An Involuntary Work of Fiction
June 07, 2013

An Involuntary Work of Fiction

The latest Trustees Reports for Social Security and Medicare contained some much reported tranquilizing news. There’s only one problem: One of those reports is an involuntary work of fiction. That’s what the Medicare trustees report has become since the passage of the Affordable Care Act.

I say this with no disrespect for the Medicare trustees. They are required to project the future costs of Medicare based on current law. So that’s what they do. Unfortunately, it is highly unlikely that healthcare costs will be anything like the Affordable Care Act would dictate them to be. The trustees say this many times.

Here’s an indication of how out-of-whack things are. The new report shows the unfunded liabilities of Medicare— Hospital Insurance, Part B and Part D— to total $27.2 trillion over the next 75 years. That’s less than the $27.7 trillion they were at the end of 2004. The total is also a whopping $10.6 trillion less than the $37.8 trillion they were as recently as 2008, just before the ACA was passed and began the fiction of future medical costs.

This isn’t news. The Trustees Report in 2010 contained as loud and sharp a qualified opinion as any actuary is likely to make- witness these words from Chief Actuary Richard Foster on page 283:

 “For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable).”

The first big sticking point is coming up soon. It’s the 25 percent reduction in fees paid to doctors for Medicare patients. It’s scheduled to take effect in 2014, only seven months away. Appendix C, five pages of the report that are short enough for everyone in Congress to read, gives us an idea of the pressures coming for doctors if the law is not over-ridden. It tells us that Medicare payments currently average 80 percent of corresponding fees paid by private health insurance. The combination of next years 25 percent cut plus future growth limited to growth in GDP suggests that payments to doctors would be down to 40 percent of private health insurance payments within 20 years.

 “If lawmakers allowed such payment differentials to occur,” the current report says “Medicare beneficiaries would almost certainly face increasingly severe problems with access to physician services.”

The Affordable Healthcare Act puts a similar squeeze on all non-physician fees and charges. The likely result is that Medicare patients will have an increasingly difficult time getting medical care.

While many people seem to feel that doctors have it made, the reality is that practicing medicine isn’t what it used to be and its going to get tougher, particularly for young doctors with heavy-duty medical school debt. For Medicare patients I have only one suggestion: If you were deferring a surgery— say for knee or hip replacement— do it now, before 2014.

How big is the ‘reality gap’ between the Affordable Care Act and likely events? Appendix C provides estimates. With current Medicare costs at 3.6 percent of GDP, the cost would rise, long term, to 6.5 percent under current law but 9.8 percent if the historical trend prevails. That’s quite a spread. Whatever your age, you’re going to be dealing with this for the rest of your life.

Another part of the report that deserves more attention is Appendix F, which I’ve written about before. It’s another seven pages that should be required reading for Congress because it reconciles the tranquilizing figures provided by Trust accounting with the brutal realities of the Federal budget. This year Table V.F1 shows a combined Social Security and Medicare Trust funds surplus of $47.1 billion. But the same programs present a cash cost of $403.1 billion in the federal budget.

But wait, it gets worse. Over the next 75 years the Trust Fund perspective shows a combined unfunded gap of $14.1 trillion. But measured in Federal Budget dollars the figure comes to $39.6 trillion. That’s up from the $30.8 trillion reported in the 2010 Trustees Report. The actuaries must have laughed like bond traders when they named it “Appendix F.”

Related Articles

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.