either working, volunteering, or trying to get a job. So the eligibility criteria have tightened up.
This doesn’t change the demand for healthcare. It shifts it from the federal government down to the local level, and that’s important. It’s going to change about a hundred billion dollars of federal government subsidies that are not going to happen. Let’s use Washington State as an example. Studies at Washington State have shown that this is a $6 billion annual hit. So let’s follow what happens.
There’s a shortfall of $6 billion. The federal government isn’t going to send that money over, and yet you still have people who want healthcare. Right off the bat, guess what? Insurance premiums are now up 30% for the year for Washington State employees.
Congratulations. You’ve inherited this burden. What do you think is going to happen?
Well, right off the bat, Washington State is going to lose a lot of businesses because the cost of operations has surged. If 30% higher insurance premiums are happening, again, companies are picking up about half of that. So the cost of doing business is higher. They’re going to leave. You’re also going to get just a general taxpayer revolt.
Now that they’re seeing and having to pay more into the kitty for the need and the usage in Washington state, taxpayers are going to start asking some very basic questions, again, along the lines of burden sharing.
How much should companies have to pay? How much should individuals have to pay? And thirdly, how much should individuals who are getting access to the system but not contributing to it have to pay? In essence, you’re going to have a one-two punch right off the bat.
And the next year, times are going to be a little bit tight. So you’re going to see some pullback on just total spending for healthcare. That hundred billion dollar shortfall from the federal government isn’t going to be fully covered. And then you’re going to start to see more and more pushback at the local level.
For example, we can all agree that broken bones, x-rays, vaccines, those should be core treatments. What about weight loss drugs? Should those be core treatments, plastic surgery? So you’re going to start to see kind of a reversal of Obamacare. Fewer people getting eligible, fewer treatments being covered, however you want to slice it.
In the world of business when you’ve got fewer customers and spending less on fewer treatments, it’s bad for business. There may be an election during the midterms which moves the dial a little bit. So if the Democrats come to power, they’re certainly going to try to preserve and even expand the ACA or Obamacare.
It’s going to be challenging. They’re not going to have the Republican support. In fact, they’re probably not going to have some Democrat party support either. In essence, spending on healthcare has kind of peaked. I see it going down in real terms. I see it having peaked and this pushback is the spark that’s going to light the fire. I certainly wouldn’t want my investments to sit around and be exposed to a pullback in total spending. Think about it. We’re to win it.
Zatlin out.
