Until very recently, the policy called “Medicare For All” (MFA) was a political non starter. Current polls, however, show a MUCH deeper than previously believed level of support. Albeit, with one HUGE reservation. Voters are MUCH less keen on Medicare the minute the price tag is mentioned: substantially higher taxes.
MFA, by design, would eliminate the bulk of the private health care sector. Under the current plan, there would be absolutely NO role for health insurance companies or their employees. Recipients would pay NO Premiums nor would they be responsible for any copays or deductibles.
Government control over virtually all aspects of health care services delivery replaces the existing fabric of private providers. The only remaining role for the private market would be truly elective surgeries such as many cosmetic procedures.
MFA is not generally expected to become the “law of the land”, but it is backed by the major Democratic Presidential Candidates. The upcoming 2020 Presidential election may prove to be a partial referendum on the future direction of how health care is delivered to US Residents. MFA may have EXTREME consequences for investors.
Medicare For All By The Numbers
Medicare/Medicaid spending is the largest category of the Federal Budget. It runs about $1.15 Trillion per year. There are 60 million Medicare beneficiaries and about 75 million receiving Medicaid. (https://www.usdebtclock.org/).
Annually, the Federal Cost per Recipient is about $8500. If the exact same level of benefit were extended to the entire population of nearly 330 million, the total Federal Care Cost rises to $2.8 Trillion (330 million times $8500 per person = $2.8 Trillion).
A direct comparison of costs, however, is not possible. MFA is far more generous than plain old Medicare. Medicare covers 80% of a recipient’s Out of Pocket Costs. Under MFA, the ENTIRE cost of a procedure or service would be covered as would any prescriptions. There are no deductibles or copays under MFA. As a result, the PER PERSON cost for Medicare For All could rise significantly and render the “guesstimate” of $2.8 Trillion (from above) quite conservative.
A number of studies have been dedicated to estimating the cost of MFA. Most conclude an annual cost of roughly $3 Trillion per year or so. (https://www.crfb.org/blogs/how-much-will-medicare-all-cost).
Health Care Sector Gets Bludgeoned
The greatest negative impact of MFA would be on the large, private health insurance providers. Under MFA, these companies would have NO role and no need for employees.
The top 5 insurance providers are: 1) United Health (UNR, 50 million premiums), 2) Anthem (ANTM, 40 million), 3) Aetna (Now CVS, 22 million), 4) Cigna (CI, 16 million) and 5) Humana (HUM, 14 million). (https://www.beckershospitalreview.com/payer-issues/america-s-largest-health-insurers-in-2018.html).
A Slide Show of the top health insurance providers is below. A few key takeaways are as follows:
- At the end of 2018, the combined market capitalization of the top 5 health insurers was roughly $600 Billion. In, 2019 alone, they have all lost an average of nearly 1/3, DESPITE growing earnings.
- None of these are “cheap” from a valuation standpoint. UNH, the largest, is STILL trading at 20 times earnings, a substantial premium to the S & P 500.
- None of these companies appear to be bottoming yet. The shakeout could last much longer. This sector should still be avoided.
Everything Health Care is Suffering
While the insurers are “Ground Zero” for the MFA bomb, other sectors are rapidly following suit. Healthcare is very broad based, including Pharmaceutical Companies (like Merck or Pfizer), Device manufacturers (like Medtronic), and Bio-tech developers (Amgen). While the exact impact of MFA on these companies is unknowable, the direction is obvious. Each of these companies will be under tremendous pressure.
The charts above for Health Care Select ETF, the Pharmaceutical Index and the Biotechnology ETF illustrate the extent of damage tied to the growing call for MFA. Very few of these companies are particularly cheap. Even at lower valuations, they are still trading at a premium to the market overall.
Nonetheless, the aggregate loss of market capitalization of the entire Health Care Sector, since the beginning of the year, is likely greater than $500 Billion.
Looking Forward For Health Care
The direct “cost” of MFA is about $1.85 Trillion per year ($3 Trillion minus $1.15 Trillion). In order to fund the extra expenditure, the average taxpayer would be hit with a bill of about $15,000 per year, or a roughly 50% increase. On the other hand, if MFA were with funded with debt alone, the annual budget deficit would TRIPLE to nearly $3 Trillion from the near $1 Trillion at current run rates. (https://www.usdebtclock.org/index.html).
The direct cost of MFA is NOT the only cost. Consider the loss of wealth in the publicly traded health care stocks, currently exceeding $500 Billion. The entire sector is thought to be worth roughly $4 Trillion. Will Investors tolerate the continued evisceration of their wealth PLUS the type of financial engineering required to foot the bill?
The concept of “Free Health Care” is very appealing until the price tag is attached. Free is NEVER Free. Free is quite Expensive. MFA may pass in some version some time down the road. Or it may not. How can a society, so in love with the Stock Market, tolerate such heavy losses? The US cannot possibly handle anymore than its already “out of control” debt level. “The Unstoppable Parabolic Increase In Debt”. (https://markonomics101.com/2019/03/24/the-unstoppable-parabolic-increase-in-debt/).
Don’t count on Medicare For All. Count on reality.
Be Informed, Not Misled!