“Doctor, Mr. MD, can you tell me what’s ailing me” The Young Rascals

While the focus in Washington has been on the possible government shutdown, Syria, Obama Care, sequestration and the debt ceiling., the 800 lb. gorilla in the room is the exploding cost of government medical care in the US, particularly for Medicare and Medicaid, which Congress and the President have so far done nothing to address. Here the numbers are sobering:

–A decade ago, Medicare, Medicaid and other government medical expenditures such as federal disability stood at about a $0.4 trillion. Today, for FY 2013 they total some $1 trillion+ or more than doubling of these expenditures. While some of this reflected expansion of Medicaid benefits during 2008-2012 to deal with greater numbers of unemployed or working poor, most was due to increasing numbers of retirees and the rapid increases in the costs of medical care.

–By 2020, according to the CBO, government medical expenses are projected to grow rapidly to some $1.7 trillion or by almost 70% in 7 years. This $0.7 trillion in growth is driven largely by the number of baby boomers that will retire by 2020 as well as the growth in the government subsidies provided for Obama Care medical exchanges for lower-income workers.

–At the same time, other mandatory outlays, according to the CBO, most notably Social Security, is expected to increase to $1.3 trillion. Further interest on US debt (again according to the CBO) will increase to $0.7 trillion or about TRIPLE today’s levels.

–In total, this means that mandatory outlays (ie. medical, social security, food stamps, unemployment, interest on the debt etc.) will be more than $3.7 trillion and will account for almost 3/4 of the federal government’s expenditures of about $5.0 trillion. We will also have an $0.8 trillion dollar deficit and well over $20 trillion in outstanding debt, assuming anyone will be willing to buy our debt by then.

As alarming as these numbers are, they are actually pretty optimistic. As readers of this blog know, I have noted on a number of occasions that the CBO uses overly optimistic GDP growth estimates (which overstate government revenues) and optimistically low long-term interest rates which understate the government expenditures to pay interest on debt. Further, the CBO assumes that there will be virtually no growth in discretionary government expenditures between 2013-2020 which I find particularly hard to believe absent some major reforms. When you combine these factors, I believe deficits will soar after 2014 reaching $1 trillion again by 2015/16 and resulting in our outstanding debt exploding to over $25 trillion by 2020. In other words, we will see a HUGE financial meltdown/ economic depression in just the next few years unless we deal with our fiscal and monetary crisis SOON.

Can anything be done to deal with this impending financial cataclysm?

Actually, lots of things can be done BUT none of them are easy. However, reform of our Medicare and government medical services is perhaps one of the most important. However, in order to bring these costs under control we must take several steps.

First, we must STOP turning every discussion of Medicare, Medicaid, Obama Care (as well as Social Security) into a highly politicized, class warfare discussion of rich versus poor. For one, it immediately demonizes anyone who constructively proposes to reform a broken and soon to be bankrupt system. ( Consider the plight of Paul Ryan whose thoughtful ideas about reform introduced a couple of years ago got him vilified by the Democrats as one who cared little for the elderly and poor.). Likewise, the recent exhortations of liberal democrats such as Elizabeth Warren to INCREASE social security and medicare benefits in recent speeches to the AFL-CIO might be good for getting votes but not particularly helpful in solving our fiscal problems. Conversely, efforts to de-fund Obama Care by Ted Cruz and others in the Republican party merely have inflamed zealots on both sides of the aisle and aren’t very constructive. For better or worse, Congress passed Obama Care into law. We should figure how to improve it and make it more cost-effective with future legislation.

Second, we need to really educate the American populace how dire our financial position is. I’ll admit our government doesn’t help matters much by adopting a “keep filling the punch bowl” monetary policy which tells Americans “don’t worry be happy” while continuing to inflate our financial problems. However, unless we actually point out the consequences of NOT reforming Medicare, Medicaid etc. and NOT cutting some benefits in the stark terms of the potential financial collapse of the entire US government and a meltdown of the entire US economy, most people will simply say, “I have been paying Medicare taxes for 45 years, why should I accept ANY cut in MY benefits!”

Third, we need to reform our government medical insurance system so that the payments into the system reflects CONTROLLABLE health care risks. Unfortunately, here the Obama care system did us a disservice by setting a precedent in over-correcting for “pre-existing” health conditions. Under the current government-run health care exchanges, insurance companies are ONLY allowed to charge different premiums to smokers vs non-smokers. In the case of many pre-existing conditions (eg. already have cancer or another disease etc.), this seems more than fair to me that as a society we make sure that those unlucky citizens continue to get health care coverage at the same cost as the rest of us. However, I strongly disagree that someone with a controllable health care condition such as obesity (which is highly correlated to diabetes and many other illnesses) not pay more in insurance in line with their higher risks. I believe a system that actually made Medicare tax rates higher for those higher “controllable” risk candidates with a 1 to 2 year grace period for individuals to allow time to quit smoking or lose weight would be much fairer. (This could also be continued into retirement with greater co-payments for treatment of Medicare patients with such “controllable” conditions). Further, it might thru “tough love” end up lowering rates of smoking and obesity and improve many people’s health and lower US health care costs.

Fourth, we need to make sure that Medicare is tiered so that basic coverage (a la the Bronze plan in Obama Care) is available to all at no charge but that greater levels of benefits and coverages are only available thru additional payments by individuals. This not only would help reduce the net outlays of Medicare, but might help better police some of the fraud that Medicare has been subject to, because now individuals who are paying for higher levels of optional care are presumably incentivized to make sure they are getting what they pay for.

Fifth, I believe there should be a tax on sugar (and an elimination of all federal sugar subsidies) to help discourage sugar consumption and to help fund Medicare/Medicaid. I posted about this back in April 2012 so I won’t belabor it here. (See “No Sugar Tonight” for more details).

Finally, Medicare needs to be ‘means-tested” to a certain degree in order to help curb net outlays. This means we should recognize that wealthier individuals will  have to put some amount of dollars to their care (e.g. co-payments) while the less well off do not. This should be limited in scope, however. We must remember that many wealthy individuals may have already paid hundreds of thousands of dollars in medicare taxes over the working careers and several times as much as the average taxpayer (since unlike Social Security there is no wage limit for the Medicare tax).

Though I haven’t run the numbers, I believe with these changes and other reforms Medicare, Medicaid and other government medical expenditures could be made financially solvent again. Further, we would encourage better health and less “overconsumption” of health care which plagues these programs currently. If we add to this, other reforms that inject more competition in medical services markets we might just solve this problem without too much pain for the typical Medicare recipient. All that remains is having our politicians- both Democrats and Republicans- to have the political will to do this. As always, we can and should encourage them to do this thru our letters and emails. If we don’t we risk the end of these programs as we know them.