Five to four: that was the margin in the Supreme Court's recent decision upholding the 2010 Affordable Healthcare Act (also known as "Obama-care"). The court's decision came as something of a surprise. The day before the announcement, punters on the intrade prediction market were offering 7 to 3 odds in favor of the individual mandate being ruled unconstitutional. Analysts expected Chief Justice John Roberts, Jr. would cast the swing vote siding with the court's four conservatives. They were right in one regard: Roberts cast the deciding vote — but he did so by siding with the liberal block.

Whatever your view on the court's decision, we offer this opinion: we have not heard the last on the subject. For all the energy expended, the Affordable Healthcare Act (AHA) does little to solve the most vexing healthcare problem facing the nation: that is, reforming Medicare.

 

 

Since 1965, when Congress enacted the Medicare program under Sub-Chapter XVIII of the Social Security Act, the federal government has been at great pains to place the entitlement on a sound fiscal footing. Year-in and year-out, Medicare expenditures increase relentlessly consuming ever larger portions of the federal budget. In 1970, Medicare spending accounted for just under four percent of total expenditures; by 2010, Medicare gobbled up over fifteen percent of spending. Over this period, Medicare spending has grown 11.3% per annum, easily outstripping every other major category — even Medicaid and Social Security, numbers two and three respectively in terms of the pace of growth.

Congress has perennially attempted to rein in this fiscal juggernaut, but to no avail. The reason why every effort has proven futile is built into the language creating the Medicare program. From its inception, the authorizing legislation included §1395, entitled "Prohibition Against Any Federal Interference." In short, Congress granted the public an entitlement and agreed not to impose any restrictions or hurdles. Expressed more bluntly, the federal government handed Medicare beneficiaries a blank check. Once the relevant federal bureaucracy determines Medicare will pay for a particular treatment, drug or procedure, little stands in the way of any beneficiary, except a physician willing to say "No", obtaining that drug or treatment.

Instead, Congress doubled down by granting Medicare beneficiaries access to another program to pay for uncovered expenses. So-called "dual eligibles" account for fifteen percent of the Medicaid rolls but account for almost forty percent of its spending. One item — spending on long-term care for the elderly and disabled — consumes over one quarter of total Medicaid spending. While this generosity may reduce poverty levels among the elderly and disabled, it inadvertently reduces the funds available to provide other segments and other age groups of the population with access to affordable healthcare.

In a 2009 report, President Barack Obama's Council of Economic Advisors estimated Medicare expenditures could be cut by thirty percent without imperiling well being or longevity. Based on 2009 spending, a reduction of thirty percent translates into $150.0 Billion in savings. This figure does not include the potential reductions in fraud requiring pre-approvals would achieve. So, it understates the savings possible.

Economists have a phrase to describe this situation. They refer to it as "the tragedy of the commons." Unless unchecked, individuals, acting in their own self-interest, may unwittingly exhaust a public good or resource. Public spending on healthcare qualifies since there is only a fixed amount of money to go around. Yes, taxes can be raised. There comes a point when those paying object and refuse to contribute more. We are at that point. True healthcare reform requires Congress to repeal the seventy-four words comprising §1395. Until then any discussion or debate on the subject will be fruitless since it ignores the elephant in the hospital room.

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Notes:

Medicare spending data obtained from the Centers for Medicare and Medicaid Services. Federal spending data obtained from the White House Office of Management and Budget. Dual eligible share data obtained from the Kaiser Family Foundation which appeared in an April 2012 issue paper entitled, "Medicaid and the Uninsured".

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American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.

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