Saturday, February 13, 2010

Medicare: Facts or Confusion

The Republican Blogger and former Bush White House adviser, Keith Hennessey, has written the following:

Medicare spending this year will be $516 billion. Seniors will pay about $78 B in premiums, and taxpayers will pay the other $444 B, making it the second largest item in the federal budget after Social Security (at about $700 B). The taxpayer cost of Medicare is projected to grow about 6.6% per year over the next decade, while the economy is projected to grow 4.5% per year over the same time period. If the projections are right, our economy will grow 54% (in nominal dollars) and Medicare will grow 89%. The cost to taxpayers will grow from 3% of GDP to 3.5% of GDP. (All data is from CBO.)

Now let us go back and deal with a few facts. He states that the taxpayers will pay the remaining amount. Excuse me Mr Hennessey, but Medicare Recipients had already more than paid their total share for years! It was the 3% Medicare Tax, and perhaps you have forgotten that Sir! Now it is not like me to rant at Republicans, but alas this is a Bush Republican, and they seem to have been a bit, shall we say, less than top rate, not that the current Democrat batch is anything to write home about either.

You see folks, you and I and all others who have worked and the few of us who have built business that have put people to work, and yes I have done that too, have, since 1968, paid out Medicare Insurance payment religiously every year! That was in anticipation of drawing down on that payment. It was not a tax, and those paying in now should be considering it as their future benefit. Hennessey, in my personal opinion in a grossly misleading manner, appears to attribute the Medicare tax as a tax on the current taxpayers to pay for the benefits for those on Medicare. No Mr. Hennessey, those on Medicare contributed their fair share and much more and you politicians confiscated that money along the way and spent it on programs to maintain yourselves in office.

So let me stop ranting and deal with facts.

1. The following chart depicts personal income annualized by month since January 2007. We can see the dip due to the Recession and we further see the recovery at the end of the last President's term. Slow and steady, it is recovering. Yet it is not yet where it was at the peak on an annualized basis.

2. The number of Medicare Recipients are shown below for the same period. Note that they are increasing. This is nothing new and it is pure demographics.

3. The following are the total Medicare Receipts annualized. Here one must be a bit careful. Hennessey seems to state that one is a tax, the 3% of gross income and the other is what Medicare Beneficiaries pay, the $100 per month. In reality the Medicare beneficiaries have been paying for 40 plus years the 3% of their gross income before they received dollar one. Either they get credit for that or perhaps the Government would like to refund their payments with interest! Hennessey seems to deny the existence of this FACT! Perhaps it is statements of the type he makes that have gotten us in this mess in the first place.

4. We now show the total Receipts and the total Outlays, each annualized by month. Now we see a gap. Outlays are growing greater than Receipts. Why? Two fold answer. First, Gross Personal Incomes are down due to the Recession, and that is the prime driver. Second, as we stimulate the economy, the stimulus seems to be SEIU directed, thus actually driving up health care employment and in turn costs! We demonstrated that in a earlier posting. The current Administration is drawing people from the ranks of private commercial employment and placing funds into union controlled cost increasing elements. Thus, the double whammy to Medicare. This is a "Government caused" problem, and perhaps Mr Hennessey should have the insight to see that and state it as such!

5. The annualized Medicare current account deficit is shown below. The issue is then how does the Government cover this? The Democrats proposal is to cut the payments to the providers. Unfortunately the physicians do not belong to SEIU and those who do have unbreakable contracts. So what happens is we drive the best physicians out of Medicare and leave the dolts to care for the old too poor to pay for it themselves. I really love Democrats, don't we all.

6. So what can we do? The chart below makes a few suggestions. We look simply at raising the Medicare tax from 3% to say 4% and then to 5%. It is logical to pay for what you will get.

And what do we see? Well 4% breaks even assuming minimal recovery from the Recession, and 5% actually creates a surplus. So what should we do with a surplus. Well again this is an insurance plan, not a piggy bank, and it should be saved and invested prudently, perhaps buy some Chinese debt, just kidding.

The Hennessey article raises many truly concerning and disturbing issues which we have tried to highlight here. The debate on Medicare will go into full swing shortly and both sides want to take a whack at it. Perhaps we need a voice of truth somewhere who can at least do a back of the envelope analysis.

Let me reiterate my conclusions:

First, there is a mind set in Washington amongst both parties that Medicare is being paid on an as is basis and that past payments into this insurance plans do not count. Namely those who are reaching 65 now contribute only what they do in the current year and the past 40+ years of contributions count for nothing. That is a bald face falsity. This was set up as an insurance plan and any insurance company who ran it this way would be bankrupt, alas the Federal Government is going that way.

Second, making Receipt and Outlays balance should not be placed solely on the shoulders of those who paid in. Namely the answer is not just reducing payments and thus care. That is a breach of contract. The alternative is a balanced plan of increasing the Medicare Fee, delaying Medicare eligibility, and using some form of means testing, namely making the fee per month dependent on income.

Third, Congress at some point should be prohibited from absconding with funds earmarked for special purposes, Social Security and Medicare. That is the prime cause for all the current problems.

Fourth, Congress and its erstwhile Stimulus is in and of itself a cause of the increase in health care costs by driving up spending on health care. It is a deadly cycle they are creating and it appears as if it will just get worse.

Fifth, there must be some intelligence in Washington to look at simple set of numbers, ascertain the problem, suggest a solution and explain it simply! But alas that may be an ever unfulfilled hope!