Healthcare Reform: Robbing Peter to Pay Paul

by: Christopher Pavese, CFA

Providing healthcare to millions of uninsured is the right thing to do. But telling Americans that a bill which creates two new entitlement spending programs will actually improve our nation’s bottom line is deceitful and creates substantial long term risks. The most important impact of the health care bill may not be on health care. The most important impact is likely to be on the government’s balance sheet. Unfortunately, our nation’s leaders are not at all concerned with the dire implications of piling debt upon debt upon debt.

We recently came across two pieces which highlight the risk of growing entitlement costs:


It’s unfortunate that consequences that occur at later dates are given less and less consideration the further in the future they fall. Policymakers’ attitudes are equivalent to Saint Augustine’s plea, “Lord, make me chaste, but not yet.” Or “Eat, drink, and be merry, for tomorrow we may die.” Well, at least now we have health insurance!

Bill Gross shares his concerns with investors in his most recent Investment Outlook:

In the U.S. in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments which portfolio managers almost always neglect, viewing them as so far off in the future that they don’t matter. Yet should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt?

The trend promises to get worse, not better. The imminent passage of health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities. No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the Congressional Budget Office. Common sense alone would suggest that extending health care benefits to 30 million people will cost a lot of money and that it is being “paid for” in the current bill with standard smoke, and all too familiar mirrors that have characterized such entitlement legislation for decades. Front-end loaded revenues and back-end loaded expenses promote the fiction that a program that will cost $950 billion over the next 10 years actually reduces the deficit by $138 billion. After all the details are analyzed, it will add $562 billion to the deficit over the next decade.

Disclosure: No positions mentioned

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