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Thursday, July 14, 2011

When you find yourself in a hole, the first step is to stop digging

There are two articles in succession in this week's NEJM which are well worth reading. I have liberally lifted quotes. The figures have been taken from other sources. The first article is  "The Economics of Financing Medicare" (NEJM | July 13, 2011 |) by Katherine Baicker, Ph.D., and Michael E. Chernew, Ph.D.
The article opens with a simple statement of fact:
"The pressure the Medicare program puts on the federal budget has been much discussed, but financing Medicare also has broader implications for the economy. Medicare expenditures currently account
for 15% of federal spending and 3.6% of the total gross domestic product (GDP). Moreover, Medicare spending grew an average of about 2.5 percentage points faster than the GDP from 1975 through 2008, consuming a rapidly increasing share of the country’s total resources." 
What the authors do not highlight is that this is not just Medicare but also Medicaid. While part of this may be due to changing demographics, there is an underlying growth rate which is demographic independent and unsustainable.  We will need to address this or else health care spending will undermine the economy.
A common diversionary tactic in this debate is to deflect attention to other portions of the budget such as defense spending or waste and fraud. While our forays into various corners of the globe are arguably a waste, the long term trend in defense allocations as a percentage of the federal budget and GDP are trending downward. This is in stark contrast to the growth of non-defense outlays. Medicare and Medicaid spending growth as well as growth in other entitlement  programs are greater than the underlying economic fundamentals. We could close the Pentagon entirely tomorrow and it will buy us a few years, but the growth in Medicare and Medicaid if continued along the presernt  course will bankrupt us still.

Baicker and Chernew go on to state:

"Although the economy can probably bear some tax increases to help finance Medicare, if recent rates of spending growth continue, taxes would have to increase precipitously. An analysis performed by the Congressional Budget Office (CBO) before the ACA was passed suggested that income tax rates would have to increase by more than 70% to finance health care spending that grew just 1 percentage point faster than the GDP — and by more than 160% to finance growth at the historical rate of 2.5 percentage points faster than GDP growth, increasing the income tax rate in the top bracket, for example, to 92% from 35%.2 Even with just 1 percentage point excess growth in health care spending, the CBO estimates that the tax increase would reduce the GDP by 3 to 16%.2"

There was a second article published in the this issue of the NEJM - The Public’s Views about Medicare and the Budget by Robert J. Blendon, Sc.D., and John M. Benson, M.A.

There is good news and bad news. The public realizes we have a big problem with spending more than we have in revenues. The bad news is that in most cases math was not their best subject when in school. In a nutshell, the public perception of the what can fix the problem is at odds of what virtually any actuary would tell  them:

Third, although most Americans (68%) believe that the federal budget deficit is a “very serious” problem (CBS, March 2011), a majority (54%) think it is possible for the federal government to balance the budget without cutting Medicare spending (AP). When people are given a list of options for reducing the deficit and asked whether they favor or oppose each item, cutting Medicare spending is one of the least favored. In two polls with such lists, only 21 to 22% favored cutting Medicare spending to reduce the deficit (WP–ABC, April 2011; CBS, March 2011; see table).

"Whenever either political party has put forth a proposal to improve Medicare’s long-term financial situation that includes raising taxes, major changes in the existing Medicare program, or substantial cuts in Medicare spending, the other party has strongly opposed it in the hope of gaining an advantage in the next election. In fact, within the past year, both parties have used the Medicare-cuts issue for campaign purposes. The current debt-ceiling debate has changed the short-term dynamic, but it has not altered the long-term play of these forces."

There you have it. What might work to actually address the the economic abyss we are facing creates a political abyss. Anyone who advocates for somethign other than kicking the can down the road will lose their next election. Can you say rock and hard place?

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