The Other Insurance Cost Fueling the US Affordability Crisis

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0:41That's Vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation Distributor. Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London. We're the hosts of the Bluebird Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now.

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1:50Bloomberg Audio Studios. Podcasts, radio, news. I can't say affordability hoax because I agree the prices were too high, so I can't go to hoax because they'll misconstrue that. But they use the word affordability, and that's their only word.

2:16I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next.

2:32We've talked about affordability a few times on this podcast, especially in the wake of those special elections where it was a major theme and potentially something that was pulling down the Republican vote. We've seen the president responding to the discussion, not always very positively. He's talked about it being a hoax. He's talked about people needing to give him more credit for the strength of the economy. But it does seem like a theme that's going to run and run, and not just because Democrats see it as a potential winner next year. What I wanted to focus on in this show is not just the political aspects, but the very real insurance aspect of affordability, which is about to get quite a lot worse.

3:17I wanted to focus on how insurance was going to start playing an even bigger role in that affordability issue as we go forward. And indeed, on January 1st, we've seen the Congress be unable to come up with a fix to restore any of the Obamacare subsidies. And that we know is going to have a very big immediate impact on the cost of premiums and potentially on consumer behavior. So I wanted to get into that a bit with our reporter covering health policy in Washington, Rachel Korsang. Thank you very much for joining us, Rachel. Thanks for having me. And Brooke Sutherland, our Boston Bureau Chief, had given me a whole other thing to worry about in this sphere by writing about U.S.

4:03manufacturing. She writes our industrial strength newsletter as part of that. And Brooke highlighted to me that car insurance and soaring car insurance premiums were already causing consumer behavior to change and potentially impacting the outlook for even U.S. manufacturing. So, Brooke, thanks very much for joining us. Thank you for having me.

4:31I like to think of this as a really nice kind of micro episode where we remind people that we're not always just at sort of 30 ,000 feet. Rachel, I did mention the Obamacare subsidies. A lot of people listening to this are sitting in the US. They may even benefit from those subsidies. Others will know that it's been quite a big debate and a tussle in Congress over the last few weeks. But where do we stand on the subsidies and what's the impact going to be as things stand for many U.S. households? So, as you mentioned, this has been an issue that's been kind of front of mind for Congress as it caused the longest government shutdown in history earlier this fall.

5:14But where we're at is that these subsidies were put into place during the COVID-19 pandemic to help people pay for insurance and, in theory, help more people get access to insurance in the middle of a public health emergency. And the enrollment in the Obamacare marketplaces has more than doubled since these subsidies went into effect. So it has had a really material impact on how many people get insurance through Obamacare. But now, Algaris kind of set this up as a temporary policy and it's expiring at the end of the year. And there's no sign that Democrats and Republicans are going to be able to come together to make some sort of deal to avert these subsidies expiring.

5:55So they've tried over the past couple of weeks. They've gone back. They've gone forth. There have been bipartisan negotiations. There's been partisan votes on the floor. But it doesn't look like they're going to be able to reach an agreement in the next two weeks. And in terms of the impact for a lot of ordinary Americans who will have potentially already had, or I guess they will definitely already have had, notice of the higher premiums they would have to pay, what kind of increases are we talking about and when would they kick in? Right. So we're talking about an average of about$1 ,000 a year.

6:28That average in Obamacare enrollees are going to see their premiums increase. But for some people, especially like early retirees, people between the ages of 50 and 64 who don't qualify for the Medicare program yet, they could see increases of$1 ,000 a month depending on where they live and what's available. Other people will see smaller increases. But I think overall, the average number is around$1 ,000 a year. I think that's important to realize because these are fixed costs. Like, they're monthly costs. Like, no matter what kind of health care that you use, your monthly costs are going to go up every single month.

7:02And it's just going to squeeze people in their monthly budgets. Or they could choose to become uninsured if they're healthy. And if you are healthy people by health insurance, then the costs go up for everyone. So it's this vicious cycle that just only continues to increase costs. And Brooke, there's a pretty obvious vicious cycle that can also happen if people are not getting enough car insurance. I mentioned at the start that you'd written about this, but what is it that you had spotted about people's response to higher car insurance premiums? Sure. And you've really seen insurance premiums skyrocket over the years.

7:36And there's a couple of reasons for that. But the biggest one is that cars are increasingly complex. They are jam-packed with sensors, semiconductors from everything from the bumper to the headlights. And so what used to be more minor fender benders are now becoming significantly more expensive repair jobs. And so what insurers have done in reaction to that is that they're more likely to declare cars totaled, but they also have to reflect those rising repair costs. And so, you know, insurance premiums have gone up alongside that. In addition, you've also seen, of course, replacement cars rise.

8:11And so this is all sort of happening in tandem. And back to Rachel's point, just raising sort of your basic fixed cost to get some of these things that in many cases are necessities for people. As much as people might need a car to get from point A to point B, it's a little bit easier to make changes around the edges on your insurance if you're trying to cut back. And so the biggest trends that are happening are people downgrading their insurance and dropping their collision repair coverage or shifting from comprehensive coverage to just liability coverage. And that alone can be a really big saving and maybe knock off about$1 ,000 from your annual bill.

8:47Or they're opting for higher deductibles, which will lower their premiums in the short term, but also make it less likely that they file claims when they do get into those fender benders. And it's really just sort of, you know, the latest example of consumers cutting back in the auto market in particular, where we've seen a lot of strain recently. You've seen people opting for longer term loans that lower monthly bills. The share of some prime borrowers that are at least 60 days past due jumped to the highest level since 1994 in October. And so this is really painting an overall picture of strain in that portion of the market.

9:21You can see that the president has been focused on at least one piece of that, which is the interest rate piece, you know, in the hope that if you put pressure on the Federal Reserve, that'll trickle down eventually into lower costs for people who are borrowing in these markets or potentially trying to extend their terms or anything else. But it's a pretty blunt edged instrument if the underlying risk of these policies is going up. But just on that, Brooke, if you have people changing their behavior, how does that affect the industry? It clearly affects how I'm going to feel as I'm driving along the road in the States because I might be worried that I'm going to hit someone or someone's going to hit me who's not properly insured.

9:59But how does it come through financially for these firms? I think, you know, the first place where you're seeing it is companies like Copart, which is a vehicle salvager. And so what that means is, you know, as I was describing, insurers are more likely to declare cars totaled these days, even if they're in relatively minor accidents, just because the repairs are so costly. And when that happens, the cars are then put on Copart's auction platform and then they're resold. And this is, you know, a really growing pipeline for this company because these cars tend to not be, you know, quite as banged up as you might think of when we talk about a totaled vehicle.

10:37and they can often resell them, particularly in emerging markets. They tend to be newer, nicer cars as well that are ending up in this pipeline. But the volume of cars making their way to the auction block is down because people are filing less insurance claims. Or, you know, if they have a higher deductible, they maybe were likely to sit on, you know, a damage to their car and decide to repair it later or maybe not do it at all. And so that's reducing the flow of cars that are making their way to this vehicle salvager. And we might talk in a minute about how that sort of feeds through into the broader manufacturing industry and the car industry.

11:18But, I mean, Rachel, are we seeing already or is it too early to see changes in behavior in response to the higher premiums that are coming down the track when it comes to health? I think it's a little bit early. I think we'll get a better sense of how many people chose to forego insurance entirely when the end of open enrollment ends. So there's a period where people can choose to sign up or not to sign up for their plans. So we're not quite through that period yet. But I think one thing to note that's really important for the Trump administration is that unlike maybe car insurance premiums that are more spread out nationwide, I think the impact of these health insurance policies is going to be concentrated in Republican-led states, especially.

12:04We're looking at Florida. We're looking at Texas. We're looking at Georgia. Some of these states that have less generous Medicaid programs under the Obamacare, they've resisted kind of signing up for these policies that help more people get insurance, help hospitals. And I think that's been the concern of some moderate Republicans. And we've seen pushback. They want to have some at least short-term extension to get them through the midterm elections. So their constituents in these really politically important states aren't going to see these price increases so dramatically. And that's what is a bit confusing for people on the outside of this.

12:39And in fact, what made the outcome of the shutdown kind of surprising because people thought the Democrats have chosen a good issue for people to hang around the necks of the Republicans. But equally, if the Republicans got together with the Democrats to fix it, you've neutralized what could potentially be one of the most corrosive politically issues going into the midterms. And yet, that didn't happen in the shutdown. We didn't have that kind of agreement. And then even now with these efforts in the Senate, we haven't seen it, even though presumably there is quite a lot of blowback coming from individual constituents for these senators and Congress people.

13:20So why is it that they haven't signed up to any of these bills? That's a good question. And from my sources on Capitol Hill, I had talked to them over the summer about this issue because we expected that there was leeway for some deal for them to put some guardrails around these subsidies to argue that they were cutting down fraud and waste and abuse and really targeting these subsidies to the people who needed them most. But they just never did it. And what my sources on Capitol Hill said they needed was some sort of clear and firm cover from the president to support these Obamacare subsidies, because there are, again, some conservative Republicans who are just opposed to Obamacare, want it repealed, you know, that holdover from that 2017 fight that so badly bruised the president.

14:07and he didn't provide that cover until it was too late. And he still hasn't said that he would support a straight extension of these subsidies. So Republicans have kind of flailed to try to find some sort of option that he'll support that would actually lower costs for consumers, but they weren't able to do it. They just waited until it was too late. And I think they ultimately didn't feel that they could get the votes to support a subsidy extension that would be good for a lot of their members going into the midterms.

14:38Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

15:20That's vanguard.com slash audio. All investing and subject to risk, Vanguard Marketing Corporation Distributor. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing, and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market. Whether you own stocks, bonds, real estate, commodities, crypto, you really need to hear these conversations. Sometimes it's behaviorists like Dick Thaler or Bob Schiller.

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16:35there's a lot of focus about the gerrymandering of districts and how few districts and even senate seats although that's not a question of gerrymandering but how little contest how much of congress and senate is not contested when we come to any election and i guess this is One manifestation of it is even if there's a lot of pressure and potentially political blowback from an issue in any given time, there's not very many senators and there's certainly not very many Congress people at this point who feel they're really vulnerable and they're not enough to make the difference. It's a slow burn impact on policy.

17:12But Brooke, I mean, it feels like what you're describing and the knock-on effect for other parts of the industry could have real economic consequences over time if consumers are just changing their behavior, cutting spending, potentially not buying the same kind of cars. What kind of ripple effects are we likely to see? Could they actually over time really have a big impact? Sure. I think one thing that's important to remember is that the manufacturing sector, you know, at least based on the ISM's gauge of U.S. manufacturing activity, has been in contraction for essentially three years. And so there's a lot of focus on when that might change and when the manufacturing sector might see a more sustained rebound.

17:59And there was a lot of optimism heading into the beginning of this year that that was going to happen in 2025. And then, of course, we got instead very sweeping, broad tariffs from the Trump administration that have really caused a pause and a paralysis, really, in decision making in the manufacturing sector that's really pushed out that recovery. But even with the optimism, you know, that that recovery might finally end up taking place in 2026, I think the extent of its robustness is really going to hinge on what you see from the consumer. There's been so much talk, particularly in the post-pandemic period, about whether you could have a decoupling of the manufacturing economy from the broader economy and from the consumer.

18:41And despite a lot of prognostications about that, it has not actually happened. And it's very difficult for the manufacturing economy to decouple just considering how much of GDP is driven by that consumer. And so when you see that, you know, retrenchment, consumers making tradeoffs, cutting back on things. You know, we've also gotten some really notable warnings on the housing market and just the past couple of days from Home Depot, from Carrier Global, which makes air conditioners and heating systems. And it all sort of adds up to a picture of continued anxiety, at least. And I think until you start to see that dissipate, it's going to be harder to see the manufacturing sector really break out and have a more meaningful recovery.

19:21tangential to that. You've seen companies make investments here and there, but even during sort of the building boom days in the Biden era, that really didn't filter down to manufacturing earnings. And we're still not really seeing that. It's a good point that you can have that sort of a slow burn effect where you don't have the dynamism at that end, where even if the big picture is going better, you know, imports are down. Some of the things that the president was focused on are actually moving in the right direction, despite the critics of his policies. Actually, the dynamics of the sort of micro level for manufacturers, especially if there's these costs going up and up on households and they're having to make tough choices.

20:00I think, yeah, it could continue to be quite tough. I mean, Rachel, I'll give you the last word in the sense of it's next week on the show we're going to be thinking ahead to next year. But in this area, what's your best bet? Do you think this is something that even though they haven't fixed it now, when people are actually paying these premiums, when you see people fall off their health insurance, when the broader medical sector is really struggling, do you think there will be a solution out of Congress or is that it? I hate to make predictions, but my sources seem to think that it's, I think that's going to be it.

20:34Like once they've had months and months to make a deal on this, they couldn't do it. And Republicans have also pursued policies in Medicaid, like the health insurance program for low-income and disabled people that have cut funding to that program, too. This is a, it's a trend. And these cumulative policies are expected to result in 10 million more people becoming uninsured over the next decade, according to budget analysts. So I think it's going to be tough to reopen this and create these subsidies out of scratch. It's much harder than continuing existing policy that maintains the status quo.

21:10Generally, that's an easier fight than resuscitating these when hospitals are struggling and when patients are struggling. I mean, we've tended to say over the years that the state of the US, and certainly even before Obamacare was passed, the state of the US health system was very much a function of the strength of the insurers and to some extent the hospitals, that they had been able to prevent reforms that in Congress that would potentially be beneficial for individual consumers, not least going to single payer, which is the extreme example. But moving towards that had been stopped every time by this overwhelming power of that lobby.

21:50Is there some sign here that lobby is in itself weakening in the face of this kind of ideological resistance of the Republicans? Because they obviously don't want, they would like to have these subsidies kick back in. Certainly. I think it is a demonstration of their waning influence for both hospitals, which, you know, they're a lot of times the largest employer in a congressional district, and also insurers. And the president attacked health insurance companies repeatedly on social media in kind of the course of this debate. He's made it very clear that he is not a fan of insurers, thinks they're too profitable.

22:25And with hospitals, they just weren't able to swing their members in the way that they used to because Republicans are scared to stand up to Trump and they didn't want to be the people who stood in the way of his big signature domestic policy and tax bill. Like, that's a big ask of people. And in the past, they were able to find champions who would do that for them. And in the second Trump administration, they haven't been able to do it. I think it shocked a lot of people here in Washington how little they've been able to do to avert these cuts. Well, I think we're leaving President Trump with something interesting to think about, that insurance, this very boring micro topic, if Brooks writes, it could be one of the reasons why we don't start manufacturing again in the US, despite his efforts.

23:11And it also might be why he continues to not get credit for a great economy. Rachel, Brooke, thank you very much.

23:30Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Brooke Sutherland and Rachel Kors-Zang. Trumponomics was produced by Sam Asadi and Moses Andam with help from Amy Keene. And special thanks to Rachel Lewis-Kriskie. Sound design is by Blake Maples and Kelly Gary and Sage Bowman is Bloomberg's head of podcasts. I'm pleased to help others find and enjoy Trumponomics, please rate and review it highly wherever you listen. Thank you.

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