Mish's Global Economic Trend Analysis

Fantasy Healthcare Scenario, Reader Anecdotes, Wildcards; Capital IQ Healthcare Report Link
No Fear
End of Employer-Provided Healthcare: By 2020, S&P 500 Companies May Dump 90% of Workforce into Obamacare
Annexation by Force; Three-Part Reality; Actions vs. Words; Paper Legalities

Fantasy Healthcare Scenario, Reader Anecdotes, Wildcards; Capital IQ Healthcare Report Link

Posted: 06 May 2014 09:13 PM PDT

In End of Employer-Provided Healthcare: By 2020, S&P 500 Companies May Dump 90% of Workforce into Obamacare I noted that the New York Times, Yahoo!, McClatchy and other mainstream media outlets referred to a healthcare report without having the decency of providing a link.

Sadly, this is the norm. Bloomberg, Reuters and countless others are guilty of the same practice on numerous occasions.

Link to the Report

Reader Julian managed to find a link to the report.

Please consider The Affordable Care Act Could Shift Health Care Benefit Responsibility Away From Employers, Potentially Saving S&P 500 Companies $700 Billion by S&P Capital IQ.

Here are a few charts from the report.

Historical and Estimated Healthcare Premiums

Employer Healthcare Contributions

Average Healthcare Premiums

Using Its Proprietary Model, Global Market Intelligence Calculates Significant Cost Savings Potential For U.S. Companies

To investigate the potential intermediate to long-term ramifications of the ACA, GMI Research constructed a proprietary model to evaluate how companies might, over time, move away from the traditional health care insurance relationship with employees. This model assesses the impact on both employees and corporate America, benchmarked by S&P 500 member companies. This study also evaluates a more general impact on the economy by including a review of companies that have more than 50 employees.

Modeled results suggest that companies have much to gain from moving employees to exchanges enabled by the passage of the ACA. As companies come to grips with the potential impact on employee morale as well as the potential use of health care coverage as a recruitment tool for skilled workers, the financial impact of limiting or eliminating its role in employee health care coverage will be a significant boost to corporate earnings, especially over the long term if health care costs continue to escalate. For S&P 500 companies alone, hundreds of billions of dollars of expenses could be transferred to employees and to the Federal government and to some extent the tax payer over a 10-year period, despite government-imposed penalties incurred by corporations (detailed later in this study).

Other Factors

Other factors could contribute to greater savings, such as corporations altering their benefits relationship with retirees.

As part of the transition, corporate America will likely alter the relationships it held with retirees. For its retirement plans, a company may see an opportunity to limit its future risks and obligations and rid itself of the health-care-related costs of retired employees that have grown to levels likely not foreseen when the retirement plans were created. A recent example of a potential change is the September 2013 announcement by IBM that it planned to move about 110,000 retirees off its company-sponsored health plan and provide them instead with a payment to purchase health insurance on an exchange. The growing costs of the plan, which the company said made the plan unsustainable, sparked IBM's action. By its actions, IBM solidifies the idea that companies can transfer the risk of future cost increases to the employees while keeping the near-term effect relatively neutral for the employee.

Another change may be a reduction in the number of corporations contributing towards the health care costs of its employee's working spouses. United Parcel Service (UPS) provided an example of this, when they dropped coverage for working spouses of its nonunion workers. UPS noted, in an available FAQ about the change, that the move, which affected about 15,000 working spouses, was because "the rising cost of health care in general, combined with the costs associated with the Affordable Care Act, have made it increasingly difficult to continue providing the same level of health care benefits to our employees as an affordable cost." UPS expects the move to save the company about $60 million per year.

Savings

Using its model, S&P Capital IQ estimates S&P 500 companies would save about $700 billion through 2025.
Total savings to U.S. businesses with 50 or more employees could amount to $3.25 trillion.
Factor in businesses with less than 50 employees and the savings would be even greater.

The major assumption in Capital IQ's projection is the projected rate of healthcare cost increases.

Table of Scenarios

Scenario One: Using the average health care inflation rate of 7.5% since 1999 (according to the Kaiser Family Foundation) through 2015 and then dropping to 6.5% per year.
Scenario Two: Using a lower average health care inflation rate of 5% through 2015 and then dropping to 4% per year.
Scenario Three: Using a higher average health care inflation rate of 10% through 2015 and then dropping to 7.5% per year.
Scenario Four: Using the health care inflation rate from Scenario One but shifting to a higher amount of workers enrolled in health care to full-time from part-time, since companies may be less likely to offer insurance to part-timers.

Capital IQ's model assumes scenario 1 has a 40% likelihood, and assigns 20% to the remaining scenarios.

Is Capital IQ's Reasonable?

Is Capital IQ's model reasonable? The answer is not as straight-forward as one may think. Obamacare itself does absolutely nothing to reduce costs, but costs may drop anyway.

I expect healthcare and education costs to drop simply because the current exponential paths are not sustainable.

Cause and Effect

More importantly, costs may drop simply because businesses do exactly what Capital IQ assumes!

A couple of readers picked up on that possibility in comments to my previous report. For example, reader Michael states "Having individuals responsible for their own health insurance is the best thing that could happen to US healthcare."

In regards to employer provided healthcare, reader Kevin surmised "Employers never should have been providing such benefits in the first place."

Reader Jon noted "My insurance company was billed $22,000 for hernia surgery. The entire pre-surgery, surgery, and post time was about two hours."

The outlandish cost mentioned by Jon is exactly what happens when someone else picks up the tab and there are no incentives to reduce cost anywhere in the system.

Here is another example: Those in no-deductible or low-deductible plans (frequently union mandated) plans have their costs assumed by taxpayers. Common sense explains what happens.

Wildcards

There are other influences to consider. For example, will Walmart or other low-cost companies create more competition? I hope so and expect so. If much-maligned Walmart opened up clinics and entered the business, we could see costs drop in a hurry.

What Happens Next?

We do not yet know the end result. If the shift away from employer-provided healthcare occurs (and I believe it will happen), will individuals be responsible to contain costs (and thus demand better care for less), or will Obamacare pick up the tab?

If the latter, healthcare costs could soar making the projected savings greater. If the former, it may appear the savings were less. However, the reality may be costs are less precisely because companies no longer are willing to foot the bill!

Free market competition is always a good thing. So is individual responsibility.

Fantasy Scenario

Given government programs typically do the opposite of what is expected, there is a chance that the perverse effect of Obamacare is the exact opposite of what Obama intended: Companies dump healthcare, consumers become more cost-conscious because they have to, Walmart adds badly needed competition, and single-payer dies on the vine.

I leave the odds of that happening up to reader fantasies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

No Fear

Posted: 06 May 2014 01:07 PM PDT

Looking for signs of fear? Finding any?

VIX Volatility Index

click on cart for sharper image

Complacency (in purple) can last for long periods of time.
Fear (in blue) tends to spike and subside.

While the VIX is not at the historic lows seen in 2007, I rather doubt it gets there. If it does, new market highs are likely.

Compare fear (as measured by the VIX) with the chart of the S&P 500 below.

Buy the dip mentality is entrenched. There is no fear.

Should there be at these prices?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

End of Employer-Provided Healthcare: By 2020, S&P 500 Companies May Dump 90% of Workforce into Obamacare

Posted: 06 May 2014 11:22 AM PDT

Companies did not always provide healthcare benefits. But over time, employer-provided healthcare became an expectation, if not a "right".

That trend, especially with part-time workers has reversed. Some argue that by 2020, healthcare coverage may go full circle.

For example, please consider the McClatchy article Report: large employers could shift nearly all workers' health coverage to marketplace by 2020

A new investor report predicts that Standard & Poor's 500 companies could shift 90 percent of their workforce from job-based health coverage to individual insurance sold on the nation's marketplaces by 2020.

If all U.S. companies with 50 or more employees followed suit, they could collectively save $3.25 trillion through 2025, according to the report by S&P Capital IQ, a division of McGraw Hill Financial.

Standard & Poor's 500 companies could save $689 billion over the same period if they did likewise, the report found. Savings for S&P 500 companies could top $800 billion if health care inflation remains at the traditional 7.5 percent rate over the next decade, the report estimates.

"Once a few notable companies start to depart form their traditional approach to health care benefits, it's likely that a substantial number of firms could quickly follow suit," the report noted. "The result would be a dramatic departure from the legacy employer/employee payroll deduction benefit provision relationship, and could quickly be the modern day equivalent of companies moving from defined benefit pension plans to defined contribution programs."

The transition to marketplace coverage won't take long, the report predicts. Ten percent of S&P 500 workers will shift coverage by 2016, 30 percent by 2017, 70 percent by 2019 and 90 percent by 2020.

Low- and middle-income workers, who already get a sizable federal subsidy to help them purchase marketplace coverage, are the most likely to be steered into the exchanges. But higher-income employees "will eventually be pushed towards the (marketplaces) and will be provided a stipend to help cover costs," the report predicts.

The projections are not etched in stone. Individual companies will decide when and how any such coverage transitions will be made. The projections could also change over time as the Affordable Care Act is amended and modified.

"Whether the current version of the ACA remains intact or is amended," the report said, "the burden of acquiring or providing health benefits is sure to shift more from the employer toward the individual or employee, with varying degrees of support from the government, as time passes."

Here are references to the report, none of which contains a link to the report.

McClatchy: Report: large employers could shift nearly all workers' health coverage to marketplace by 2020.
New York Times: Envisioning the End of Employer-Provided Health Plans
Yahoo: Thanks to Obamacare, more companies are likely to dump health benefits
Politico Pro: Requires login
Advisory: Report claims 90% of employers could shift workers to exchanges by 2020

The articles essentially read the same. It's as if someone published the story and everyone copied it, referring to "the report".

Advisory had additional comments supporting and in disagreement with the report...

S&P Capital IQ Managing Director Michael Thompson says, "We still expect some companies to hold on to their health care plans. ... But we think that the tax incentives for employer-driven insurance are not enough to offset the incentives for companies to transition people over to exchanges and have them be more autonomous around management of their own health care."

"For most firms, there isn't a net gain to dropping coverage for active workers," according to David Cutler, a Harvard economist who was an advisor to the White House during the ACA negotiations. "The subsidies are more than offset by the higher taxes workers will pay"

Report Believable?

Is the report believable? I think so, but I would prefer to read the entire study. If I can get a copy with permission to list it or excerpt it, I will do so.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Annexation by Force; Three-Part Reality; Actions vs. Words; Paper Legalities

Posted: 05 May 2014 11:30 PM PDT

In response to Misrepresenting the Libertarian Position on Putin and the annexation of Crimea by Russia a close friend responded ...

The reality is that the international community overwhelming does not recognize the annexation. Annexation by force is no longer how the world does business and that is what is at stake here. That is why it cannot be allowed to stand. As Radek Sikorski the Foreign Minister of Poland, whose country was also ripped apart and partially annexed by Russia before World War II said, "Do not underestimate our determination not to return to the politics of the 20th Century."

Three-Part Reality

Here is the three part reality.

Crimea is again part of Russia whether the world community likes it or not.
The annexation will stand.
The only thing that can change the above outcome is another major war.

Reflections on World Opinion

Recall that world opinion once said the earth was flat. Was it?

The US had no legitimate business in Vietnam or Iraq. The citizens of those countries did not want us there. World opinion (supportive at the time) did not make either invasion just. Polls today would likely show completely different results on the wisdom of those wars.

Personally, I do not care what world opinion is on Crimea. Nor did I care when majority opinion found it acceptable for the US to be in Vietnam or for the US to invade Iraq.

I do care about the opinions of people who live in Crimea. Overwhelmingly, Crimeans want to be part of Russia.

Question: Who the hell is the world, the UN, or anyone else to tell people living in Crimea any different?

Answer: Not only is it is the height of arrogance to force a different viewpoint on Crimeans, it also risks WW III to impose that arrogance.

Nonetheless, my friend (let's call him F1) says the annexation "cannot be allowed to stand".

Really?!

As long as we are discussing world opinions, let's consider the opinion of US citizens.

CBS news reports Most Say U.S. Doesn't Have a Responsibility in Ukraine. "A majority of 61 percent of Americans do not think the U.S. has a responsibility to do something about the situation between Russia and Ukraine, nearly twice as many as the 32 percent who think it does. There is widespread bipartisan agreement on this."

Do opinions matter or don't they?

Tellingly, opinions only seem to matter when one agrees with them!

Paper Legalities

I have another friend (F2) who also disagrees with my overall point of view on Ukraine. F2 is a lawyer who wants to remain anonymous. F1, F2, and I all communicate daily. We see each other's responses.

F2 commented on F1's "paper thin distinctions". F2 also stated "There is no consistent legal principle that drives these events. It's always power. Eventually the international community recognizes reality. The international community's quasi/legal acts don't create reality."

On that, I am in complete agreement. In time, probably quickly (unless a major war breaks our), the international community will recognize Crimea is part of Russia.

F1 responded "I am feeling pretty good about my position. The world isn't talking about sanctions, and bolstering NATO'S eastern defenses because they see paper thin distinctions."

Will world opinion and recognition that Crimea is part of Russia change F1's mind? Time will tell.

Outrage Over Odessa

Reader Rich pinged me with his thoughts on Odessa and media bias.

Hello Mish
Thanks for your comments on Ukraine

It seems to me it's essentially a state's rights issue since polls indicate that most in the east favor more autonomy from Kiev and only a minority want independence or annexation by Russia.

But where is the outrage in the Western press over the gruesome events in Odessa. There are videos of people shooting into windows while the building was burning and people were trying to escape the flames. Why the outrage over Kiev snipers, but near silence over what happened in Odessa?

Lastly, what has been the role of CIA/FBI in directing / training Kiev's special forces who are attacking the east? Russia is almost certainly stirring the pot, but the US/EU has done so for months and years, and almost certainly continues to do so.

Where is the serious, unbiased reporting on this? I can find a little at the Guardian, BBC, and Al Jazeera. RT has useful information but they are not unbiased.

US press has an unquestioning Cold War mentality and defines things as either pro-Russia or pro-west. Given the complexities and subtleties, where is the unbiased reporting and analyses by Western mainstream media?

Rich

Question: Where is the unbiased reporting and analyses by Western mainstream media?

Answer: Generally "nonexistent". And those of us who present a different point of view are accused of being pro-Russia, unpatriotic, or traitors.

I have several emails from people who hope I am tortured to death for my opinions.

Actions vs. Words

Finally, let's consider the opinion of another close friend of mine, Pater Tenebrarum at the Acting Man Blog.

Via email, also in response to Misrepresenting the Libertarian Position on Putin, Pater writes ...

Very well said!
You saved me from having to write something along these lines myself.

Besides, here are some of the things Putin has said over time. The first quote is in response to the crisis he inherited from Yeltsin:

"During the time of the Soviet Union the role of the state in economy was made absolute, which eventually lead to the total non-competitiveness of the economy. That lesson cost us very dearly. I am sure nobody would want history to repeat itself. We should also be aware that for during the last months, we have been witnessing the washout of the entrepreneurship spirit. That includes the principle of the personal responsibility – of a businessman, an investor or a share-holder – for his or her own decisions. There are no grounds to suggest that by putting the responsibility over to the state, one can achieve better results. Another thing – handling crisis must not turn into financial populism, into rejecting a responsible macro-economic policy. Unreasonable expansion of the budget deficit, accumulation of the national debt – are as destructive as an adventurous stock market game."

"While a modern state must honor its obligation 'to take care of its population and ensure its social protection' or face the risk of collapse, European countries have been 'living beyond their means' and are now witnessing the rise of a dependency mentality … [that] endangers not only the economy but the moral foundation of society. It is no secret that many citizens of less developed countries come to Europe specifically to live on social welfare."

"Let us be frank: provoking military-political instability and other regional conflicts is also a convenient way of deflecting people's attention from mounting social and economic problems. Regrettably, further attempts of this kind cannot be ruled out."

"We must seek support in the moral values that have ensured the progress of our civilization. Honesty and hard work, responsibility and faith in our strength are bound to bring us success. There should be no place for despondency. The crisis can and must be fought by uniting our intellectual, spiritual and material resources."

"Unfortunately, more and more often we hear that increasing military spending will help solve today's social and economic problems. The logic here is quite simple. Additional allocations for military needs create new jobs.
[...] At a glance, it seems to be merely a method to fight the crisis and unemployment. Perhaps, in the short run, such a measure may yield some results. But in reality, instead of solving the problem, militarization pushes it to a deeper level. It draws away from the economy immense financial and material resources, which could have been used much more efficiently elsewhere."

"One must not allow oneself to skid down to isolationism and unbridled economic egoism. ... The second possible mistake would be excessive interference into the economic life of the country. And the absolute faith into the all-mightiness of the state."

Can one in all honesty disagree with any of this? Admittedly, and unfortunately, Putin may not walk the walk, but Russia does have a 13% flat tax, and that alone is eminently praiseworthy.

Enforcing Paper Legalities

If Putin did what he said, and the US acted in accordance with its own constitution, the world would be far better off. In terms of significance, the latter is far more important.

Obama, Bush, and numerous presidents before them, all did what they wanted, not what was in accordance with the constitution.

When we go to enforce "paper legalities" the world over, we would be wise to act in accordance with our own paper first.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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