By Ron Robins. First published February 10, 2011, in his weekly economics and finance column at alrroya.com
Medical spending could deliver a debilitating heart attack to the US economy, despite the recently passed healthcare legislation that hopes to significantly control costs. Depending on assumptions made, the unfunded US government medical liabilities range as high as $125 trillion, equivalent to about eight times America’s annual gross domestic product (GDP). These unfunded liabilities—money that might have to be borrowed—have the possibility of totally derailing the US economy.
In 2008, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas cited the US government’s unfunded Medicare program liabilities at $85.6trn over the infinite horizon. He said that including the unfunded liabilities of US Social Security the total rises to $99.2trn. Mr. Fisher further added that were they to be funded, it would require a lump sum payment of $1.3 million per family of four to the US federal treasury! Or alternately, an increase of 68 per cent in federal taxes for all individuals and corporations, for now and forever.
The unfunded liabilities figure of $125trn arose from a conversation I had recently with Boston University’s renowned Professor of Economics, Laurence Kotlikoff, who believes they could range that much also using an infinite horizon time frame.
Now really ‘low-ball’ medical unfunded liability estimates come from the 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. They are the reports of the Medicare trustees of the US government. The 2010 estimates of US government medical unfunded liabilities have been shaved dramatically from their prior year reports.
And the Medicare trustees make the following remarks in that regard. They say that, “the Affordable Care Act [the recently passed healthcare legislation] improves the financial outlook for Medicare substantially. However, the effects of some of the new law’s provisions on Medicare are not known at this time, with the result that the projections are much more uncertain than normal, especially in the longer-range future… the actual future costs for Medicare are likely to exceed those shown by the current-law projections.” In other words, their low-ball estimates are based on such flimsy assumptions as to make them untenable.
And the record of government predictions and cost containment in regard to Medicare expenditures is anything but encouraging. As Gary Shilling, a US economist recently remarked, that in 1967 a special committee of the US Congress predicted by 1990 that Medicare would cost $12 billion. It actually cost $110bn. Quite likely the estimates of US government medical unfunded liabilities, by Richard Fisher and Professor Kotlikoff are nearer the reality, barring truly significant program cuts, changes and increases in taxes.
The US government’s Medicare program began in 1965. It primarily covers medical expenses for people over 65 years of age and for certain disabilities for people younger than 65. Medicare was envisaged as being able to pay its own way through payroll deductions, and for many years it did even more than that: it built up surpluses. However, in January 2011 the US Congressional Budget Office (CBO) showed that the cash flows of the Medicare trust funds had now grown significantly negative. Also, the CBO sees US government Medicare related costs jumping from an estimated “$870bn in 2011, or 5.8 per cent of GDP… to $1.8trn in 2021… and 7.4 per cent of GDP.”
Also, the US spends disproportionately higher on its healthcare than other developed countries, yet with frequently poorer outcomes. Mark Pearson, Head, Health Division, of the Organisation for Economic Co-operation and Development (OECD), made these written comments to the US Special Committee on Aging on September 30, 2009. He wrote that, “the United States spent 16 per cent of its national income (GDP) on health in 2007. This is by far the highest share in the OECD… Even France, Switzerland and Germany, the countries which, apart from the United States, spend the greatest proportion of national income on health, spent over 5 percentage points of GDP less: respectively 11.0 per cent, 10.8 per cent and 10.4 per cent of their GDP… For all its spending, the US has lower life expectancy than most OECD countries (78.1; average is 79.1).”
Further illustrating the enormity of the US healthcare spending problem, the US government’s Centers for Medicare and Medicaid Services (CMS) said that total US national health expenditure (NHE) “grew 4.0 per cent to $2.5trn in 2009, or $8,086 per person, and accounted for 17.6 per cent of GDP [up from 16.6 per cent 2008].”
Additionally, CMS found that US government Medicare and affiliated Medicaid 2009 program expenditures grew even faster at 7.9 and 9 per cent respectively, accounting for 35 per cent of NHE. The US federal government’s share of health care spending rose by just over 3 per cent in 2009 over 2008, to 27 per cent.
Reining in the growth of US federal government Medicare and related spending will require huge healthcare industry adjustments, spending cuts and continuing modification of government health funded programs. And it will probably require substantially increased taxes to fund its remnants. In recent polls by CNN/Opinion Research Corp Poll and Gallup, the vast majority of Americans said no to cuts in Medicare. A healthcare expense heart attack could be on the horizon for Americans.
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