Seeking Alpha
Profile| Send Message|
( followers)  

Medicare and social welfare are heading for insolvency more rapidly than previously forecast. The $50 trillion plus of their unfunded liabilities (according to the government’s “Financial Report of the United States” is beginning to appear over the horizon. At the same time, the U.S. Congress is discussing extending Medicare to those not covered.

But maybe that’s OK because the industry has said it is going to get costs under control and save literally trillions.

Alas, closer inspection shows the idea of extending Medicare to be suicidal and the trillions in savings do not exist, based on the government’s own figures.

First, basic common sense would tell us that if facing a funding problem so huge it can destroy the economy, it would be best to make sure it is brought back under control before adding fuel to the fire. Congressional records are full of ideas for reining in and rebalancing the Medicare budget, but none have worked yet. Managers of a business facing such a record but plunging ahead to increase exposure would be culpable in law.

Second, this time is not different. Set aside your disbelief that the health industry is going to reign in costs (and would you want to bet the farm on that?). Look at what’s promised: the industry says they can shave off 1.5 percentage points a year from a growth rate otherwise projected to average 6.2% annually through the next 10 years. That would bring it down to 4.7%. Sounds good if obtainable. But wait. Based on past experience, the supervisors of Medicare forecast excess cost growth for Medicare of 2.0% to 2019 and then a declining trend. So, that’s 2 percentage points above inflation. What is the inflation forecast? The government trustees of social welfare etc are using for their “intermediate" (i.e. middle) scenario an inflation rate of 2.8% - roughly in line with the 2.6% average CPI of 1997-2007. So: 2.0% plus 2.8% gives us 4.8% as the implied government expectation for annual medical inflation up to 2019.

That figure or something close to it lies behind the latest glum forecasts for Medicare. So, the industry is gallantly promising to reduce medical inflation to 4.7% and the government is already assuming 4.8%. In other words, there are no trillions of savings to save Medicare. In fact there are none at all. The industry’s proposed “savings” do no more than bring it into line with existing government assumptions about medical costs. If the industry did run at its pre savings figure of 6.2% it would bankrupt Medicare (and the country) even sooner than forecast.

If anything, the 6.2% figure that the industry has used as its base is a warning of just how out of control medical costs are and how lucky the U.S. will be to see a figure of anything like 4.8% for medical inflation. The industry’s position shows that the risk is that government’s Medicare forecasts are too optimistic.

Third, some of the proposals for extending Medicare are largely “user pays” and thus self funding. There is delusion here. To think this is a good idea you have to believe that (a) government can do a better job of running a self funding insurance scheme that private industry can; and (b) that it can resist all attempts to obtain a federal subsidy. This is otherwise known as magic.

That the U.S. government would even contemplate extending Medicare at this time demonstrates a frightening ignorance or disdain for the financial facts of life.

Disclosure: No positions

Source: Extending Medicare: Medical and National Suicide