McConnell Bites The Dust-----What It Means

The chickens are coming home to roost. Indeed, if such domestic fowl could fly Washington's skies would soon be dark with them.

That's because the events of the past week have extinguished the illusion that there is a functioning Republican government that can reverse the nation's slide towards fiscal catastrophe.

Moreover, that signal reality has become absolutely clear just as the Fed has officially thrown its printing presses into reverse for the first time in 30 years. So under the guise of balance sheet normalization it will now begin to pump into the bond market what amounts to old red ink (i.e. its holdings of existing Treasuries) on top of the $1 trillion per year of new Treasury debt emissions lurking just around the corner.

This is a step change. The long gray eventide of kicking the can is over and done. Now comes a deep night of cascading crises.

The official demise of Graham-Cassidy Tuesday was not just three strikes and you are out on the matter of "repeal and replace". Rather, it was the final proof that no entitlement can be undone in America's ungovernable Welfare State democracy and that the nation's $3.5 trillion per year socialized health care juggernaut is now beyond recall.

At the same time, the Donald's weekend war on the NFL/NBA wasn't just another tweet-storm and eruption of Trumpian bile. We now have a President using the Bully Pulpit to conduct a culture war that has no place whatsoever in a constitutional democracy predicated upon individual liberty.

What Trump's culture war will do, however, is intensify the campaign of the Dems and their mainstream media collaborators to discredit his presidency and remove him from office, thereby further foreclosing whatever small chance there was to enact sweeping policy changes capable of reinvigorating America's faltering engines of capitalist prosperity.

At the center of the maelstrom right now is Senate Leader Mitch McConnell, who Tuesday took a thrashing from the populists in Alabama and a pounding from the special interest legions of the Washington medical cartel. That is, he mobilized $20 million of PAC money to elect a hand-maiden Senator in Alabama and lost---even as the same beltway legions buried his last ditch effort to pass a bill that might as well have been called ObamaCare UltraLight.

As the Washington Post described it, Tuesday was one bad hair day for the Senate Majority Leader:

Senate Majority Leader Mitch McConnell lost just about every way possible on Tuesday.

The Kentucky Republican had to abandon, again, an effort to repeal the Affordable Care Act amid an uprising from the more moderate wing of the GOP caucus. Then he learned that one of his most influential Republican chairman would not run for reelection next year, setting up a potentially divisive race to succeed the senator.

Finally, before 9:30 p.m. Tuesday, McConnell suffered the final indignity: His preferred candidate in Alabama, Sen. Luther Strange (R), lost the GOP nomination in embarrassing fashion to a conservative insurgent who vowed that his victory would send a message that McConnell and his allies should “run scared for a while.”

Indeed, we doubt that McConnell will last much longer in the Majority Leader's chair. But his exit will not be as relatively bloodless as that of Lawnchair Johnny Boehner two years ago.

McConnell's ringing defeat at the hands of Alabama's populists and red necks and Steve Bannon's alt-Right swat teams means that the beltway boodle that held the Senate GOP caucus tenuously together will fail. The quietly divided caucus will now split more loudly asunder.

To be sure, the Donald doesn't really want to govern anyway----just vent, incite, declaim and boast. At the same time, a fractured, leaderless Senate GOP will now be completely incapable of the same---if it ever was.

And in that context, this we know from our years in the Congress and the Reagan White House. If the Senate GOP is fractured, weak and unreliable (as is now surely the case), the GOP backbenches on the House side turn into a swarm of dissidents, free-lancers and anti-Senate complainers. They simply refuse to walk the plank on tough votes owing to the expected perfidy of their Senate colleagues.

Needless to say, this means the final breakdown of the notional Trump/GOP governing coalition has arrived, and it will have enormous historical ramifications. Fiscal policy is now dead because Obamacare "repeal and replace" was the ultimate litmus test all along, as we will document below.

Accordingly, there will be no FY 2018 budget resolution, reconciliation instruction or meaningful tax reform---notwithstanding today's brave pretensions of turning all focus to the tax bill.

In fact, there are only 40 legislative days left before Christmas and those will be consumed by the Donald's culture wars, the Mueller investigation/coup, massive disaster relief programs for Texas, Florida and Puerto Rico, urgent extension of expiring legislation like the Child Health Insurance program and disaster insurance, and looming drop-dead dates for the CR (December 8), DACA (March), the debt ceiling and much more.

But more than anything else, the final, complete and abysmal failure on ObamaCare repeal and replace means that the Fiscal Doomsday machine known as the Federal budget will roll forward on automatic pilot---even as the GOP coalition descends into intramural strife and the Senate stumbles around with a wounded leader on his way out the door.

Too be sure, we never expected that our mythical "Republican government" would actually govern or accomplish fundamental economic policy change. It will take a thundering crisis and a complete repudiation of the current Wall Street/Washington ruling class to accomplish that.

So we do see a silver lining in yesterday's contretemps. That is, good riddance to Mitch McConnell. He's the very epitome of the gang of self-perpetuating careerist pols who turned the conservative party of Ronald Reagan into essentially a beltway racketeering operation.

Indeed, Mitch McConnell was born and bred in the Swamp insofar as his career is concerned. He went to Washington DC 53 years ago at age 22 as an intern for Senator John Sherman Cooper from his home state of Kentucky and never really left.

In fact, insofar as we can tell he's never had an honest job in his life outside of drawing a stipend from the public till. Thus, after a succession of jobs on Capitol Hill and in the Ford Justice Department, he got himself elected county commissioner back home. And then shortly thereafter to the U.S. Senate in 1984---- where he now holds the title of the longest serving Majority Leader ever.

Thirty-three years in the most polluted part of the Swamp---the U.S. Senate---is a long time. The Senator is veritably pickled in its politically putrid brine.

So it is not surprising that a career pol from the Swamp could not lay a glove on Obamacare---a quintessential legislative product of the Swamp. The truth is, despite striking out three times on different legislative vehicles since late June, McConnell didn't really try.

We have always said "repeal and replace" was a political scam perpetuated by the spineless GOP congressional leadership, and that it would soon bite the clueless Team Trump in the posterior. So the campaign fittingly ended in the demise of Graham-Cassidy, which self-evidently was a big nothing-burger that made a complete mockery of the Donald's campaign pledge.

At least the intrepid Rand Paul saw through the Senate leadership's phony block grant. The latter simply bundled up $2 trillion of ObamaCare exchange credits and subsidies and the Medicaid expansion (over 10 years) and out-sourced the administrative job to state governments. The latter were supposed to have been given "flexibility" to operate 50 state versions of ObamaCare---albeit so long as they stayed inside the bill's "guardrails".

You have to admire the beltway's facility for obfuscation and misdirection. The real name for "guardrails" is regulation, and their purpose was to preserve the essence of what is wrong with ObamaCare. To wit, government designed insurance plans that inflate costs, restrict choice and absolve beneficiaries of responsibility for the consequences of their own lifestyle choices and health practices.

So we called this last ditch effort to powder the pig ObamaCare Ultra Lite and here's why. Health care socialism---that is, cost pool averaging and elimination of market pricing---is what will finally bankrupt America.

Under current law, government programs will cost at least $24 trillion over the next decade. That staggering sum includes CBO's $16.5 trillion cost estimate for the Federal medical programs including ObamaCare----plus $4 trillion in tax benefits for employer health plans and $3.5 trillion for the state share of Medicaid.

Those humongous figures sound unfathomable, but look at them in relative terms. The government health care total is nearly double the 10-year cost of $13.2 trillion for social security, which by 2027 will cover 80 million retires, dependents and disability recipients. And it would amount to 7X the $3.3 trillion cost for all non-medical means-tested benefits like foods stamps and welfare over the next decade.

But here's the thing. At least these latter entitlement programs are cash-based and closed-ended owing to eligibility limits and demographics. By contrast, health care socialism is the most fiscally explosive entitlement ever conceived because it destroys market discipline on costs-----even as it corrodes individual accountability for the ultimate drivers of medical care demand such as personal fitness and nutrition habits and practices.

In our judgment, Graham/Cassidy would have ended-up costing $23 trillion or 95% of the current baseline over the next decade, and would have left most of  the anti-market and collectivist features of the existing health care doomsday machine fully in place.

Needless to say, the only solution to the latter is three-fold. First, there must be a sharp diminution of the massive government fiscal transfers flowing into all sectors of the system---Medicare/Medicaid, employer plans and the individual coverage market. After all, the US spends an incredible 18% of GDP on the health care system and gets no better results than most European democracies at 10-12%.

Secondly, free market pricing, resource allocation and utilization discipline must be introduced back into the health care sector in lieu of the pervasive and dysfunctional third party insurance and payments model.

And finally, there needs to be a drastic rollback of third-party payments for medical services in favor of out-of-pocket purchases by financially motivated and attentive health care consumers.

The truth is, there is no longer any such thing as free markets in the health care sector; it is dominated by provider cartels, rigid government funding programs and the perverted incentives of the third party payment system.

In fact, the underlying problem with the bloated US health care system---of which soaring Medicaid costs are only a symptom--- is too much insurance, not too little competition; and too much government money in the system regardless of whether the latest dollop is channeled through the Obamacare exchanges and Medicaid expansion or through the GOP's block grant and tax incentives.

And most important of all, there are few market-based, price-sensitive medical care consumers----just several hundred million cost-indifferent prepaid patients.

That's the essence of the matter. When everything is paid for by third-parties, you do not have price-conscious, shopping-oriented, cost-minimizing consumers who have their own money at risk.

It was not always that way. As recently as 1960 the nation's third party and government dominated health care behemoth didn't really even exist, yet the medical needs of the population were reasonably met.

Back then, in fact, nearly 50% of personal health care expenditures were financed out-of-pocket, not by third-party or government "insurance."

At that time, the GDP was about $55o billion and the nation spent $27 billion on health care in all forms----from doctors to hospitals, drugs, nursing care and vocational rehab. It all computed to just  5% of GDP.

In per capita terms that amounted to just $145 per person, but the startling thing is that $70 of that or nearly half the total was paid for out-of-pocket. Indeed, third-party insurance of all types only paid $40 per capita and just $9 per capita of that amount was attributable to government programs.

Viewed in terms of today's constant dollars (2014 $), total health care spending amounted to just over $1,000 per capita.

Fast forward 55 years and the health care payments landscape is unrecognizable. Third-party payments in 2015 amounted to $7,450 per capita, not $145. And self-evidently, the overwhelming share of that massive increase is not attributable to inflation or economic growth.

In fact, per capital health spending had rising by 186X during that span, while the CPI rose by only 8X and nominal GDP per capita was up by about 18X.

Stated differently, total health care spending of $3.2 trillion in 2015 amounted to 17.8% of GDP compared to just 5% back in 1961. By contrast, out-of-pocket spending for health care by US households in 1960 amounted to 3.2% of personal income compared to only 2.0% in 2015.

That is, the share of national income devoted to health care has risen by 255% while the bite out of household cash budgets has declined by nearly 40%. And that's the heart of the whole runaway health care system problem

The bottom line is straight forward. Today only 10% of expenditures are out-of-pocket, even as health spending has soared by 10X to just under $10,000 per capita (2014 $).

In short, America's vaunted consumers have been economically euthanized by the current system; it turns the throngs patrolling the aisles at Wal-Mart or relentlessly searching on Amazon for bargains in everyday life into zombie patients who sit around the doctor's office instagraming on their iPhones waiting to be seen for a visit that will be charged to an anonymous third-party payor.

Needless to say, there is no such thing as an efficacious free market when their are no real consumers. What passes for the health care market today is just a bureaucratic clearing house where provider cartels attempt to maximize their billings while insurance companies, HMOs, PPOs and utilization review and pre-approval agencies seek to minimize what they certify for payment.

The consequence is high prices, endless hassles over coverage and pre-approvals and a complete loss of consumer sovereignty over their own health care costs and quality. And that is what the public is fundamentally objecting to under the rubric of "Obamacare".

Yet soaring premiums coupled with rapidly rising deductibles and copays and intensifying utilization and "gate-keeper" review hassles---cannot be remedied until the underlying problem of a third-party payment system is addressed head on.

At the end of the day, it can be well and truly said that the sweeping anti-Obamacare sentiment that Trump tapped into during the campaign has been squandered. On the fiscal front it is now Katie-bar-the-door because there is virtually nothing to stop the explosive path of the Federal health care entitlements in the years ahead.

From just under 6% of GDP today, these programs are heading toward 10% during the next two decades. On top of that, the annual cost of the other big entitlements---- social security, veterans and military and civilian retirement, food stamps, housing----will cost nearly 10% of GDP by the middle of the next decade.

Indeed, the medical and income entitlements alone will eventually cost more than 20% of GDP or substantially more than the entire Federal revenue base at 18% of GDP. And that before any tax cuts.

Beyond that, the $750 billion Warfare State budget has gotten more entrenched than ever owing to the Donald's seconding of national security policy to his triumvirate of generals. And that's to say nothing of more money for border control, law enforcement, infrastructure, and the intractable domestic pork barrel.

In short, the real meaning of Mitch McConnell's very bad hair day is that the Federal budget is now being drawn and quartered as shown below. There is virtually nothing that can stop it short of a thundering monetary and financial crisis.

Needless to say. That's coming. And reasonably soon.

NOTE: The material below is from an earlier post and provides further detail on the systematic failure of the current health care system.

The ObamaCare crisis, in fact, is about fundamental problems which afflict the entire system---including the 160 million universe of employer provided coverages. The sticker shock which hit the tiny sliver of the population (about 8 million) using the Obama exchange bronze and silver plans only provided a dramatic whipping boy for Trump and the GOP politicians to finally crystallize the issue in the 2016 elections.

Moreover, there is no doubt about how the current inflationary health care behemoth evolved. The greatest of all abominations on the free market is employer provided health insurance, a product that would not exist if it were taxed like other wage income, and which is not insurance at all but merely a form of prepayment for health services.

Like many of the other deformations which distort the free market, today’s giant $340 billion per year tax subsidy for employer health plans (the combined impact of the exemption from both income and payroll taxes) was a New Deal special (wartime phase when health plans were excluded from wage controls).

The rest was history: So-called employer health insurance plans drove a giant wedge between the higher prices received by doctors and hospitals and the steadily shrinking out-of-pocket costs felt by medical service consumers.

And, yes, it was some kind of wedge. In 1960, private insurance amounted to $5.8 billion. That covered just 22% of total health care expenditures and amounted to only 1.3% of personal income.

By contrast, private health insurance---almost entirely employer plan provided----was $1.07 trillion in 2015 or 107X its 1960 level on a per capita basis. It amounted to 7% of personal income----far more than the 2% consumers spent out of their own pockets.

Owing to the inherent dynamics of the third-party payment system, in the fullness of time health-care inflation came to occupy its own perch far above all others. During the last half-century, for example, the consumer price index has risen by 8X, average wages by 10X and hospital costs per day by 40X.

Inflation in physician costs, drugs, lab tests, and most other health services has been only slightly less explosive, but the underlying cause is the same. That is, routine health services are not insurable risks because both providers and consumers heavily drive the frequency and cost of service.

In certain extreme demographic strata, for instance, the rate of obesity and diabetes is so high that health coverage amounts to providing arsonists with fire insurance. Likewise, it has long been demonstrated that the incidence of a variety of surgical procedures per 100,000 population is a function of the number of surgeons in the catchment area.

In truth, employer-provided health insurance is one of the great deformations of our times, and is no more an honest form of free market insurance than Social Security pensions. Instead, it is a form of tax-subsidized cost pooling in which overutilization, overpricing, and free-riding is endemic.

But the insuperable problem is the massive spillover on innocent citizens. Rampant health-care inflation means that much of the non-employer-plan population is eventually priced out of the health-care system, including the poor, the retired, the self-employed, and those with preexisting conditions. And so we got Medicare, Medicaid and Obamacare, respectively.

That is, one market disturbance by the state begat another and another and another. Yet when the opportunity to reverse these baleful chains finally arose, the GOP could do no more than conjure up Obamacare Lite, and couldn't even pass that.

Needless to say, use of health-care services thereby became utterly divorced from financing their costs, and in the process two great deformations of the state quickly emerged. Since there was no means test on Medicare, the entire retired population became a potent political force against any patient cost-sharing measures that might have helped contain the explosion of costs owing to the third party (i.e., taxpayer) payment system.

More importantly, Medicare and Medicaid were built on a misbegotten combination of socialism for the beneficiaries and capitalism for the providers. While both programs attempt to regulate providers through utilization controls and reimbursement caps, this cumbersome and bulky bureaucratic machinery fights on an inherently uneven battlefield; that is, the K Street and PAC-dominated milieu of Washington where virtually every medical specialty, supplier, and type of institutional medical care facility has organized representation.

The proof that Medicare and Medicaid function in the realm of crony capitalism, not market capitalism, is in the pudding. Before these programs were enacted, total government insurance and other health care funding in 1960 amounted to just $1.7 billion or 0.3% of GDP and $9 per capita.

Today the combined cost of Medicare/Medicaid and other government programs amounts to $1.5 trillion or 8.5% of GDP. That amounts to $4,800 per capita or 530X more than was spent per capita in 1960.

Moreover, government insurance and medical subsidy programs---regardless of how Obamacare is tinkered with in the years ahead---will reach $2.4 trillion, or 10.5 percent of GDP by 2026.

Yet it goes without saying that the medical needs of the elderly and the poor did not escalate by a factor of 10 percent of GDP over the last fifty years.

What happened was that the state created massive insurance pools for an uninsurable service, and then invited the medical profession to morph into Washington’s greatest crony capitalist lobby.

The American Medical Association, for instance, fell on its sword in opposition to Medicare in 1965, but in 2010 it sold its soul in support of Obamacare in exchange for a more doc-friendly control régime, the very thing which caused the cost of Obamacare to explode in the years after enactment.

In fact, Obamacare is the endgame of the 74-years ago carve out (from income and payroll taxation) for employer health plans. The combination of giant employer-based health cost pools and the even larger ones run by Medicare and Medicaid have not only driven health inflation skyward, but have also generated a noxious system of price discrimination that would be wholly unnatural on the free market.

The so-called "big buyers", consisting of large plans and managed-care operations, have extracted ever larger “discounts” (25 to 75 percent) from “rack rates” ( i.e., sticker prices) for their plan participants, thereby forcing rack rates higher and higher for everyone else including small employer plans and individual insurance buyers.

Accordingly, the Obama health exchanges came about essentially because another component of the population was flushed out of the system. That is, self-employed and workers in part-time jobs and small businesses became the third wave of citizens needing state intervention to compensate for the original employer-paid insurance distortion.

Their claims arose for the same reason as Medicare and Medicaid; namely, part-time and self employed America was priced out of the crony capitalist health-care system in the same manner as the elderly and the poor.

Yet with eligibility for state-run health exchanges under Obamacare reaching up to $90,000 per family, the cost explosion from still more health-cost averaging of pre-paid plans subsidized by the public purse has become virtually unimaginable.

So what has actually happened is that the nation's crony-capitalist-driven healthcare system is devouring the American economy, and the figures which prove it could not be more dispositive. To reiterate, in 1960 national health expenditures amounted to $145 per capita and hardly 5 percent of GDP. By 2015  those figures had grown to $10,000 per capita and 17.8 % of GDP.

To be sure, these trends are widely known to the policy wonks, and widely lamented, too. But the backstory is far less noted and is the reason that the Keynesian state in America is headed for inexorable insolvency.

Namely, as the free market economy continues to fail owing to the burdens of debt, money printing, and fiscal profligacy, more and more of the population will be flushed into the state-funded pools of Medicare and Medicaid; and that will be further supplemented by the new tax credit, HSA and block grant mechanisms and expedients that will be stuffed into Obamacare to keep it from imploding in the years ahead.

Yet near uniform pricing regardless of actuarial risk is at the heart of all that is wrong with the current system. It amounts to cost averaging of giant insurance pools-----or socialism-----when what is needed is efficient pricing of individual risk.

But absent structural change and the abolition of employer covered health plans and the $4 trillion of tax subsidies they are slated to receive over the next decade, there is little hope for improvement. 

Without a return to an out-of-pocket, cash-based consumer payment system (perhaps supplemented by true catastrophic insurance), Obamacare will accomplish virtually nothing on the cost containment front; and it will also end up generating even more burdensome restrictions on patient health care choices than already exist.

Fortunately, there is a simple way to abolish employer provided health plans that would be highly popular. Namely, mandate as a condition of employer tax deductibility for such plans that any employee can elect to take the insurance value of his employer's plans in cash and put it in an HSA (health savings account) where it could be spent on any health plan or out-of-pocket payment scheme that was right for the employee's circumstances. 

That option has been called Super-HSAs. There would be a veritable stampede of tens of millions of workers to accept that option, and to use some of the proceeds to buy their own catastrophic insurance on a revived insurance market.

But the GOP is owned by the insurance companies, HMOs and organized provider groups. Accordingly, this logical solution the baleful legacy of FDR's dead hand would never even occur to the so-called free market conservatives who profess to lead the GOP in Washington.

So as the fiscal crunch in the Imperial City intensifies, the crony capitalist gangs which fed on these giant pre-paid health pools will resist controls and cost containment with a vast mobilization of lobbying power and campaign lucre. It is the ensuing hand-to-hand combat in the corridors of Washington which will further paralyze the fiscal process; and it is the asymmetrical nature of the contest which will ultimately break the state.

The Donald and many of his conservative supporters in the GOP back-benches mean well, of course. But under the deceitful leadership of Mitch McConnell, Paul Ryan and their henchman, they are heading into a Swamp far deeper than any of them can possibly imagine.



David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.