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The Shifting Political and Policy Wind

(January 21, 2010)

Dear Subscribers and Readers,

Health care reforms have been a most visible part of the American political agenda since the early 1900s.  According to the Kaiser Family Foundation (a bipartisan think tank on U.S. and global health issues), the U.S. has flirted with the idea of government involvement in U.S. healthcare issues since Teddy Roosevelt endorsed social insurance (which includes health insurance) as part of his platform for his failed White House bid in 1912 (the following timeline is courtesy of the Kaiser Family Foundation):

Timeline with U.S. government's involvement with healthcare issues.

In 1929, Baylor Hospital created a first-of-its-kind pre-paid hospital insurance plan for a group of school teachers.  This subsequently led to the creation of the nonprofit Blue Cross plans (which now cover 100 million Americans in 39 states).  Ironically – in a period of unprecedented government intervention and a national mood conducive to health care reform – the Roosevelt administration failed to pass any meaningful healthcare reform legislation as retirement security and unemployment insurance became much higher priorities during the Great Depression.  When the Social Security Act was signed on August 14, 1935, it did not address healthcare issues in any meaningful way.  After the Social Security Act was passed, Roosevelt appointed the Technical Committee on Medical Care in 1937 to advance healthcare reform.  However, by 1938, the political environment has changed – as southern Democrats aligned with Republicans to oppose the idea of general government expansion – thus preventing further New Deal social reforms.

The American political environment is full of ironies.  While the Roosevelt administration failed to expand health care insurance coverage or services, the private sector stepped in to fill the gap in 1943.  During World War II, American companies had a very difficult time hiring workers as the U.S. government implemented wage and price controls.  However, the War Labor Board ruled in 1943 that certain benefits, such as health care insurance, were exempted.  As a result, many American corporations created or expanded their health care benefits in order to recruit workers.  Despite Roosevelt's further push of health care reform in his January 11, 1944 State of the Union Address (the so-called “Second Bill of Rights”), and Truman's mandate for health care reforms stemming from his winning the 1948 election (with Congress also swinging back to a Democratic majority), no meaningful health care reforms were passed until President Johnson signed both Medicare and Medicaid into existence in July 1965 as part of his “Great Society” agenda (ironically, it took a Southern Democrat to break the 30-year old southern Democratic alignment against national health care reform).

The current health care reform bill had his origins in the early 1970s as Senator Ted Kennedy held national hearings and published a report entitled “The Health Care Crisis in America” addressing the critical issues in 1971.  Kennedy's idea would include the creation of a universal single-payer plan – with a national health budget and no cost-sharing – and would've been financed by payroll taxes.  President Nixon countered with his own plan in 1971, and would expand on this proposal in 1974.  This “Comprehensive Health Insurance Plan” would include universal coverage, voluntary employer participation, and a program for the working poor and the unemployed – the latter of which would replace Medicaid.

By early 1974, there was bipartisan support for implementing some kind of health care reforms.  Even the insurance industry supported some kind of reforms (albeit more incremental ones), as it believed that health care reforms were inevitable.  While the American Medical Association continued to lobby against health care reforms, its campaign of labeling it as socialized medicine was a dismal failure, given Nixon's anti-Communist credentials.

Despite the bipartisan efforts, a national mood conducive to national health care reforms, and a relative consensus from a diverse mix of interest groups, the passage of health care reforms were not meant to be.  The competing mix of proposals bogged down the legislative process.  At the same time, Congress was dominated by the Watergate hearings which eventually led to the resignation of President Nixon.  While President Ford continued to support health care reform legislation, a comprehensive bill never reached the House floor for lack of consensus.  Following the resignation of Wilbur Mills –who had spearheaded health care reforms – as chair of the House Ways and Means Committee due to scandal in late 1974, the momentum for health care reforms faded.

By the late 1970s, the national mood again shifted, as conservatism were again on the rise, culminating in the election of President Reagan in 1980.  This shift in national mood is captured by the following chart for the period from 1952 to 2008 (courtesy of Professor James Stimson at the University of North Carolina at Chapel Hill – note that the methodology is discussed at his website):

Mood Estimates with One Standard Error Boundaries

Health care reforms did not get on the Presidential agenda again until President Clinton's election in 1992.  With the exception of the passage of the Children's Health Insurance Program in 1997, however, Clinton's efforts did not result in any meaningful reforms – as the legislation was bogged down by its complexity and as Clinton lacked the large electoral mandate to implement sweeping reforms.

Coming off the 2008 Presidential election – and as suggested by the above chart – there was no doubt that President Obama carried a large electoral mandate to implement sweeping national health care reforms (President Obama garnered 53% of the popular vote, which was the highest percentage for a non-incumbent President since the 1952 election, when Eisenhower received 55% of the popular vote).  The filibuster-proofed Democratic majority in the Senate seemed a guarantee.  But in another great irony in American political history, the premature death of Ted Kennedy – who have spearheaded national health care reform legislations many times over the last 40 years – put an indefinite halt to Obama's health care reform plans.  If the Obama administration and/or Congress had not been bogged down by the financial crisis, sweeping national health care reforms would no doubt have been passed already.  Similarly, if Ted Kennedy had lived on and retained his seat, sweeping national health care reforms would have been guaranteed.  I still believe some kind of reform will be passed, but it will be a watered-down version of the House and Senate bills that have emerged in some shape or form over the last 18 months.  In addition, subscribers should note that the national mood has tended to swing from one extreme to another (as shown in the above chart).  With the national mood having swung its most liberal since the early 1990s, there's chance that the national mood is swinging back towards conservatism (the Republican gaining control of Ted Kennedy's Senate seat may be a harbinger of things to come, although with the generally more liberal Gen-Yers gaining more political power, it is difficult to envision this occurring).

Speaking of shifting policy wind, investors are now baking in a gradual tightening of Chinese monetary policy over the next 12 months.  Goldman Sachs believes that the People's Central Bank of China will raise its policy rate three times (from its current 5.31%) starting in March in 27 basis-point increments.  Over the next 12 months, the consensus is calling for a 1.08% hike in the Chinese policy rate.  Interestingly, while Chinese stocks have probably already reacted to this shift in monetary policy, commodities in general have not corrected.  Meanwhile, inflationary expectations in China remain high – meaning that the People's Bank of China may adopt an even tighter policy going forward, especially if Asian economic growth surprises on the upside.

Signing off,

Henry To, CFA

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