Rising health insurance costs and larger deductibles

Transcription

1 Mike Taylor, CFA Investment Strategy Analyst Ken Johnson, CFA Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS February 27, 2018 Small Business Snapshot Part 3: Health Insurance Costs Key takeaways» Based on surveys from the National Federation of Independent Business (NFIB), the rising cost of health insurance has been the top problem facing small businesses since 1986.» Small businesses, in general, pay more for health insurance than large businesses do. What it may mean for investors» Small business owners and investors should pay attention to any updates on health care policy from the Trump administration throughout the year. We also recommend keeping portfolios well-diversified in a changing market landscape. As we pointed out in the first installment of our small business series, small business optimism in the U.S. is near record highs. The latest Wells Fargo/Gallup Small Business Index recently reached an 11-year high. 1 Yet, there are genuine concerns that many small business owners face. In the second installment of our small business series, we reviewed concerns over labor availability, quality and costs. Today s report continues our focus on concerns confronting small businesses. In this third installment of our series, we discuss how the rising cost of health insurance disproportionately affects U.S. small businesses and highlight efforts underway by lawmakers to address health care affordability and accessibility. We also point out how potential changes in health care reform could impact small business owners and investors. Rising health insurance costs and larger deductibles Every four years, the National Federation of Independent Business (NFIB) Problems and Priorities survey asks 20,000 NFIB members to rate 75 potential problems their businesses face on a scale from 1 to 7, ranging from critical to not a problem. According to the most recent survey, the top problem for U.S. small business owners is the cost of health insurance. It was rated as a critical problem by more than half of the respondents. But this is nothing new. In fact, based on previous surveys, the rising cost of health insurance has remained the top problem for domestic small businesses for the past three decades. 1 Wells Fargo Survey: Small Business Optimism Hits 11-Year High, January 25, Wells Fargo Investment Institute. All rights reserved. Page 1 of 7

2 More broadly, the state of U.S. health care has been a matter of debate among legislators for decades, particularly around issues of accessibility and affordability. Health care costs in the U.S. have been rising faster than the rate of inflation for a long time. When dissecting the different types of health costs, we see sizeable increases in inflation in both outpatient and inpatient services (Chart 1). Chart 1. Health care costs have been rising faster than inflation in the U.S. Consumer Price Inflation Medical care inflation Outpatient hospital inflation Source: Bureau of Labor Statistics, January Based on this increase in health care costs, a trend of rising health insurance premiums and larger deductibles has been impacting small business bottom lines for more than a decade. As Chart 2 illustrates, since 2004, health care costs for small businesses have increased considerably faster than wage and salary costs. Chart 2. Health insurance costs for small employers are rising faster than wages and salaries Health insurance cost 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Inpatient hospital inflation 1-49 workers workers Headline inflation workers 500 or more workers Health care cost Wages and salary cost Source: Bureau of Labor Statistics, September Wells Fargo Investment Institute. All rights reserved. Page 2 of 7

3 This increase in health insurance costs, that afflicts many small business owners, tends to divert capital away from investing in their businesses and workers. Small businesses, in general, pay more for health insurance premiums than their larger counterparts. On average, small businesses pay between 8 and 18 percent more than large businesses for the same policy. 2 Since 2003, the average premium for a single-employee health insurance policy at smaller companies increased from $3,481 to $6,101 in Meanwhile, deductibles which are generally higher for smaller business insurance plans than for those of larger businesses for single-employee plans rose by 10.1% between 2015 and 2016 alone, from $1,541 to $1, Furthermore, the small business health insurance and medical device tax attached to the Affordable Care Act (ACA) has returned this year, and it is expected to exacerbate plan cost increases. The Affordable Care Act Access to health insurance for workers has prompted debates from U.S. lawmakers for decades. Today, the number of workers who are employed by smaller businesses and have access to health insurance lags the number of employees in larger businesses that do. Chart 3 shows that only about 50% of workers in businesses with 1 to 49 workers had access to employer-sponsored health insurance and that less than 40% of the workers actually participate. These numbers are significantly greater for their larger counterparts. Chart 3. Access to (and participation in) health care benefits by business size Health care benefits by business size (in percent) to 49 workers 50 to 99 workers 100 to 499 workers 500 workers or more Access Participation Source: Bureau of Labor Statistics, March 2017 Following the financial crisis, the U.S. enacted reforms to increase access to health care, with effects that reached far beyond the health care industry. The ACA brought significant changes for businesses and the insurance sector. However, small businesses were particularly hard hit by the ACA legislation; some chose to purchase highdeductible plans to help offset rising premiums. 2 National Conference of State Legislatures, July 15, Medical Expenditure Panel Survey, September Wells Fargo Investment Institute. All rights reserved. Page 3 of 7

4 Last year, although the House voted to repeal key components of the ACA, the Senate did not repeal it. In October 2017, President Trump responded by issuing an executive order, Promoting Healthcare Choice and Competition Across the U.S., which required agencies to explore expanding coverage options through association health plans, health reimbursement arrangements (HRAs), and short-term limited duration plans. And in his State of the Union address last month, President Trump reminded constituents that the individual mandate for government-ordered health plans with imposed penalties had been abolished as part of the Tax Cuts and Jobs Act that was passed in December. This change is set to take effect in Small business advocates lead the charge for change The NFIB has been a vocal advocate for health-insurance reform to benefit small businesses. The NFIB supports health insurance options for small businesses that are affordable, flexible, and predictable. The agency was the lead plaintiff in the Supreme Court case NFIB versus Sebelius, which supported a full repeal of the ACA. In addition to repeal, the NFIB is seeking a replacement for the ACA that aims to revive health insurance markets, a goal that is similar to that of the Trump administration. In terms of affordability, it is important to recognize that health insurance firms pay federal and state taxes, just as small businesses do. The average 10-year effective tax rate for health insurance companies is near 30%. This is embedded in the Health Care Equipment and Services industry figure in Chart 4. In addition, there are fees and taxes such as health insurance providers fees that are added to the cost of health insurance premiums. Current rules mandate that businesses that purchase health insurance policies must pay this expense. One study found that suspending the health insurance tax would reduce premiums by more than 3% or $200 per person annually across all-insured major medical plans. 4 But the true effect of eliminating the tax remains a matter of debate. Chart 4. Average effective tax rate by industry Diversified financials Health care insurance Banks Retailing Food and staples retailing Food, beverage, and tobacco Energy Insurance Household and personal products Commercial and professional services Media Capital goods Health care equipment and services Software and services Consumer services Transportation Consumer durables and apparel Materials Technology hardware and equipment Source: Strategas, % 5% 10% 15% 20% 25% 30% 4 Oliver Wyman, Wells Fargo Investment Institute. All rights reserved. Page 4 of 7

5 The House Ways and Means Committee is reviewing proposed legislation to suspend health care taxes and penalties in an effort to reduce overall health insurance costs and to offer relief for small businesses. The Trump administration has reiterated its commitment to seeking a replacement of the ACA, but that objective falls on a list of competing priorities. And it is unclear how that list may change as we approach the midterm elections later this year. Investment implications Readers may be left with the impression that a reduction in health insurance costs for small businesses is a good thing. Many small business owners (and political leaders) strongly support reducing these costs. We wouldn t refute the view that lowering health care costs for small businesses would be a beneficial change, yet there is one caveat that involves the consumer. Reviewing Chart 1, we see that health care costs are rising faster than inflation. If health insurance costs paid by businesses were to decline, their employees (otherwise known as consumers) could be left with more out-of-pocket costs for health insurance. According to the Kaiser Family Foundation and the Health Research & Educational Trust, the average worker pays $5,714 for a family healthinsurance policy 30% of the total $18,764 cost. This has increased 27% from five years ago. Since consumers drive the U.S. economy, the more they spend on health-related expenses translates to fewer available funds to purchase goods and services that support small businesses. Likewise, for sole proprietor business owners, money spent on health insurance costs takes away from capital for potential business investment. It is important for business owners to find a balance between what they spend on health insurance costs versus what their employees must cover. Clearly, small business owners should pay attention to any changes or updates in health care policy from the administration throughout the year. The ACA will continue to be an agenda item for lawmakers, but it is unclear where it falls on President Trump s list of priorities in his second year. Now that tax reform has been addressed, we expect the focus to switch to other priorities laid out in the State of the Union Address. Investors also should keep an eye on political changes throughout this year. Up until a few weeks ago, we hadn t seen much volatility triggered by policy actions from the current administration, but as policies are debated further and then implemented, market volatility could increase. We encourage investors to prepare portfolios for potential political and market volatility. Maintaining a diversified portfolio may be a good way to weather political fallout. This includes a mix of stocks, bonds, real assets and alternative investments (for those who qualify) suitable for an investor s profile. In equities, we currently favor certain equity sectors based on strong, underlying economic fundamentals and likely support from recent tax reform. These include the Consumer Discretionary, Industrials, and Financials sectors. In addition, we favor Health Care, a sector which could be impacted by any changes in the ACA Wells Fargo Investment Institute. All rights reserved. Page 5 of 7

6 Economic Calendar Date Report Estimate Previous 2/27/2018 Advance Goods Trade Balance -$72.0b -$71.6b 2/27/2018 Wholesale Inventories MoM % 2/27/2018 Retail Inventories MoM % 2/27/2018 Durable Goods Orders -2.50% 2.80% 2/27/2018 Durables Ex Transportation 0.50% 0.70% 2/27/2018 Cap Goods Orders Nondef Ex Air 0.50% -0.60% 2/27/2018 Cap Goods Ship Nondef Ex Air % 2/27/2018 House Price Purchase Index QoQ % 2/27/2018 FHFA House Price Index MoM 0.40% 0.40% 2/27/2018 S&P CoreLogic CS 20-City NSA Index /27/2018 S&P CoreLogic CS 20-City MoM SA 0.60% 0.75% 2/27/2018 S&P CoreLogic CS 20-City YoY NSA 6.30% 6.41% 2/27/2018 S&P CoreLogic CS US HPI NSA Index /27/2018 S&P CoreLogic CS US HPI YoY NSA % 2/27/2018 Richmond Fed Manufact. Index /27/2018 Conf. Board Consumer Confidence /27/2018 Conf. Board Present Situation /27/2018 Conf. Board Expectations /28/2018 MBA Mortgage Applications % 2/28/2018 Personal Consumption % 2/28/2018 GDP Annualized QoQ 2.50% 2.60% 2/28/2018 GDP Price Index 2.40% 2.40% 2/28/2018 Core PCE QoQ 1.90% 1.90% 2/28/2018 Chicago Purchasing Manager /28/2018 Pending Home Sales MoM 0.40% 0.50% 2/28/2018 Pending Home Sales NSA YoY % 2/28/2018 Revisions: Pending Home Sales 3/1/2018 Personal Income 0.30% 0.40% 3/1/2018 Personal Spending 0.20% 0.40% 3/1/2018 Real Personal Spending -0.10% 0.30% 3/1/2018 PCE Deflator MoM 0.40% 0.10% 3/1/2018 PCE Deflator YoY 1.70% 1.70% 3/1/2018 PCE Core MoM 0.30% 0.20% 3/1/2018 PCE Core YoY 1.50% 1.50% 3/1/2018 Initial Jobless Claims 226k 222k 3/1/2018 Continuing Claims k 3/1/2018 Bloomberg Consumer Comfort /1/2018 Markit US Manufacturing PMI /1/2018 Construction Spending MoM 0.20% 0.70% 3/1/2018 ISM Manufacturing /1/2018 ISM Employment /1/2018 ISM Prices Paid /1/2018 ISM New Orders /1/2018 Wards Domestic Vehicle Sales m 3/1/2018 Wards Total Vehicle Sales 17.20m 17.07m 3/2/2018 U. of Mich. Sentiment /2/2018 U. of Mich. Current Conditions /2/2018 U. of Mich. Expectations /2/2018 U. of Mich. 1 Yr Inflation % 3/2/2018 U. of Mich Yr Inflation % 3/5/2018 Markit US Services PMI /5/2018 Markit US Composite PMI /5/2018 ISM Non-Manf. Composite Source: Bloomberg, as of February 23, Wells Fargo Investment Institute. All rights reserved. Page 6 of 7

7 Risk Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Diversification does not guarantee profit or protect against loss in declining markets. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 7 of 7