What the Government Isn't Telling You About the New Healthcare Bill

In a vote that was held at 1 a.m. Monday, the Senate approved a procedural measure that makes it likely a version of the national healthcare bill will make it into law.

In fact, by taking advantage of an obscure rule that allowed lawmakers to start their day and vote on the measure well before dawn, Senate leaders were able to approve the measure and keep alive the possibility that the healthcare bill will be passed by Christmas.

But if you study the Senate bill carefully - no matter what your political persuasion may be - you have to wonder why they even bothered.

The bill will significantly increase federal healthcare spending - by about $185 billion in 2019, according to the Congressional Budget Office (CBO). It will involve a substantial increase in taxes - by about $100 billion in 2019. It will compel everyone to buy healthcare, even the young and healthy, which ought to reduce costs.

But the political classes seem to have brought forth a miracle: According to the CBO, the plan will actually increase healthcare premiums for individuals and small business by an average of 10% to 13% in 2016.

The American healthcare system is already the most expensive in the world, at a total cost of nearly 17% of U.S. gross domestic product (GDP). After the better part of a year of effort by the Obama administration and Congress, one would have hoped that one result of this healthcare-system makeover would have been a measurable reduction in costs. Instead, this bill increases it. It's only a modest increase, to be sure. But it's still an increase.

There are three cross-subsidies in the U.S. healthcare system, which greatly increase its cost. Cross-subsidies increase costs because when Party A makes Party B provide a service without paying for it, the service is generally lousy and the cost high.

The first cross-subsidy is the provision of free emergency care facilities for the indigent. If Congress wants to make hospitals provide these services, it should pay for them. Under the current system (which was sneaked in through the small print of a 1,000-page reconciliation bill in 1986), hospitals have to provide the expensive facilities to everybody, and don't get reimbursed for the deadbeats. Needless to say, loaded with these extra costs, hospitals do what comes easiest - they unload those costs onto the middle class. That's about $80 billion a year in extra healthcare that we pay either directly or through higher insurance premiums.

Second, the same service gets charged at three completely different rates - depending on who's paying for it. The lowest rate is paid by the government through Medicare/Medicaid. This means doctors hate taking Medicare patients, which is tough for senior citizens who need healthcare. The middle rate is paid by insurance companies, who negotiate and get volume discounts. The highest rate - and we're talking here about three or four times the insurance company rate - is paid by the middle class, by folks who lack health insurance and by those who have been denied coverage (such as for a "pre-existing" condition).

Needless to say, this grotesque pricing system adds hugely to the costs of healthcare, as everybody devotes huge amounts of time, energy and resources to accessing more-attractive payment methods or to offloading low-rent patients.

Third, there's the cost of the trial lawyers. Here we're talking about roughly 1% of GDP in direct costs, and an additional 2% to 3% that gets spent on unnecessary medical procedures that are undertaken to fend those lawyers off.

We don't expect Congress to solve all these problems, even though previous Congresses were in many cases the major cause. But you'd think a huge healthcare bill - like this one - would be viewed as a real opportunity to fix the system, and to make a dent in those costs.

This bill forces everybody to have healthcare. That brings a lot of young healthy people into the pool, which should reduce rates. It forces companies to cover people with pre-existing conditions, thus cutting out a lot of the insurance games that prevent people from having proper healthcare coverage. That should also reduce costs, as well as reducing healthcare bankruptcies. And it sets up a system of health exchanges, which should allow health-insurance policies to be sold across state lines, creating one large market instead of 50 small ones. This, too, should reduce cost.

And yet, according to the CBO, the bill increases healthcare premiums paid by individual people (as distinct from premiums that are paid by companies through group schemes) by 10% to 13% in 2016. That's on top of the aforementioned $185 billion increase in federal healthcare spending and $100 billion in additional taxes that we'll see in 2019. Then there's also the $100 billion in Medicare savings that won't happen because it involved reducing Medicare reimbursement rates still further.

Can't one expect any economic literacy from our Solons?

The one saving grace is that this mess won't come properly into effect until 2014, so two more Congresses will have the chance to sort it out.

If we hold our breath and try really hard to believe in fairy tales, perhaps one of them will do so.

[ Editor's Note : There's a reason Martin Hutchinson is building a reputation as one of the sharpest prognosticators in the investment world today: He can see things that "the system" is trying to hide from individual investors. Today's analysis of the new U.S. healthcare bill is a case in point: Hutchinson sees the costly pitfalls.

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