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Mark's Market Blog

2-20-10: Health care will bankrupt us

By Mark Lawrence

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The markets resumed climbing, even in the face of Bernanke announcing Thursday evening that he was raising the discount rate, which will have little effect on consumers but will lower the profits of banks a small amount. Since banks are roughly the only corporations making money right now, this is a concern. The fact that the markets went up a bit on Friday after this news shows that this bull market has not run its course yet.


S&P 500 November 19 2009 to February 19 2010

Well, it turns out Goldman Sachs is at the center of yet another crises. Back when Greece joined the EU, they were required to reduce their deficit. Goldman helped by lining up deals to pay Greece for future landing fees at their airports, for future revenue from their lottery, and with currency swaps which basically were massive loans disguised and kept off books. Greece is now looking like a financial car wreck. Meanwhile, Goldman earned roughly $300M per deal. Lloyd Blankfein, the Chairman of Goldman, who famously said a few month ago that they were "doing God's work," was perhaps telling the truth. My mistake was misunderstanding which god. Greeks should beware of Goldman Sachs bearing gifts. Goldman Sachs is evil and needs to be shut down.

I've been saying for some time that this is the year that government worker's pay and retirement schemes hit the radar screen. It's started. Governor Christie of New Jersey gave a speech last week to his legislature. Here's a brief excerpt: One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits -- a total of $3.8m on a $120,000 investment. Is that fair? A retired teacher paid $62,000 towards her pension and nothing -- yes, nothing -- for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it 'fair' for all of us and our children to have to pay for this excess? The total unfunded pension and medical benefit costs [in New Jersey] are $90 billion.

The Congressional Budget Office, a group of (mostly) non-partisan economists who analyze budgets and bills, have projected our national debt based on current policies until 2080. The national debt as a percentage of GDP is shown below for the US from 1790 to about 2030. The graph goes off the chart in 2030. National debt hits 100% of GDP in about 2025. Most economists consider this the point of no return: this is where it becomes much harder to sell bonds, interest rates raise, and payment on the debt dominates the budget and spirals out of control. At this point most countries would have a run on their currency like Greece just threatened to and require a bailout; the US will more likely just start up inflation like in the 70's to make the debt shrink.


Federal Debt 1790 to 2030

From where is this debt coming? Below we see the budget broken into three pieces, social security, medical expenses, and everything else. Immediately you see it's medical costs that come to dominate the budget excesses. Obama's plan, to freeze spending (not including defense, social security, medicare and Medicaid, and interest on the National Debt) is frankly a complete joke. The ship is leaking and he proposes to bail water with a tablespoon.


Federal Budget 1962 to 2080

Below is projected federal spending on health care. Today it's 15% of the federal budget. On current trends, payments to Doctors, Hospital administrators and owners, and Insurance companies will be 45% of the federal budget in 2080. The medical and insurance industries are a cancer tumor on our economy.


Health care expenditures 1960 to 2080

Where does the money go? Insurance companies take a huge slice of the pie - Blue Cross is in the news this week for wanting a 40% rate increase this year. Health care providers take a huge slice. Drug companies too. Doctors are almost on the bottom of this little totem pole; however the lowest parts of the totem pole, the part buried in the dirt where you can't see it would be the patients. On whom do we spend the money? That's easy, old people. Below we see relative health care costs by age in the US.


Relative Health Care Costs by Age

The baby boomers are aging, and that's one of the driving forces for this problem. Between 2010 and 2025 there will be almost 50% more people in this country over 65, which means there will be 50% more people soaking up serious health care costs. People 65 and over use a bit over 55% of the health care in this country, rationing will apply to them first, that's the clear simple result. These people almost universally have the bulk of their expenses paid by Medicare. People 15 to 44 use about 21% of health care, and therefore tend to not buy insurance - if something catastrophic happens to them, they prefer to declare bankruptcy. About 40% of your lifetime health care costs will be incurred in the last six months of your life. A big part of the solution will be to educate Americans about the fact that doctors can't do much of anything when you're truly dying, so most of these people need to be given a good prescription for pain killers and sent home.

To illustrate this, imagine someone from the future or a spaceship arrives and hands us a cure for cancer - a pill the size and cost of an aspirin, you take it once in your life, you never get cancer. About 40% of all deaths are caused by cancer. This pill would increase the life expectancy in the US by about six months: people dying of cancer typically also have heart disease and problems with various internal organs, cancer just won the race.


Percent US Population over 65, 2000 to 2050

I don't have any simple answers, this is not a simple problem. However, the democrats are right that health care is the most pressing issue in our society today. The republicans are right that it's about cost containment. Inevitably there will be health care rationing in this country, starting soon. We simply cannot afford to provide all the care that anyone wants. The democrat's solution was to force people in the 18 to 44 age bracket to buy insurance, thus throwing more money into the insurance pool. The real solution will be rationing, which is going to look a lot like the so-called "death squads:" hospital boards, insurance companies, or the government will at some point in the near future have to draw a line, and when you pass that line your personal answer is going to be "Bye bye. Here's some morphine. Have a nice trip."

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