” Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.”
— Edward Coke
We were going to write about something completely different for today’s post, but world events have short-circuited that plan. Instead, we’re going to take America’s recent credit downgrade, the resulting stock market slide, the double-dip recession we’re experiencing along with a record duration of high unemployment that is setting records, the idiocy of the recent debt-ceiling deal, and link them all to the current state of American healthcare. It’s really not much of a stretch.
As recently reported in the New York Times, it appears that the United States is entering the first double-dip recession in thirty years, the last one occurring in 1980 and 81-82. The average duration of unemployment now stands at a record 40.4 weeks – about 10 months. Printing money to finance the federal debt has forced interest rates near zero for a select group of borrowers like big banks, governments and big corporations, but at the same time small businesses can’t get loans and individual savers are earning next to nothing on their CDs. The events and circuses of the past week wiped out $2.5 trillion of valuation from global markets. Even America’s Chinese creditors have become critics with the first-ever downgrade of the government’s credit rating, adding their own $1.7 trillion two cents:
“’The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,’” China’s official Xinhua news agency said in a commentary…
In the Xinhua commentary, China scorned the United States for its ‘debt addiction’ and ‘short sighted’ political wrangling.
‘China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,’ it said.”
What a proud moment. If only the Founding Fathers were here to see what our political and economic Leaders have done with their Republic. But what does this have to do with healthcare? Everything. For ask yourself, what makes this recession so special?
The New York Times article notes that with respect to double-dip recessions:
“…In each case the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.”
What makes this recession very special is the notion that we’ve already spent so much, and printed so many dollars to pay for it, that creditors of all nations, races and religions have lost confidence in America’s ability to both continue spending and pay them back in non-inflated dollars. The only thing that can possibly make these people regain confidence is to see our federal government reduce spending relative to taxation. As shown in this graph from the Heritage Foundation, the current crisis of confidence is clearly being caused by increases in spending, not reductions in revenue.
Okay, what accounts for the huge increases in spending? As shown in this diagram from the Center on Budget and Policy Priorities, the majority of the federal budget is spent on defense, Social Security and federal healthcare programs.
Of these, defense is declining relative to Social Security and federal healthcare spending. Furthermore, the U.S. government’s credibility is clearly suffering as a result unrestricted growth in these specific social entitlement programs.
So when we come right down to it, the entire crisis of confidence – and the double-dip recession that it appears to be precipitating – is a result of the world’s perception that the United States is not serious about limiting the growth of its healthcare spending. No limitation of growth in healthcare = no limitation in growth of deficit spending = no confidence in the American economy, credit or the dollar.
But gosh, where on earth could anyone get the impression that Congress and the President aren’t serious about healthcare spending?
The answer is really pretty simple: (1) the Affordable Care Act (ACA); and (2) the recent agreement to raise the debt ceiling. In both plans, the proposals intended to reduce the growth of healthcare spending are complete and total hogwash. This might not be a problem except that everyone knows it. And this makes them uncertain about the future and undermines confidence in America’s government and economy.
For all practical purpose, Congress and our Presidents have had only one single, solitary idea for how to reduce U.S. healthcare costs: cut payments to providers by regulatory fiat. This was the approach taken back in 1975, when annual increases in physician fees were limited by the Medicare Economic Index (MEI). It was the idea in 1989 when the Omnibus Budget Reconciliation Act of 1989 turned the byzantine Medicare Fee Schedule and RBRVS into law. It’s what they tried in 1998 when Congress passed the “Sustainable Growth Rate” (SGR) formula for limiting payments to physicians. Actions speak louder than words, and the track record of this approach has been a complete failure. As we’ve described in previous posts, Soviet-style price controls haven’t worked any better in the United States healthcare industry than they did in the Soviet Union. By using insurance to subsidize demand and creating a completely artificial payment system with a high administrative overhead cost and clear incentives to over-utilize resources, the consumption of healthcare goods and services has skyrocketed.
Psychology experiments tell us that when a rat’s actions lead to bad results several times in a row, the animal rapidly learns to stop taking that course of action. Apparently this is a major difference between rats and our elected representatives. For when President Obama and the Democratic Party majority crafted the ACA, they once again (in addition to dozens of other measures to directly or indirectly increase healthcare costs) directed the Independent Payment Advisory Board to once again control the growth of healthcare solely by cutting payments to providers.*
And now we’ve seen the most recent event to shake the confidence of businesses, creditors, investors and savers around the world: the political debacle over lifting the debt ceiling. In response to concerns about the nation’s inability to meet its future obligations, Congress and the President agreed to take the healthcare bull by the horns. In a White House fact sheet explaining the debt ceiling deal and misleadingly entitled “Bipartisan Debt Deal: A Win for the Economy and Budget Discipline”, the President explained that, with respect to hundreds of billions of dollars in cuts to Medicare spending:
“Consistent with the bipartisan precedents established in the 1980s and 1990s, the sequester would be divided equally between defense and non-defense program, and it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.” [Our emphasis – Ed.)
Okay let’s take a step back, shall we? There have been whole books written on the topic of waste and inefficiency in healthcare. We know that the U.S. spends more per capita on healthcare than any other country in the world, and that at least one-third of each dollar we spend goes to administrative overhead expense. We know that economic inefficiency is rampant, and that rules and regulations – from billing to HIPAA to electronic medical record mandates to the FDA’s push to newly regulate drugs your great grandparents might have used – are pushing the cost of care ever higher. Little or none of this is associated with any evidence of positive economic, social or medical benefit. And when push really comes to shove – when the world’s sole remaining superpower is broke and the underlying root causes of excess healthcare spending must be addressed – Congress and the President decide to go right back to their 40-year old, one sentence playbook on controlling costs by hitting on providers.
What’s an employer or a creditor or an investor supposed to think? That our Leaders really are serious about healthcare costs this time? Or that they do not know how to control these costs, or know but have no intention of doing so? With a plan like this, no serious person could really think that it’s the former.
Let’s do a little thought experiment. Let’s say that, instead of treating healthcare’s contribution to the deficit in the same, zombie-like fashion, President Obama and House Speaker Boehner had issued the following press release:
“After much serious thought and discussion on both sides, we have concluded that the time has come to address the root causes of our excessive national spending on healthcare. We have therefore agreed to take the following steps:
– We will dramatically simplify the payment and regulatory systems commonly associated with Medicare, Medicaid and private insurance. This will include abolition of the existing Medicare Fee Schedule and RBRVS systems and their replacement with a system based on simple, transparent pricing that makes it plain what everyone owes for care. It will utilize simply methods, such as paying clinicians by the hour, that do not encourage the delivery of excess services or the withholding of needed care. It will also permit the use of market tools such as cost-sharing and reference pricing to better balance the supply and demand for services.
– We have agreed to the formation of a bipartisan commission whose sole job will be to streamline government healthcare regulatory practices, ranging from licensure and accreditation to the FDA approval of drugs and devices. Our objective must be to minimize the amount of paperwork, duplication and administrative overhead produced by the actions of state and federal governments.
We will address the issue of defensive medicine with a system of dedicated federal healthcare courts to better meet the needs of both patients and providers, minimize legal expense, reduce the need for defensive medicine and improve the fairness and efficiency of the medical malpractice system.
– Rather than following the failed example of the United Kingdom, all national healthcare information technology programs are being scaled back to emphasize the least expensive technology that can meet the basic needs of easily sharing electronic medical records between medical providers, with the patient’s express consent. Physicians and hospitals are free to deploy more expensive and complex systems if they wish, but the federal government will not require investments that clinicians do not wish to make voluntarily, nor technologies that they do not wish to use.
The CBO estimates that these changes alone will save the U.S. healthcare system nearly $6 trillion over the next ten years, of which nearly $4 trillion will accrue directly to the federal government and can be used for deficit reduction. These are real savings in the use of healthcare resources, not accounting or spending gimmicks. However we do not intend to stop here. Medicare and Medicaid will be converted to high-deductible basic insurance programs with accompanying healthcare savings accounts that will give patients the opportunity to spend or save this money as best meets their individual needs. We believe that this program will generate many hundreds of billions of dollars in additional cost savings, as well as generating a new pool of personal savings that will support the growth of businesses and jobs.
In a way, we are grateful for the opportunity that this spending crisis has provided. It is an opportunity to put the federal government’s financial house to order while breaking the logjam that characterized much of the national debate on how to control the unsustainable growth of national healthcare costs. We hope that state governments will closely follow the results of the actions that we are taking here today, and emulate those that they may find useful. We must control our borrowing and spending before it takes control of our own future and that of our children.”
We suspect that the reaction of investors around the world, and the average American voter, would have been considerably more favorable if this had been the approach our elected representatives had taken in raising the federal debt limit.
Former President Bill Clinton is famous for having observed that the most important single issue of the 1992 election was “the economy, stupid”. With respect to our current recession, the reluctance to invest, and the reluctance to generate jobs, the single most important issue is uncertainty. When you get right down to it, it is uncertainty about whether our political Leaders have the knowledge, ability and cojones to do something financially meaningful about our unsustainable healthcare system.
*Here’s an interesting question. The Independent Payment Advisory Board created by the “ObamaCare” Accountable Care Act is charged with shaving some $500 billion from Medicare, solely by reducing payments to healthcare providers. Now as a result of the legislation lifting the debt ceiling, Congress is obligated to sequester roughly another $600 billion in saving from Medicare, again relying strictly on reductions in payments to providers. Are these two mandated reductions in payments to Medicare providers additive? (We know that both are additive to the mandatory reductions in payments to Medicare providers under the SGR.) If so, cuts to Medicare providers over the next few years will exceed $1 trillion, easily making Medicare reimbursement the lowest of any insurance plan in the United States. Under these circumstances virtually every Medicare patient will cost more money to see than they are bringing in.