Australia | Jun 29 2012
By Kathleen Brooks, Research Director UK EMEA at FOREX.com
On Thursday 28th June 2012 the Supreme Court in the US upheld President Obama’s healthcare reform programme. This is a major milestone for the President and was one of his campaign pledges in 2008. The Supreme Court ruling means that Americans must buy insurance or face a fine.
So what does healthcare reform mean for America?
· All firms with 50 employees or more must provide healthcare to their employees
· It also extends a rebate to Medicare prescription drug beneficiaries of $250
· It bars insurers from not providing care when people get sick
· It would subsidise the cost of the insurance for low income households
· Ultimately it would expand healthcare coverage to 32 million people in the US; anyone without insurance would be faced with a fine.
So will this be enacted straight away?
The bulk of it will not come into effect until 2013, which is a new Presidential term. There is still a risk that Obamacare could be confined to history as the Republicans have vowed to repeal it if Mitt Romney wins the election in November.
What is the economic impact?
1, If more people have insurance this could increase spending on healthcare. This sector makes up 18% of US growth, so it could have an impact on GDP in the short-term if it is enacted.
2, This could boost jobs in the health sector, which has been a fairly resilient jobs creator during the economic downturn. This would likely be only a temporary boost as the health sector re-adjusts to a larger number of people with insurance.
3, But the jobs effect could be neutral; especially if small firms stop hiring when they get to 49 employees so they don’t have to pay for employee insurance.
4, Healthcare reform has been framed as being fiscally neutral so prescription rebates and subsidies need to be funded by tax rises elsewhere. These could come from taxing higher earners and increasing investment income tax. This may have an impact on consumption, but since the rich save more than others with lower incomes its actual effect could be fairly minimal.
5, If more people have insurance it could save the government money on emergency healthcare spending. Currently, if people can’t afford to get care they may leave ailments until they become serious and then need emergency care, which tends to be more costly. By expanding insurance it may encourage people to get treatment at an earlier, and crucially for government finances, cheaper, stage, and reduce the number of patients visiting emergency rooms across the US.
6, The Congressional Budget Office (CBO) has said that the healthcare bill could cut the deficit for the US over the next two years. The CBO estimates the cost of the bill to be $940 billion over a decade, which needs to be funded by tax rises (which are notoriously hard to predict). However, it may cut the deficit by $138bn over the same period through new fees, taxes and cost-saving measures as it could reduce the state medical bill if everyone is mandated to have health insurance.
What is the market impact?
The markets had a bad day on Thursday and at the time of writing the SPX index is down more than 1%. Interestingly, financials and the technology sector have taken the biggest hits, while the health care sector was down less than 1% post the Supreme Court Ruling. The news on healthcare soured the mood as the markets’ worried about the cost to firms’ to have to provide insurance to their employees, hence the immediate reaction could have soured investor sentiment towards all sectors of the SPX, not just healthcare.
Markets like clarity, and today’s decision doesn’t rule out the prospect that a Republican President could veto the whole thing, thus the impact on the markets could be short-term. However, going forward there are a couple of things to watch out for:
1, if the law is not vetoed by the next President then we would expect some tax increases to come into play to fund the bill. When these are announced it could have a major negative impact on US stocks. However, the fiscal cliff (the expiration of the Bush tax cuts scheduled for the end of this year) could have a larger impact on the markets as it threatens US GDP to the tune of nearly 1% according to some estimates.
2, If the bill remains fiscally neutral then we don’t foresee it having an impact on the dollar or Treasuries; hence on Thursday Treasury yields were lower as risk aversion gripped the markets. It also suggests that the markets are not concerned about the fiscal impact of this bill, that they have faith that tax increases can cover healthcare costs in the future and that Obamacare could help to reduce the US’s structural deficit.
Going forward, we think that this ruling will only have a very temporary impact on the markets. Of much more importance to the future impact of markets in our view, is the outcome of the EU summit and concerns in the Eurozone.
The SPX: performance by sector after the announcement of the Supreme Court Ruling on Thursday 28th June
The SPX 500 was looking vulnerable before the Supreme Court Ruling. 1,300 is a major support level (the 200-day sma) that could be breached if the EU summit delivers a disappointment later this week. Resistance lies at 1,340 and then 1,360 (the 100-day sma). Added to this the 50-day sma crossed below the 100-day sma, which is another bearish technical signal.
SPX 500: daily chart
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