Tuesday, June 16, 2009

Obama’s Accountants Have Some Explaining To Do

What if I said I could buy a brand new Ferrari for $10,000. Would you believe me?

President Obama sat in front of the nations doctors yesterday, and with a straight face, claimed his far-reaching Ferrari of a health care reform plan would cost around $1 trillion over the next 10 years. While it was acknowledged that it could go higher, quoting $1 trillion over 10 years seems to be unrealistic, and borderline fraudulent.

If a publicly traded company made this claim and it turned out to be understated, the executives of that company could be thrown in jail. Shouldn’t we hold our elected officials to the same standard – or an even higher standard - after all, it’s our money they are throwing around. If they were required to be held to this standard, they might be more careful about the numbers they throw around when trying to push an agenda.

Without getting into detail or the merits of this plan (dubious) or the unintended (er, ignored) consequences on patient care, doctor recruitment, taxes, private health insurance industry, economic growth, etc. (disasterous), I would really like to focus on how preposterous it is to claim that this will only cost $1 trillion over the next ten years. $1 trillion per year, maybe, but over 10 years, not a chance.

As we all know, if a true reflection of the costs were known, the American people, and Congress, would balk at the proposal as being too expensive. Therefore, the $1 trillion quote is just politics as usual – lie to the American public because they don’t know any better.

For example, part of Obama’s plan includes coverage for the 50 million Americans that are currently without insurance coverage. An admirable goal of any health care reform, but we need to be realistic about the cost of this coverage, and forthcoming on how it will be paid for.

I’m no health care professional or expert, but I am an accountant and a minimal amount of research and some common sense shows that there is no way this amount is possible.

Let’s assume that only the 50 million American’s without health insurance coverage are the beneficiaries of this new reform (a very conservative assessment).

In 2009, Medicare covered approximately 45 million people at a cost of $425 billion. If we assume 0% increase in medical care over the next 10 years (when actually it has increased at an average rate of approx 8% per year), and a 0% increase in the amount of people insured over 10 years, this equals $4.25 trillion dollars over the next 10 years. Even if we present value those future costs to today, and apply a discount rate of 4% (Treasury just issued 10yr notes at 3.99%), the US would have to borrow $3.4 trillion today to pay for the next ten years of health care reform – 3.4 times the amount quoted by Obama.

I admit there are some clear shortcomings to the analysis above, but I believe they are offset by some very conservative assumption (i.e. zero cost inflation over 10 years, only based on 44.8 million participants, etc.). These shortcomings include the exclusion of the cost savings plans envisaged by the Obama Administration ($200 billion cut from hospitals and $313 cut from Medicare and Medicaid over the next 10 years – neither of which would put a material dent in the analysis above - if they turn out to work), and the fact that generally, patients covered under Medicare are older and in need of more healthcare than younger citizen. I have no way of guessing what this amount is, but I doubt it would reduce this amount down from $3.4 trillion to the $1 trillion quoted by the Obama Administration.

To overcome the fact that Medicare’s patients are older and in need of more care, let’s look at an example of national health care (i.e. care for all). I live in the UK and have been exposed to the National Health Service, and while it is competent in emergency situations, it is dangerously inefficient in all other health care situations. Again, the pluses and minues of national health care is a debate for another time, but let’s focus on the costs.

The 2009 budget for the mediocre-at-best NHS in England is approximately £100 billion. The population of England is around 50 million, so again it roughly matches the population of Americans without coverage that would benefit from a new plan. Again, I highlight this as a conservative assumption because the Obama plan is not just for those currently without coverage, many more will end up under this option, and the numbers will increase as the governments influence will eventually price out private insurance companies – but again, this is for another debate.

Using a similar approach to above, applying the current exchange rate of approx. 1.60 USD/GBP, the present value of the UK’s budget, in dollars, over the next 10 years is $1.3 trillion.

Before we compare this to Obama’s $1 trillion number (after all, what’s $300 million between taxpayers?), consider these facts that make this number an extremely conservative calculation to apply to any new government run and funded health care scheme:

  1. This assumes the US health care costs are the same as the UK’s (they are not, the US costs are much higher. To illustrate this point, I have worldwide private health insurance, excluding the US. If I include the US, my premium would triple!)
  2. This also assumes no growth in costs or people covered over a 10 year period (again, extremely unlikely)
  3. This assumes the US can implement this system with the same efficiency as a system and infrastructure that has been in place for 60 years
  4. The NHS is a pure single payers system, it owns its own hospitals, and directly employs its own doctors and staff – a cost benefit that could not be matched by any US plan in the short term.
  5. Even with this budget, the NHS is seriously underfunded and is running a huge deficit, so its costs are even higher than the budgeted amount.

Therefore, even an unrealistically conservative cost analysis shows a larger number, 30% larger, than the cost quoted by the Obama Administration.

In summary, two simple calculations and a bit of common sense is all it takes to put some very large holes in the Obama administrations cost projections, I just wonder why nobody has challenged the Obama Administration’s math?


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