Tuesday, January 22, 2013

Are Health Care Costs (Shudder!) 'Moderating'?

'Happy Days Are Here Again...Maybe?'
Medical care observers in Washington are popping champagne lately over some data that seems to indicate that health care costs have 'flattened' out in the last couple of years. Is it possible that health care costs have 'moderated' down significantly from the stratospheric triple-the-annual-rate-of-inflation we have seen in America for the last several decades?

Maybe President Obama read these reports before giving his 2nd inaugural speech yesterday.  Why else would he so adamantly stand fast against any sort of Medicare reform?

Stuart Butler of the Heritage Foundation wrote a recent article exploring whether this was possible or not and came to the conclusion that 'the jury is still out on this'.

Our gut feeling is that with a rapidly-aging Boomer generation now about to hit the highest medical period of their lives; no significant changes to tort reform and other cost drivers inherent in health care nationwide and a vast expansion of health care coverage under Obamacare, there is about as much chance that health care costs have suddenly 'moderated' as President Obama will become known as 'The Hammer' when it comes to controlling federal spending in his second term.

As Mr. Butler notes in his article, we have seen such plateaus before, most notably when America went through the HMO Boom of the '90s which 'worked for awhile'...and then health care costs exploded again for the last decade.

We think that the Great Contraction in the American economy has put the squeeze on many people who either can't afford health insurance or medical care any longer since millions of people have been out of work for all or part of the first Obama term. They might be holding back as long as they can with some medical problem they might have which means it will only be more expensive to treat later.

We also think that there must be some marginal health care operators who have cut their prices in order to hold onto business just like every other business in America has done in order to stay in business. Health care costs are not totally immune to the overall health of the economy anymore than any other product or service in America.

However, just to show you the inordinate impact that overall health care inflation has on our federal budget, debts and deficits, we have put together this chart for you to take a look at and ponder: (the link will be more clear and easy to read)

We have updated the chart to take into account the loss of revenues signed into permanent law by President Obama as a result of the most recently-concluded fiscal cliff 'deal' (sic) passed by Congress earlier this month.

You will note, just for the record, that cutting taxes in the fiscal cliff will cause the reduction of revenues in coming years. Cutting taxes reduces tax revenues. That is why you cut taxes in the first place: so people will pay less taxes!

There might be some increase of income tax revenues when economic growth exceeds 3%, if it ever does again. Enhanced tax revenue collection over previous expectations comes from more people working and paying payroll taxes, first and then in income taxes if they are in the higher-income brackets, that is.

However, most of the surge in overall tax revenues to the federal treasury that first occurred under President Reagan and then swelled under Bush 41, Clinton and W to over $200 billion/year came from the 1983 Social Security Act which raised payroll tax rates beyond what was needed to pay current benefits. This is known as the so-called 'Social Security Surplus' which has just about vanished in the last 4 years due to this crushing recession.

For now, however, let's all agree that making the Obama tax cuts permanent reduces tax revenues relative to the previous baseline, almost exactly by one year as evidenced by the above chart.

Once you plug in the loss of revenues from the fiscal cliff deal, which increases our national debt accumulation by close to $3.5 trillion over the next 9 years all by itself, you'll see that under the optimistic CBO projections, future deficits are projected to hover around between $486 billion and $719 billion for the same period of time (dark-blue shaded line)

We say 'optimistic' because CBO estimates that economic growth will average 6.5% per year on a nominal basis from 2014-17 (4.3% on a real inflation-adjusted basis) and an average of 4.5% per year on a nominal basis from 2018-2022 (2.4% on a real inflation-adjusted basis)

Based on the headwinds we know we are already facing American business from the first term of the Obama Administration with more to come in his second, we have heard economists predict that we are stuck in a 2%/year annual real inflation-adjusted growth rate range for the rest of our lives! So we are not betting on the CBO revenue projections here either.

Take a look at the bottom group of figures associated with Medicare/Medicaid marked 'w/3% annual growth' (light blue line). If indeed excessive health care cost inflation's back has been completely broken as hoped for and possibly indicated in CMMS report referred to in Stuart Butler's article, our deficits will plummet and possibly be as low as $162 billion in 2022.

All by itself without any changes to any other federal program. Just because health care inflation falls back into line with 'normal' inflation rates in the rest of the economy.  Amazing, isn't it?

Any sort of uptick in reasonably robust economic growth between now and then would get us out of this death spiral of pilling $1 trillion+ debt levels upon each other as America has done like stacks of wood for the past 4 years. The question then would be should we continue to pay off debt for a considerable length of time or will Congress and the next President go on a spending spree like they won some sweepstakes at Neiman Marcus or something.

This points out very clearly that the largest part of our debt problem has been caused by our inability to rein in health care costs for the past 20 years which is very clearly a 'spending' issue, not an under-taxation problem as President Obama and the left seems to believe. Remember: these projections were made with the REDUCED revenue projections under the fiscal cliff tax cuts being signed into law.

Which brings up a pretty interesting question: IF we can save close to $550 billion in 2022 alone due solely to lower Medicare and Medicaid costs in that one year, will the Paul Krugmans of the world who love more government spending object? If health care inflation is only 3% per year for the next 9 years, that will reduce federal spending by close to $3 trillion over that time period!

Over $3 trillion of directed federal spending by Washington and the state capitals will have 'vanished into thin air' over the decade to come. What will a lover of more government spending do then?
A Great Economic Future?

Would that be a 'good thing'...or a 'bad thing' for the US economy?

It would be a monumental victory for the American people and our children and grandchildren. $3 trillion in less debt; balanced budgets again. Why, people around the world will start to believe that America has got its act together once again!

Our children might be able to see some light at the end of the tunnel and not wonder if it is a locomotive heading their way.

We'd like to hope and believe health care cost moderation is true. We are not counting on it yet though. Not by a long-shot.

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