THURSDAY NOVEMBER 19, 2009

Let me get this straight?

Let me get this straight:  the healthcare "reform" bill is going to insure an additional 31 million people, create at last count 111 new government agencies and at the same time reduce the cost of healthcare?  Sure!  The Senate's version of reform will cost $845 billion over ten years while supposedly reducing the deficit by $130 billion.  One would think the market would respond favorably to this news of deficit reduction, as the chronic deficits are a major concern of the markets.  Yet, today the market sold-off strongly on this news.  Why?

For one thing, the accounting of the costs lacks credibility.  The Senate bill counts 10 years of revenue while delaying many of the costs until 2014.  Not exactly Generally Accepted Accounting Principles is it?

The bill also relies on "cost savings" from "waste and fraud" to finance between $300-400 billion of the bill.  Is there really $300-400 billion in waste and fraud in the healthcare system?  And if there is, why should we expect the same bureaucrats that allowed the waste to be able to find religion now?  It is one thing to say there is waste and another to cut it out.  Just look at the battle being waged in Albany over a measly $3.5 billion budget gap! 

Also, the bill does not account for all of the expense.  Many of the newly insured will land in the Medicare and Medicaid systems.  But Washington passes on a significant part of these system's cost to the states.  The $845 billion bill only accounts for Washington's part of the expense.  Washington passes the rest of the cost on to the states.  It is an unfunded mandate.  It is estimated that New York State will see its Medicare bill go up by $2 billion+!  At a time when there is a $3.5 million budget gap for 2010 and a $6.5 billion projected deficit for 2011.

What does all this mean for investors.  It means that the massive budget deficits forecast for the next ten years most likely be worse, if that is possible.  That means more issuance of government debt and higher interest rates in the future.  Fixed Income investors need to be careful when buying long dated maturities.

POSTED AT 1899-12-30 18:30:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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