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How Obamacare Will Gut Muni Bonds (Especially in These 7 States)

MoneyMorning.com Report - There is a reason that adults are told to don their oxygen masks before assisting children in the event of an emergency on an airplane. If the most capable people are disabled, the weakest are unlikely to be able to help themselves.

The same adage applied to the U.S. economy when Barack Obama took office in January 2009. In the midst of the worst financial crisis in a century, it was imperative that everything be done to address the causes of that crisis and to strengthen the fabric of the economy to position it for sustainable economic growth. That wasn't done. Instead, the president made a historic decision that will rank among the great policy errors of the 21st century. He decided to pursue his dream of universal healthcare.

The result, as you might expect, is the infliction of enormous
damage on the American economy and tens of millions of Americans
whose medical care has been turned upside down in the name of
providing another entitlement without asking anything in return of
the recipients. The Affordable Care Act (known as ) has increased medical costs, deprived Americans of their
chosen physicians and treatments, and contributed to a culture of
dependency that has no place in a land of liberty.

It's been an economic and political nightmare.

The result, as you might expect, is the infliction of enormous damage on the American economy and tens of millions of Americans whose medical care has been turned upside down in the name of providing another entitlement without asking anything in return of the recipients. The Affordable Care Act (known as Obamacare ) has increased medical costs, deprived Americans of their chosen physicians and treatments, and contributed to a culture of dependency that has no place in a land of liberty.

And now, in 2016, it's about to gut municipal bonds.

The Disaster That Is Obamacare

President Obama decided to pursue healthcare reform despite opposition from a majority of the American people and a near-majority of Congress. He managed to sneak the legislation through by a bare majority using a reconciliation process designed for budget items and sold it as a phony civil rights measure. In the rush to pass the highly complex law before losing his Congressional majority, neither the president nor the vast majority of those who voted for the law read the bill or evaluated its unintended consequences.

For one thing, it unleashed an enormous merger wave, which has resulted in a series of mergers among health insurers, hospital chains, and pharmaceutical companies that were unopposed by antitrust regulators.

The law is also, predictably, a financial shambles. While the Obama administration claimed that Obamacare would be revenue neutral or save money, estimates now place the cost at close to $2 trillion (conveniently incurred after President Obama leaves office).

Eleven of the 23 regional coops formed under the law have failed. The largest health insurer in the country, UnitedHealth Group Inc. ( UNH ), warned that it may withdraw from state exchanges after suffering hundreds of millions of dollars of losses. We are also learning the true costs of the law's expansion of Medicaid to the states - and they are nothing short of catastrophic. While the Obama administration thought it could conceal the true costs of the law by pushing them off until after it leaves office, the chickens are already coming home to roost.

Obamacare was designed to incentivize states to expand their Medicaid programs by offering to pay 100% of additional costs through 2016, dropping to 90% by 2020. This free money led many states to take what appeared to be a great deal, but they are learning that there are no free lunches.

According to the Associated Press , at least 14 states have seen new enrollments exceed their original estimates, causing seven of them to increase their cost estimates for 2017.

  • California expected 800,000 new enrollees after the state's 2013 Medicaid expansion but ended up with 2.3 million.
  • Enrollment outstripped estimates by 44% in New Mexico...
  • 73% in Oregon...
  • And more than 100% in Washington state.
  • Illinois, which is already hopelessly bankrupt, originally projected that its Medicaid expansion would cost $573 million for 2017-2020; but 200,000 more people enrolled than expected, and the cost has increased to about $2 billion. Where the state is going to come up with this money is anybody's guess.
  • Enrollment overruns in Kentucky (which just elected a Republican governor who promised to end the Medicaid expansion) forced officials to double their estimates of the cost for 2017 to $74 million from $33 million, and the figure may rise to $363 million in 2021.
  • Ohio, home of presidential candidate John Kasich, has seen state spending on its Medicaid program grow by $5.8 billion since 2011. It now projects the total cost of its Medicaid program to hit $28.2 billion in 2017 - a 59% increase during Gov. Kasich's tenure.

Why is this important? Among other things, states have to balance their budgets by law. If their Medicaid budgets are blowing up, they are going to have to make sharp cuts in other areas or raise taxes significantly. Municipal bond investors are going to have to pay special attention to deteriorating credit quality in states that decided to enter the Devil's Bargain known as Obamacare.

This law is profoundly flawed and is going to have to be repaired or repealed before it completely destroys the American healthcare system.

But in the meantime, muni bond investors beware.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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