Wednesday, March 19, 2008

A Generational War We All Lose

As a very astute reader pointed out last year, what we call "healthcare insurance" is not actually insurance. Insurance means pooled risk, as in, three out of every 100 cars will be involved in an accident this year, and we spread the risk out by all having auto insurance. Many of us will go decades without making a claim against our auto policy. The same is true of home insurance and even life insurance: an actuary table enables the company to estimate how many of its insured will die before the policy matures.

But we all get old, ill, and die. That means all of us will pull money out of the Medicare system. That is not insurance; that is a generational transfer of wealth.

Those of you in the medical and healthcare insurance/services worlds know what care costs in the U.S.; those of you with good coverage might not know that a few days in the hospital can cost $20-50,000 or more, and any major procedure can run over $100,000. Toss in some long-term care, years of multiple expensive medications, horrendously expensive tests and the final weeks of life when the medical community is more or less forced to pull out all the stops to keep the patient alive, and you easily get to $1 million dollars per Baby Boomer in the waning years of their lives.

There are about 76 million Baby Boomers--roughly speaking, the generation born between 1946 and 1964. Even assuming a total cost per Boomer of less than $1 million, that adds up to $60 trillion in medical costs. Gee, that's kind of a big number. OK, let's grant that some Boomers will die prematurely or suddenly, and many others will require less than $1 million in government-paid care. But others will cost more than $1 million. Any way you cut it, Boomers did not pay $60 trillion into some magical "fund" which awaits their insanely expensive decline; current taxpayers will have to foot the bill.

How many taxpayers does it take to pay $1 million over 30 years of work? Some high-income taxpayers (less than 10% of the U.S. workforce) might pay $30,000 a year in Federal tax, and therefore pay about $1 million over their careers, but many lower income U.S. workers with mortgage deductions and children pay little or no taxes. These workers might pony up $20-$40,000 a year in lifetime Federal taxes, meaning that 40 -50 taxpayers are needed to pay the $1 million needed for Medicare benefits for one chronically ill Boomer.
Shall we guess that 10 workers on average will need to pay taxes their entire lives just to fund the Medicare bills? Or do you think it might be only five? Well, the worker-to- retiree ratio is falling to 3-to-1 or less, so any way you cut it, there isn't enough taxes being paid to fund Medicare--not to mention the rest of the Federal government.

As the chart above indicates, Medicare alone will suck up the same GDP as the entire non-Social Security/Medicare Federal government. Will your children and grandchildren gladly pay 40-50% tax rates in order to fund your third MRI and your useless stent procedure and your $20K per year in meds?

The bigger question is: should they? My answer: no. As I wrote almost three years ago in Boomers, Prepare to Fall on Your Swords (June 2005):

Now it falls to us to fix the finances of our foolishly bankrupted nation. Either we sacrifice our freebies (every recipient of these programs has extracted far more than they paid in, even including accrued interest) or we leave our children and their children burdened by an impossible debt.

I say we go out with idealistic panache, and fall on our swords with grace and dignity. Instead of sucking off future generations like our parents have, let's pay our own way, tighten our belts, stay healthy without absurdly expensive operations and medications (which don't work that well anyway, in case you've ever read the fine print) and leave the next generations a financially stable nation rather than a bankrupt, self-absorbed "pass the buck to your kids" mess--which is the current state of affairs.

So how do we start? First, admit our entire "healthcare" a.k.a. "sickcare" system is irredeemably broken. I mean the whole thing: the legal part, the care part, the pharmaceutical part, the FDA part, the multiple-forms-paperwork-insurance part, all of it.

You think this is some wild opinion from left field? Apparently the providers have reached the same conclusion, because they're shipping patients to Thailand for affordable procedures:
Outsourcing the Patients More U.S. health insurers are slashing costs by sending policyholders overseas for pricey procedures (BusinessWeek):

"For years, Americans have been traveling abroad to save money on elective procedures or dental work. David Boucher, 49, doesn't fit the usual profile for such medical tourists. An assistant vice-president of health-care services at Blue Cross & Blue Shield of South Carolina, he has ample health benefits.

But Boucher recently chose to have a colonoscopy at Bumrungrad International Hospital in Bangkok, mainly to make a point about the expanding options available to Blue Cross customers. And his company happily picked up the $640 tab—a bargain by U.S. standards.

Blue Cross and other insurers would like to see more policyholders traveling abroad for medical care. Since the start of the year, Boucher has signed alliances with seven overseas hospitals and hopes to add five more by yearend, including them all in coverage for his company's 1.5 million members. As health-care costs continue to rise in the U.S., "medical travel is going to be part of the solution," he says."

In other words: affordable care is simply not available here yet--that will take turning off the endless spigots of money (i.e. Medicare and other "insurance"). When bills are paid in cash and "insurance" is a dead/abandoned system, then affordable care will magically appear--if not in the U.S. (which will then lose all those millions of jobs) then in Mexico, Thailand and India.

This is capitalism at work, folks. When a bloated, inefficient bureaucracy finally grows to unaffordable heights, it is toppled and replaced by a much leaner system. As Fernand Braudel and other historians have shown, this process of obtaining cheaper goods and services from overseas has been underway for hundreds if not thousands of years. Those who do the replacing reap immense profits. Here is BusinessWeek again:

"After all, a heart procedure that costs $100,000 in the U.S. runs only $10,000 to $20,000 at some of the best private hospitals in Asia. And the quality of care? Foreign hospitals in such arrangements are typically approved by Joint Commission International, part of the same nonprofit organization that accredits American hospitals."

Two factors which don't make it onto charts of future Medicare costs are: the costs of borrowing trillions from oil exporters, China and Japan will be rising for decades to come, and the U.S. economy will be shrinking for years. The interest on the national debt is already an immense burden, and it will be increasing just as tax revenues are shrinking. As for Federal deficits: you ain't seen nuthin' yet.

So far, we've been cruising down East Street via borrowing trillions from our friendly allies the Gulf Oil States, China's central bank, Japan, et. al. As their economies slip into recession and their big surpluses vanish like summer rain in Death Valley, they will be unable/unwilling to pony up the $50 trillion we need over the next 20 years.

Here is my affordable solution to Medicare's obviously unaffordable future: Every taxpayer (and no, that doesn't mean recent citizen's parents--it means people who have paid taxes for 30+ years and their spouses) gets a lifetime account of $50,000. That is still a lot of tax money but it's certainly more affordable than $1 million.

If you want a heart procedure done in the U.S., then Medicare pays $50,000 and you pay the $50,000 balance in cash. That's it; the government's done with its obligations to your care after the age of 65. From now on, it's on you and your family.

Alternatively, you fly to India or Thailand and get the deal done for $10K plus $2K for airfare, and you have $38,000 remaining in your Medicare account. (Of course this number must be adjusted for inflation.)

Or, you may want to try to solve your heart condition with the Dean Ornish diet and some exercise, and save the $12,000 for later.

As millions of Americans flock overseas for procedures, new kidneys, MRIs (same machines, same tests, at 5% of the cost in the U.S.--I know this for fact in China), than suddenly competition sprouts up around the world. Look, if you can't afford the procedure here, or you can't wait for an organ here, then would you go elsewhere for the organ? Yes, there are risks--when did Americans get the idea that risks could be evaporated, or that we can sue somebody if it doesn't work out?

If you want all those legal protections, then by all means, have the operation done here and pay the fees in cash. That's always an option.

I predict that a global free-for-all for U.S. healthcare dollars will encourage price cuts in U.S. care which would be considered impossible. Longtime correspondent Jum Twamley is on record here supporting the idea of "cash and carry" medical care at drive-in clinics provided by Wal-Mart and other consumer-oriented corporations: A Partial Answer to National Health Care (November 11, 2006)

Is this "the answer" a near-sighted populace wants to hear? Of course not. But as $7 trillion in real estate wealth vanishes into thin air, and trillions in stocks, bonds and other "financial insruments" slip from our fingers, what is "affordable" is about to undergo a radical re-assessment. And once we face there is no more free money from overseas lenders, then we will have to finally face the truth of our national bankruptcy, and deal from that reality instead of wishful thinking.

You might be interested in these entries in the archives:
Medicare Waste--50%? (January 24, 2007)
Financial Worry, Health, and the Reverse Wealth Effect As Housing Pops (December 12, 2007)

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