Takeaway: Health care stands poised to eat the American economy without some tough choices which is not normally what you find on Capitol Hill

Conquering Wuss-dom and Inflation | Politics, Policy & Power - 2022.02.05 P3

Politics.  Dr. Art Laffer, my fellow Nashvillian and friend, once told me that politicians were most dangerous when they are scared…or drunk. However, even after Transportation Week, it is difficult to find a quorum of the intoxicated to do much damage.

That leaves fear.

Fear of terrorism. Fear of a warmer climate – and if you are former Senator Al Gore, boiling oceans. Fear of viruses. Fear of violence. Fear of high-altitude balloons. You name it. Getting what you want in politics has meant scaring to tar out of Americans.

Wuss-dom rules.

The latest opportunity to put the fear of God in Americans – or at least 535 of them on Capitol Hill – is the debt ceiling vote. The conventional wisdom among Washington’s chattering classes is the credit of the United States is too important to be the subject of partisan negotiations.

It is facile as it is stupid.

The debt ceiling like the budget – which isn’t really a budget as most people understand the word – is fair game and always has been. Negotiation, of course, requires a little fortitude. It requires a little fearlessness, especially when this or that leadership fund starts running ads in your district accusing you of killing the elderly and eating the young.

Disrupting the heuristics from about $7T ago are a minority of Republicans who insisted on debt ceiling negotiations in exchange for supporting, or not opposing, Kevin McCarthy as Speaker.

In their view, the credit of the United States may not be in peril but you can see it from here. Also, for those that remember the 1980s, controlling inflation has a significant fiscal component about which Jerome Powell can do nothing.

I cannot profess to being a fan of the little band of mutineers. We should at least acknowledge, however, that demanding the rate of spending slow in exchange for a yes on raising the debt ceiling takes more fortitude than doing so without qualification.

Buckle up.

Policy.  Not sure how much longer Wall Street will ignore the chasm we have crossed these last two three years. Even if the markets and its narrative pillars do not recognize it, give credit to Federal Reserve Chairman Jerome Powell for acknowledging the daunting task before him.

I do not recall how many times he noted the uncharted territory in which we sail but it was more than one would expect from a central banker. He specifically called out services as an area of the economy that had not yet seen labor-driven inflation wash through.

Although Powell did not specifically cite health care, he might as well have. Services PCE index is up 5.1% YoY in part, because health care is behaving as if nothing happened. It is up 2.4% YoY, a pretty typical annual inflation rate.

Health care’s slow meander through inflation will change as February data come in. Payer contracts will begin updating on a rolling basis to reflect the higher labor and supply costs. Premiums will increase. As GDP takes a beating from monetary policy, health care’s share will rise, making those spending reductions the Republican mutineers seek, politically fraught.

To put it in Hedgeye terms, health care’s near-term future includes accelerating inflation, (industry) GDP growth and dovish monetary (reimbursement) policy.

It becomes hard to imagine a 2% inflation rate as the federal government and wage earners shovel cash into the raging inferno that is the American health care industry. You may even see recent declines retrace as monetary policy proves ineffective in reducing demand for health care services.

It could become enough of a problem that the Speaker McCarthy’s loyal opposition start to look a little less dim-witted.

Power. It will take a little courage but addressing health care’s voracious appetite for the American economy can – and probably will – be addressed by deregulation. The state and federal regulatory systems are protectionist and very expensive.

Federal law requires certain procedures to be performed on an inpatient basis because of some misguided pretext that patient safety is the primary concern of CMS. States limit the number of providers in a market under the delusion that resources will otherwise be allocated inefficiently. Despite some very intelligent policy on price transparency, providers and insurers prevail in hiding their bacon.

It is so obvious an opening for Republicans you have to wonder why they have ignored it as a policy priority to date. Instead, they choose to prattle on about HSAs and high deductible plans.

Of course, Speaker McCarthy has pledged the expected fealty to preserving Medicare and Social Security benefits. Let’s give him a little credit by pointing out he did not say how.

Have a great rest of your weekend.

Emily Evans
Managing Director – Health Policy