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There’s lots of talk about the effects of tariffs on inflation, but my expectation is that the big inflation story in the coming year will centre on healthcare. It’s the focus of the current government shutdown, of course. Democrats are refusing to sign off on a budget that cuts Medicaid benefits for poor Americans in exchange for tax breaks for the rich.
Meanwhile, insurance premiums are set to go sky high next year. They rise every year, but surveys show that the median proposed increase across the country for 2026 is 18 per cent, which is double last year’s rate and triple 2024’s. Federal tax credits for premium spikes may also expire, which means that the total inflation in middle class tax brackets could be as much as 80 per cent, and for the poorest Americans, out of pocket expenditures on premiums could rise by 400 per cent.
Now, businesses will be able to negotiate to reduce some of the proposed premium hikes, but even if you were to get, say, a nine per cent increase that’s a huge impact for most people. The bottom line is that healthcare affordability may end up being a make-or-break political issue in the midterm elections.
It’s ironic that Donald Trump’s first proposal for dealing with the issue is taking a page out of the book of Obamacare (which had in turn taken ideas from what Republican Mitt Romney did in Massachusetts) with his “TrumpRX” proposal, which would create a federal marketplace where individuals could buy cheaper prescription drugs. Of course, he’s also threatened tariffs on European drugmakers (unless they move production to the US) in ways that could potentially drive-up costs on certain drugs. So, it’s tough to figure out where it all nets out.
In my ideal world, we’d both use the purchasing power of the federal government to create a strong demand signal as a way of reducing prices, and we’d not only not cut Medicaid, but we’d have a single payer system for the entire country, with an option for private insurance that you can buy if you want it — just like the UK and many other countries do.
As it is, the complexity and decentralisation of American healthcare make it rife with rent seeking and inefficiency, a topic which I’ve documented in many past columns.
Nationalised healthcare won’t happen anytime soon in the US, of course — unless the hard left gains more steam (that’s an issue I look at in my Monday column). But there are so many bits of low hanging fruit that could be pulled in the US healthcare system to make things cheaper and more efficient, from creating a national medical records system (so you wouldn’t have to deal with new paperwork every single time providers shift, or you move states), to focusing on prevention rather than after the fact treatment. It just amazes me that we don’t do more.
I’m lucky today to have as my respondent the FT’s US healthcare reporter, Patrick Temple-West. Patrick, my question for you is two-fold. First, what will the impact of the Medicaid cuts be, economically, in your opinion? And what do you think of TrumpRx? Finally, do you agree that healthcare inflation will rise sharply next year? And if so, what impact might that have on the larger economic picture in the US, as well as a the political scene?
Recommended reading
I saw this piece by James Mackintosh about how Microsoft’s borrowing costs are lower than America’s. It put me in mind of how the largest technology firms have decoupled from the economic fortunes of the countries in which they reside, even as investors know that there will be two tech stacks — one American, and one Chinese. So, how long does the divide last?
A good feature on Tylenol’s crisis following Trump’s comments linking the medication to autism (with no good medical data). It made me think about how foolish it is for individual CEOs to try and “manage” the president — they’d do better to band together against his attacks.
Two great opinion pieces in the FT to read, one from Martin Wolf on a world in which we now have not one but two predatory superpowers and another from FT alumna and former Canadian deputy prime minister and finance minister Chrystia Freeland on how Ukraine is actually innovating in defence, and how that could be a huge advantage for Europe. This echoes a bit of what I wrote a few months ago on how Ukraine heralds the biggest shift in warfare since Genghis Khan.
And just for fun, I’ve been watching and loving this HBO Max series on big wave surfers. As someone who finds it difficult to stay up on a board for more than five seconds, I can’t believe what these guys (and a few gals) do.
Patrick Temple-West replies
Hi Rana. Medicaid coverage dramatically increased during and after the Covid-19 pandemic. Republican deficit hawks say Medicaid has got too big and is rife with fraudulent claims. The budget reconciliation bill from earlier this year slashed Medicaid, prompting the Congressional Budget Office to estimate 7.8mn Americans would lose health insurance.
Republicans argued people who might lose Medicaid coverage are too often sleeping, watching television and playing video games. These people would be better off getting jobs and earning their health insurance.
On the other hand, Medicaid covers a whopping 40 per cent of all childbirths in the US and nearly 50 per cent of births in rural communities, according the American Hospital Association.
People are inevitably going to lose Medicaid coverage. If you think that instability is bad for the economy, then Medicaid cuts are harmful. These cuts also inevitably add financial stress to hospital systems. These hospitals issue debt to municipal bond investors. All these stress fractures aren’t great for the economy.
On TrumpRx, the White House took great pains to say it isn’t getting into the drug distribution business. This website sounds like it will work as a search engine to help people find cheaper drugs. During Obama’s second term, the troublesome rollout of healthcare.gov hurt him politically. TrumpRx isn’t as complicated, but it also isn’t as consequential.
Finally, healthcare inflation is real and will be shooting higher next year. It isn’t a question, it is just a matter of how much it will eat into people’s disposable spending. Will the inflation be high enough to sully Trump’s halo in the eyes of his voters? We’ll see 12 months from now. But this is exactly why the Democrats have gambled on a shutdown.
Your feedback
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