Thursday, September 10, 2009

Beware the Public Option

I originally anticipated discussing the collapse of GM in this blog, however given the debate currently raging over health care reform this is where I will focus today because, guess what, the hidden cost of health care overhaul is… another Unfunded Liability!

Last night the President laid out a plan for health care overhaul. The plan contains numerous necessary reforms, others are not. Here I will only take issue with one: the Public Option. Why? Because the Public Option is a prime example of an unfunded liability.

Here is what he said, “But an additional step we can take to keep insurance companies honest is by making a not-for-profit public option available in the insurance exchange.” And how does that get paid for? “... not a dollar of the Medicare trust fund will be used to pay for this plan… Reducing the waste and inefficiency in Medicare and Medicaid will pay for most of this plan.” Isn’t this contradictory? In other words, if Medicare and Medicaid savings are going to pay for this isn’t the payment by definition going to come out of money that would otherwise be available to the Trust Fund?

This provides us with an easy segue into a discussion of the financial health of Medicare. If we are relying on savings in one entitlement to pay for another the former had better be financially sound. It is not.

Each year the Social Security and Medicare Boards of Trustees publish an annual report along with “A Message to the Public”.(1) In this year’s report signed by the Secretary of the Treasury as Managing Trustee it states, “As was true in 2008, Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81 percent in 2017 to about 50 percent in 2035 and 30 percent in 2080. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.”

The consequence of this statement is profound. The current Medicare system will need substantial savings and additional revenue just to keep its own head above water. The problem once again is the unfunded liability that arises from guarantees of benefits without a dedicated payment plan. Simply reducing the deficit of an unfunded liability doesn’t create funding available for another. Today the unfunded liability in Medicare alone is $85.9 trillion or six times the total annual production of our economy. The report goes on, “The projected exhaustion of the HI Trust Fund within the next eight years is an urgent concern. Congressional action will be necessary to ensure uninterrupted provision of HI services to beneficiaries. Correcting the financial imbalance for the HI Trust Fund—even in the short range alone—will require substantial changes to program income and/or expenditures.” And this is how we are going to fund the new Public Option?

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