We Are So Screwed

I saw an article the other day with this headline:  We Are So Screwed.

When I saw the national health expenditure numbers which were released this morning by CMS, I remembered the headline.

There are a lot of numbers in the release, so to simply the message, I’ve created this table which I think shows the problem far better than words.

Rate of Annual Growth Notes
2008 2009 2010E 2009-2019
National Health Expenditures 4.4% 5.7% 3.9% 6.1% +4.7% with doc pay fix
GDP -1.1% 4.0% 4.4% Unrealistically high — 4.4% next 10 years??
Healthcare Spending as % of GDP 16.2% 17.3% 19.3% 1.1% change in 2009 is largest in history
Medicaid spending 4.7% 9.9% 7.5% Recession caused uptick in 2009
Medicare spending 8.6% 8.1% 1.5% 6.9% 2010 assumes physicians get 21.3% pay cut
If docs pay frozen, NHE rises 4.7%; Medicare 5.1%
Private health insurance 3.1% 3.3% 2.8%
Out of pocket expenses 2.8% 2.1% 4.8%
Hospital spending 4.5% 5.9% 6.1%
Physician & clinical spending 5.0% 6.3% 5.9%
Prescription drug 3.2% 5.2% 6.3%
Source: CMS & Villwock Advisory Services LLC

In 2009, Medicaid spending grew by nearly 10% and Medicare over 8%.

In 2009, healthcare spending as a percent of GDP increased at the fastest rate in history.

For the next 10 years, the government is assuming Medicaid growth of 7.5% annually and Medicare spending growth of 6.9% annually while they use a foolishly unrealistic assumption of GDP growth of 4.4%.  GDP growth is much more likely to be in the 2.0-2.5% range.   Also the Medicare growth of 6.9% has the stupid assumption that we are going to reduce doctor’s pay by 21.3% this year.   So Medicare spending will be over 7% annually without that assumption.

Want to know how a country can go broke?  Increase entitlements by 7% annually with GDP growing at 2-3% annually.  This release is not an update of the Medicare trust fund, but the Medicare trust fund will be out of money perhaps as early as 7 years and no later than 9 years from today.

While there has been a huge focus on the $1.6 trillion deficit for fiscal 2011 (beginning in October 2010), as investors we can’t forget that in addition to this deficit, the Medicare program goes negative and quickly runs out of money.

We’ve been playing games with this problem for decades, and we have now lost another year with a social rather than economic agenda in the White House.

As investors we need to be planning personally for the probability that the US will have trouble financing its deficits, healthcare reimbursement needs to decline, healthcare will need to be rationed (UK model), taxes go up and economic growth goes down.

Am I missing something?  We Are So Screwed.