An event study of ACA winners and losers

I have not had the chance to read through this paper, by Jonathan Hartley, but thought I should pass along the abstract and link:

The Patient Protection and Affordable Care Act of 2010 marked a substantial shift in US healthcare policy. We create an event study observing the returns of healthcare stocks in the S&P 500 when on June 28, 2012 the US Supreme Court very unexpectedly ruled that the individual mandate, a provision requiring that Americans maintain a certain level of health insurance or face a monetary penalty, was not unconstitutional. The paper finds that as a result of the upheaval, over two days following the ruling the cumulative average abnormal return of managed care stocks was -6.7% (equal to -$6.9 bn in market capitalization), while the same metric was -1.2% (-$1.5 bn) for biotechnology companies, 3.2% ($0.4 bn) for hospital firms, 1.9% ($1.6 bn) for healthcare service firms, and 0.5% ($4.8 bn) for pharmaceutical companies. Healthcare equipment, distribution, and technology sub-industry stocks had relatively flat cumulative abnormal returns over the period.

Do those results make you more or less favorable toward ACA?


"the US Supreme Court very unexpectedly ruled that the individual mandate, a provision requiring that Americans maintain a certain level of health insurance or face a monetary penalty, was not unconstitutional"

"Very unexpectedly"?

Even Randy Barnett himself, on the eve of the decision, was putting the odds in favor of being upheld. I suppose Intrade had things at 80/20 in the final couple weeks, but it was 60/40 from April to June.

I'm not sure 'upholding' was unexpected, let alone "very unexpected".

A gap up/down of healthcare related stocks in general or of the known losers would give us a hint of the degree of expectations, assuming no insider information...

Aw, but that would be real work (compared to what these types are used to).

The results reinforce my view that, although it has potential for evolution, that ACA was not a very substantial shift in healthcare policy, although it was a larger shift in how helath care is paid for.

Well, since biotechnology is our only hope...

LOL, and you now this how? Biotechnology has been hyped beyond what it can ever promise to deliver and I suspect if you did the accounting the vast majority of investors have lost rather than gained money (good current example: Human Genome Sciences who turned down an offer to be acquired last year only to accede this year with a big loss to shareholders).

I know this because of a little thing called common sense.

I haven't hyped biotechnology, and yet we spend what, maybe 1/100th on it compared to government healthcare transfers?

You think that lifespans will be increased significantly by ACA? "And you know this how?"

No, it is quite obvious that significant improvements to length and quality of life will be from things like step change improvements to heart disease and cancer treatment rather than just getting the existing treatments to more people, if that even happens.

By the way, I've been the one on here criticizing human genome nonsense and embryonic stem cell hype, not to mention hydrogen economy hype and solar hype and all manner of other hype that has come and gone.

The changes in market cap are in the low billions. Healthcare spending over the next few years is in the low trillions.

Can we revive the word "kerfuffle"?

That's my reaction. Low billions in this business is nothing.

I'm getting back $183 from my health insurer because they spent less than 85% on medical care. I can understand why some insurers do not like the ACCA.

What's in your wallet.


The entire costs of administration are not included in Medicare accounting. For example, tax collection is not included. Fraud avoidance is not included, probably because it is not attempted.

Typical in every way.

The ACA increased fraud and abuse funding significantly (about $350 million over 10 years) and those efforts are expected to recoup $6 billion in fraud savings over the same time period. They will be counting that.

But no matter you slice it, Medicare administration costs are much lower than private insurance.

That's wonderful. Let's hope the fraud that has been going on will actually be reduced by the increased spending we hope reduces them.

"no matter you slice it, Medicare administration costs are much lower than private insurance."

No they aren't.
In addition, the technical paper shows that average private sector administrative costs,
about 8.9 percent – and 16.7 percent when commission, premium tax, and profit are
included – are significantly lower than the numbers frequently cited. But even though
the private sector’s administrative costs are higher than Medicare’s, that isn’t “wasted
money” that could go to insuring the uninsured. In fact, consumers receive significant
value for those additional dollars.
We also raise an important, although heretofore unrecognized, issue that gives
Medicare an inherent advantage on administrative costs. Because of the higher cost per
beneficiary, Medicare administrative costs appear lower than they really are. If the
numbers were adequately “handicapped” for comparison with the private sector, they
would be in the 6 to 8 percent range.

Ah, Andrew, ever notice in your piece how profit and commissions are included in your number.

Do you think Medicare has profit or commissions?

Do contortions come easy to you?

So if the government is more efficient than the private sector in delivering healthcare services, presumably due to economies of scale and such, why wouldn't that apply to other sectors of the economy? Or perhaps you think it would.

If the US government took over, say, food production and distribution, would it be able to do so more efficiently than private actors do today by eliminating profit and reducing administrative overhead? if not, why not?

You said fraud avoidance is not attempted. It is. It is being counted. Are you suggesting that we should spend less money to catch fraud? Is that how we'd achieve $6 billion in fraud recoveries?

CAHI is funded by insurance companies. They produced a paper whose goal is to undermine Medicare and relies on questionable methodology. They first discuss Medicare's "hidden costs" then move on to say that--ok, Medicare admin costs are lower--but administrative costs private insurers employ actually add value. They also include the cost of legislator and their staff salaries in the Medicare administrative costs. That tells you what rigorous and unbiased analysis this is.


You're confusing what the government is doing with Medicare. It is not delivering health care service. Just like private insurance companies, it is administering the benefit and paying for the health care. The parallel you draw to government food production is false.

I am just intrigued by this notion that you can make healthcare cheaper simply by having the government pay for it. If this is true, why wouldn't the same principle apply to other industries and situations?

Taxes are going to be collected Medicare or not, so piggy-backing Medicare tax collection on general tax collection is a legitimate savings just as stopping at the store that's right on your route home from work saves the time and gasoline a separate trip would cost.

"Do you think Medicare has profit or commissions?"

It's right there in the quote from the paper, Bill. That is why the Medicare administration is still lower than Private. What are you talking about?

Jan, that was the first google link that I found googling "actual medicate administration costs."

If they are the only person that looked into it, then we don't know as much as you think you know.

"Taxes are going to be collected Medicare or not, "

This is misleading. FICA is a different line item on the form. It also has to be kept separate. That means that it's cost is not zero. Maybe this expense is included in the Medicare administration numbers touted by Medicare expansion pundits but I highly doubt it.

It is just one example of how people are using fallacious numbers to bolster their argument. The point is that costs exist even if they are not accounted for. But if you are comparing costs then you are lying if you use misleading accounting. Winning by lying is called cheating. In politics that is accepted. I just can't stand letting people think they are winning fairly.

"Medicare "improper payments" were $47.9 billion in 2010, but some of these payments later turned out to be valid.[1] The Congressional Budget Office estimates that total Medicare spending was $528 billion in 2010.["

Fraud is somewhere in the neighborhood of 5-10% of Medicare expenditures.

And that is not counting the "non-fraudulent" medical bills that Medicare incentivizes such as the study between the two cities in Texas where they found vast disparities in cost-per-patient.

Insurance companies have to prevent their own fraud and this falls in their adminstration costs. Medicare outsources some of their prevention if they even try. See how we are closing the gap very quickly without even trying hard?


I'm not on medicare, and I don't know how you could read the comment to say that.

This is a provision of the ACCA which provides that in large group plans if the medical care costs are less than 85% of the premium, the difference has to be refunded to the employer and the employee has to be notified.


Now I think you must be hearing voices, Bill.

The point is very simple. Medicare is a program within the government. Many parts of the government perform services to Medicare (such as collection via FICA/IRS and not to mention people doing their taxes on behalf of the government). These jobs are accounted for in private insurance administration costs but NOT in medicare. A full accounting has apparently yet to be done, although all kinds of people are using fallacious numbers to tout Medicare even though things would change if Medicare was changed (e.g. expanded) and their current fallacious comparison that doesn't apply now would apply even less after change.

Here is how you can REALLY know the comparison of administrative costs is completely misleading and totally irrelevant:

Paul Krugman has commented on it multiple times. I mean that half snarkily, but ONLY half snarkily.


Read this slowly. The provision that I am talking about involves only PRIVATE non medicare insurance.

Repeat again: The provision I am talking about involves only private non medicare insurance.

If you come back again with some story about medicare, I don't know what you are reading, or taking.

With the Medicaid ruling, it was a mixed decision. I assume the managed care stocks got hit because of the MLR rules becoming law, but not sure the other make sense. Changes are not big enough to make me want to change my opinion.


Managed care stocks got hit because the Medicaid expansion, which creates a huge bias toward managed care, was made optional for the States with the highest rates of free health care delivered by unmanaged care in ERs and unpaid bills that are used to justify government bailouts of the hospitals at risk of closing from unmanaged care losses.

No insurers actually provide managed care; they just employ lots of people to deny claims to wear down patients and providers and making managed care uneconomic for both doctors and patients.

A number of provider networks have tried to game the insurance system to provide managed care, and in some cases insurers have cooperated to profit from the lower overall costs. But insurers won't be happy if HMOs return, in the guise of ACOs, because the doctors, clinics, and hospitals of the ACO will want the profits from risk management in managed care the insurers think belong to them.

One would have to assume that markets are perfectly efficient, that estimates of future cash flows are accurate, and that the error in the estimation of abnormal returns is small before you could even begin to approach the question of whether thr ACA will have the impact inferred by these statistics.

Health care has generally been a good sector for financial investment and remains so. The expected costs and benefits of ACA are so unpredictable, I wouldn't even attempt the analysis. The effects are not only small, but ambiguous.

If you're going to be rigorous about it, one must also factor in the political impetus of the law being repealed as a result of the decision.

My opposition to ACA has always been founded on Constitutional basis, not merely economic. The individual mandate was the only economically sensible part of the law and, in my opinion, the only part that was illegal.

In other words, morality and health care economics are incompatible under the Constitution?

Only by treating people like cars getting repaired and maintained can a health care be constitutional, so only by creative destruction of junking cars and people that cost more to fix than the owner can pay with the property sold for scrap value can health care be constitutional?

In an efficient market, lots of people would be scrapped and sold for salvage value, in many cases 6-8 months before they were born.


The whole point of an event study is to use market reaction to news as a proxy for analyzing all the issues you mention. The idea is that the degree of abnormal behavior by securities prices in reaction to some event tells us, roughly, what the effects will be.

You can believe that or not, and I won't argue with you either way.

Patient Protection and Affordable Care Act of 2010
The Affordable Care Act is a certain killer of jobs and could potentially be a threat to America's fiscal future. This big government program is going to push indebtedness to such a height that it will change the way Americans live their life on a daily basis. It is going to have huge negative impacts on the quality of medical care the baby boomers receive as they reach retirement and the access to medical care for our children and grandchildren.

Did you read this from some campaign literature.

You didn't find that in any CBO report.

You are right, Bill.

"Fixing" healthcare certainly saved the economy like Obama promised.

There is a similar paper forthcoming in AEJ: Policy that looks at the MA special election

I could not agree more, the government is incapable of providing medical care without breaking down the entire economy. The private sector does a great job at providing health care, it is the insurance companies that are in bed with the government officials IE: Obama Care....... this is going to cause a destruction in health care. My children and grandchildren are going to be in the same destitute situation as the canadians are. VERY SAD, for every american population.

Barbara, Canada has a free press and its people are well informed about the American health care system. If our system was better than theirs, the Canadian political system would react. One of their parties would demand that Canada give up its health insurance system and import ours. This hasn't happened. It also hasn't happened in France, German, the Netherlands, Switzerland, Great Britain, Israel, Taiwan, South Korea, and you name it. It hasn't even happened in Massachusetts, where the Republican party maintains a discreet silence about the Massachusetts health insurance system, and where Senator Scott Brown says he supports it.

Does this tell you anything? Does it suggest that you're mistaken about health care economics? Or are you so committed to right wing orthodoxy that you've lost your reasoning abilities?

Trading noise, no effect on my opinion.

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