Sunday, June 7, 2009

The numbers: is health care reform financially realistic?

According to a front page article in the "New York Times" this morning, President Obama intends to, "forge a greater role on health care." The article goes on to say that, "broadly speaking, he wants to extend coverage to 45 million uninsured, while lowering costs, improving quality and preserving consumer choice."

All loudable goals. Broadly speaking, I'd also like to extend my family's personal monthly spending into several new areas as well, all while lowering our monthly expenses, improving quality and preserving choice. Sounds fantastic. I'm in. Just show me how.....

The problem, of course, is cost. Money. Money, money, money.

As reflected in the pie chart above, according to the Congressional Budget Office, or CBO, so-called "mandatory" expenditures on entitlement programs like Social Security and Medicare alone made up 44% of Federal spending in 2008, with another 10% characterized as "other mandatory" spending (like Congressional salaries, apparently). That's 54% of the US government's annual spending of just about $3 trillion that's apparently untouchable.

In that same "New York Times" article, President Obama is quoted as saying, "we must attack the root causes of skyrocketing health costs." Again, a very laudable goal. But even his first budget has proposed only slowing the rate of growth of Medicare costs, not cutting them in absolute dollars. So that's 54% of the Federal budget that's essentially certain to increase, even before any proposed health care reform is enacted. Insuring another 45 million people would seem an unlikely (but perhaps audacious) way to try to cut absolute costs.

Now let's quickly focus on interest payments on the national debt, which is also classified as so-called "mandatory" spending. According to the pie chart above from the CBO, those payments accounted for another 8% of Federal spending in 2008. (As an aside, that makes a total of 62% of 2008 Federal spending which is classified as "mandatory.")

As the dust begins to settle from the current financial crisis, the United States is almost certain to face a much higher cost of borrowing in the future, as well, especially if the US dollar begins a widely predicted devaluation against other foreign currencies. And the national debt is certain to increase in the future in absolute dollars as well, in part because of the prior adminsitration's profligacy and in part because of the current President's (and the Democrat-controlled Congress') stimulus plan.

So "mandatory" interest payments on the national debt are also certain to rise in the future, both in absolute dollars and as a percentage of the Federal budget. That leaves even less room to increase Federal spending in the future on health care reform. Indeed, these inevitably increasing interest costs alone may necessitate painful benefit cuts in entitlement programs in the future, even with more tax increases. Let alone the budgetary effect of any health care reform.

All of this is in a context where the Federal government ran a $455 billion budget deficit in 2008, roughly 25% of the $2.5 trillion in revenue it collected that year. Since 1970, the US Federal government has apparently run budget deficits in every year except four (1998-2001).

And this analysis above doesn't even get at the potential impact of widely predicted inflation in the future.

The President's health care reform goals are, perhaps, unassailably noble. But the numbers don't lie, as they say. We simply can't afford to be that noble right now.

Sure, some significant reductions in defense spending, which made up 21% of 2008 Federal spending, may be possible. But with the President deepening our commitment to the war in Afghanistan, and jobs in the defense industry being some of the last relatively high-paying manufacturing jobs in the country, it seems unlikely to me that financially significant cost savings are right around the corner in that area, either.

Indeed, these numbers tell us that the nation is already facing the statistically certain outcome in the near future of painful tax increases and cuts in entitlement spending, just to keep us where we are. All in an inflationary environment.

I wish the level of candor about this financial reality by our political leadership in Washington, D.C., would match the soaring rhetoric about new or expanded government programs. But perhaps that's the audacity of hope.....

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