We Are All Asset And Liability Managers Now: Financial Advisors' Daily Digest
By SA For FAs :
In the journalism trade, "Man Bites Dog" describes the kind of story that gets attention, because it is not commonplace in the way that "Dog Bites Man" would be. And so it was with Eric Basmajian's article " Deflation Coming in Healthcare ."
Isn't all we ever read about that healthcare costs are rising ? The latest figures I saw from consultancy HealthView Services project expenses for retiree health (a specialized field) to rise at an annual rate of 5.47% - triple the general inflation rate for the preceding five years and more than double expected Social Security cost-of-living adjustments - "for the foreseeable future."
And while healthcare costs rising forever and ever and ever, i.e., "the foreseeable future," is in theory a "Dog Bites Man" story, it actually does get attention, because the folks back home feel this bite and don't much like it. So Basmajian's thesis is rather shocking - in a good-news kind of way, and given that he is a quite serious analyst, it commands attention. And indeed one thing he wrote struck me as a particularly plausible support for this thesis. I quote:
Personal health care costs have risen to 16% of total personal disposable income. Individuals are starting to pay more out of pocket for healthcare and it is now almost 1/5 of the personal household budget. Healthcare is now a major conversation in every household budget. As the costs rise and households feel the burden of the expense, individuals will both find innovative ways to reduce healthcare costs as well as simply reduce usage due to cost.
The fact is, people do converse about this topic. Well-to-do people routinely lament their high and rising costs. I myself was on the receiving end of such discussions multiple times this week already. Indeed, a commenter on one of my articles, a physician, offered a few ideas on how to reduce prescription costs, which I forwarded. It seems to be that indeed, people are eager and active in efforts to reduce such costs, so Basmajian seems onto something.
Apart from consumer rumblings, another part of his argument seems akin to an economic law of gravity. He writes:
Soon, interest expense, Social Security, Medicare, and Medicaid will be greater than total tax receipts. Currently, these four line items represent roughly 65% of total tax receipts, reaching over 80% in the last recession.
As a result of this unsustainable situation, Basmajian notes that "the government, in the newest budget proposal, is actively taking steps to begin reversing Medicare Part D."
His main point is that this "Man Bites Dog" trend he is forecasting will hurt healthcare stocks. One reason for this comes in his opening sentence, redolent with linguistic if not political irony:
For the better part of the past five years, the healthcare sector has been a major beneficiary of the Affordable Care Act as healthcare costs have soared.
Let's leave out the politics (which Basmajian is careful to do as well) and consider a market truism - namely, that there are two sides to every trade. If, as he says, "the healthcare sector has been a major beneficiary" of rising healthcare costs, then who in the corporate world has borne the costs?
The answer, we can glean from business news, has been major corporations saddled with the obligation to pay their employees' healthcare expenses. GM's long-term decline, it is now understood, was not a result of the quality of its cars as its huge outlays for its employees' pensions and healthcare. GE's dramatically downward share price spiral owes entirely to its GE Capital unit's mismanagement of its long-term-care insurance underwriting. Who knew LTC would be so expensive?
Your friends, neighbors, relatives and you do - that's who. That's what people complain about - the cost of a nursing home for their loved one, and sometimes the years-long wait for the privilege of getting into that home.
This has had a powerful effect on corporations and appears to be seeping into the consciousness and behavior of individuals. GM and GE became, whether or whenever they realized it, asset-liability management enterprises, with auto and household product manufacturing sidelines. And so too are we. We must keep our day-jobs going as stewards of our human capital, while acting as hawkeyed financial controllers, making sure our healthcare liabilities don't eat us out of house and home.
To me, Basmajian's "healthcare deflation" came as a surprise. It's not a trend I saw coming. But it does seem to be a directional shift in the making, as governments, corporations, and individuals all have powerful incentives to reverse healthcare's daily death by a thousand cuts.
Please share your thoughts on this issue in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha.
- Yuval Taylor proposes a better small-cap value index.
- Rob Marstrand unpacks stock valuations for savvy investors.
- Doug Short: India's Sensex has trumped world markets , including U.S., since the 2009 bottom.
- Charlie Bilello: The Fed has maintained emergency monetary policy longer than any previous period.
- Columbia Threadneedle Investments cautions investors chasing dividend yield .
- Russ Thornton: Is the financial narrative you telling yourself true?
- Janus Henderson Investors: How advisors can cultivate junior staff into full-fledged partners.
- For more content geared to FAs, visit the Financial Advisor Center .
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