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The Medicare Ponzi Scheme

Just today, our next President spoke out against the largest investment swindle in US history.  The alleged behavior of Bernard Madoff may have cost investors up to $50 billion.

“In the last few days, the alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets. … And if the financial crisis has taught us anything, it’s that this failure of oversight and accountability doesn’t just harm the individuals involved, it has the potential to devastate our entire economy. That’s a failure we cannot afford.” — Barack Obama Dec. 18, 2008

What did Madoff do?  He lured investors with big returns, and used the “profits” as a means to encourage additional investment by investors, while luring new ones.

The only problem is he was using the new money to pay off the old investments. And when current investors asked to redeem their shares, there was no money left.  The whole scheme was a sham.

Which brings us to Medicare.

When you hear about “unfunded liabilities”—insert the phrase “Ponzi scheme.”

How much is Medicare’s unfunded liability?

Adding up Medicare Part A, Part B, and Part D … $85 trillion

Let’s make this even simpler. To meet the obligations “promised” to Medicare current and future recipients — that is how much would need to be in the bank today.

There is zero difference between the promises made by Madoff and those made by elected officials of both parties on Medicare.

Anyone want to consider whether the new administration or the Republican minority will use the same language that President-elect Obama used today to describe the Medicare system?

It is time we add another letter to the alphabet of Medicare: P.

Welcome to the world of Medicare Part-P!

And, for my “single payer” advocate friends, have no fear, because everyone in the USA is already covered.

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20 replies »

  1. I’m not sure exactly why but this blog is loading incredibly slow for me. Is anyone else having this issue or is it a issue on my end? I’ll check back later on and see if the problem still exists.

  2. Kuttner: “A comprehensive national system is far better positioned to match resources with needs — and not through the so-called rationing of care. (It is the U.S. system that has the most de facto rationing — high rates of uninsurance, exclusions for preexisting conditions, excessive deductibles and copayments, and shorter hospital stays and physician visits.) A universal system suffers far less of the feast-or-famine misallocation of resources driven by profit maximization. It also saves huge sums that our system wastes on administration, billing, marketing, profit, executive compensation, and risk selection. When the British National Health Service faced a shortage of primary care doctors, it adjusted pay schedules and added incentives for high-quality care, and the shortage diminished. Our commercialized system seems incapable of producing that result.”
    source:”Market-Based Failure — A Second Opinion on U.S. Health Care Costs”, http://content.nejm.org/cgi/content/full/358/6/549

  3. Robert Kuttner: “Changing demographics and medical technology pose a cost challenge for every nation’s system, but ours is the outlier. The extreme failure of the United States to contain medical costs results primarily from our unique, pervasive commercialization. The dominance of for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation. Profits, billing, marketing, and the gratuitous costs of private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent, but the more serious and less appreciated syndrome is the set of perverse incentives produced by commercial dominance of the system.”
    source: http://content.nejm.org/cgi/content/full/358/6/549

  4. Deron S. and Peter,
    Significant cultural differences between the U.S. and other countries with respect to attitudes and expectations regarding end of life care and the U.S. litigation environment which drives doctors to perceive the need to practice defensive medicine to a greater degree than elsewhere drive up costs here materially. Moreover, we have many more doctors practicing solo or in very small groups and more small hospitals as compared to other healthcare systems. That also adds costs. All of these cost drivers, interestingly enough, have absolutely nothing to do with how our healthcare system is financed or whether providers and/or insurers are for profit or non-profit entities. Even if we could implement a single payer system tomorrow, all three of these large cost drivers would remain in place.

  5. Peter – You need to start providing some depth to your single pay argument because your only justification is that it works in other countries. Are you saying that you have controlled all of the other variables in your analysis when comparing to other countries? In other words, have you taken into account that our obesity rate is the highest by far? Our teen pregnancy rate? Our gun violence rate? The list goes on and on about why our spending is higher.
    The average Medicare recipient has several chronic conditions, sees 6+ providers each year, and takes 10+ medications. How do you think having that coverage is working out for them? I suppose you could say it’s keeping them alive, but that’s about as far as you can take it.
    What are these single pay budgets that you keep referring to and why do we need to spend $100s of billions on a new system to get budgets? Who sets the budgets and who do they apply to?
    As I’ve said in the past, I will be ok with the move to single payer if someone could start adding depth to the argument. Simply comparing to other countries is a weak argument because we have just as many differences as we do similarities with those countries.

  6. “Unfortunately, just giving someone coverage does not automatically make them healthier.”
    Au contraire, being able to get treatment for disease does make people healthier. Would you say starving people need to learn how to grow food before we actually feed them?
    “I’d like to see the cost/benefit analysis of universal healthcare and/or Medicare for All.”
    Look at every other industiralized country in the world.
    “In fact, calling it universal “healthcare” is a misnomer. It has nothing to do with healthcare and everything to do with moving money around in the existing, expensive system.”
    The present players would like to have us believe that “universal coverage” is akin to single-pay. It is not although single-pay assumes universal. Single-pay establishes budgets so there is less money moving around to best targeted places. At least that’s the goal and no, it’s not perfect.

  7. Unfortunately, just giving someone coverage does not automatically make them healthier. I’d like to see the cost/benefit analysis of universal healthcare and/or Medicare for All. In fact, calling it universal “healthcare” is a misnomer. It has nothing to do with healthcare and everything to do with moving money around in the existing, expensive system.

  8. Why in the world are we acting as though the problem of untenable future costs is peculiar to Medicare? Medicare’s cost trend, putting aside demographics, is actually better than the cost trend among the privately insured and the uninsured.
    Because there is no “promise” by employers to keep offering group coverage and funding a majority of it we don’t classify it as an “unfunded mandate.” But how does that help us? To the extent that employers continue to fund coverage, they will experience the same unsupportable cost increases and be forced to reduce employee wages. To the extent that they don’t, everyone under 65 and over the poverty line will have to take up the burden of these costs or go uninsured. Wow, great advantage over paying more taxes to Medicare!
    The truth is: that which cannot continue, won’t. There will be massive reform. Medicare will not in fact end up paying that entire projected $85 trillion unfunded mandate. The questions are only how much worse does it get before it gets better, and how much better does it get.
    That’s where political tactics come into play. And that’s why I keep recommending that we institute universal coverage as quickly as possible. Note that Eric, as a Republican/Libertarian, focuses his ire and dread on Medicare. Not on private coverage or out of pocket costs. Once we have universal coverage that is subsidized for low income citizens, those on the right will stop defending the bloated private/commercial aspects of the system and start criticizing them. They will become better allies of reform.

  9. Eric —
    What you mean by unfunded liability is the future cost of health care for Medicare enrollees present and future.
    Yes, there is a huge future unfunded liability for health care.
    But if we make the assumption that we will continue to allow people to get health care, that unfunded liability exists whether it is covered by our existing system, but private insurance, by a single payer system, or by whatever.
    So talking about unfunded liability is not useful at all.
    What we need to do is figure out how to meet that unfunded liability, to reduce costs, to improve results, and to provide health care for everyone.
    Fortunately, we have actual working models for how to do this: every other developed country in the world. They all provide care for a lot less money and most provide better care, based on scientifically valid statistics, than we get in the US.
    What we need to do is what Taiwan did in the 90’s when they realized their “every man for himself” system was not working. They studied all the on the shelf solutions being used around the world, and chose a system they thought looked best for them. It worked. Their health care is now better than ours and their costs are much lower.
    We just need to open our eyes.

  10. “But you see, the reason single-payer is the way to go is because it is backed by the power of taxation and massive borrowing capacity.”
    No Deron, single-pay has the hammer of universal budgets, the last thing present players want.

  11. There is quite a difference between what Madoff did and “unfunded liability” in Medicare/Medicaid. If you want to make the case about the considerable fraud in the Medicare program, you would have a more apt comparison.
    What Madoff did was just commit outright graft with his wealth management unit and deserves to go to jail for a long, long time. Hopefully the rest of his life.
    My bet is that you will see justice here in the form of what is basically a life-long prison sentence because Madoff ripped some very powerful and politically-connected people. There will be a whole new raft of legislation around hedge funds too. Days of 30:1 leverage and insane fees are over.

  12. Eric – Interesting post. I forgot just how big that unfunded liability was! (Maybe we’re supposed to forget about it.) But you see, the reason single-payer is the way to go is because it is backed by the power of taxation and massive borrowing capacity. The private sector simply can’t match it. If I was a politician and I put a massive social program in place knowing it could at least sustain itself past my time in office, I would have nothing to lose.
    By the way, I used to limit my discussions to reform without interjecting political rants into the mix. I blame Peter for my change of heart. Happy Holidays Peter!

  13. Speaking of Medicare ponzi schemes, one must also observe that its partners in crime include big Pharma. Medicare drug spending is forecast to grow from $2 billion in 2000 to $153 billion in 2016–a 7,550% increase. How will this enormous growth in Medicare’s share of total U.S. drug expenditures affect private insurers? Will it encourage employers to reduce or eliminate retiree and other “optional” benefits? How does this spending squeeze out the potential for other proactive efforts including prevention, EMR’s, and quality and safety efforts?
    Does the Obama team have the political backbone to go up against Pharma and other powerful lobbies whose agenda will be to preserve the status quo, in light of massive layoffs across the pharmaceutical and biotech industries? Is rational drug pricing a solution to some of these unfunded liabilities?

  14. This is an unspoken truth: IT doesn’t reduce costs over the long haul. It does leverage a single person’s efforts by hiding underlying complexity. In that regard we appear to be working “harder” and “smarter” but in reality, like when we blow up a photo too far, this sort of effort-Magnification creates ugly artifacts, worms in the details.
    The truth is that technology as a cost-cutting measure is more often a problem-hiding one. Data-mining yields “facts” found in the dark. Ubiquitous computing means no one has any sort of tactical or strategic advantage for more than six months.
    No, the value comes from, well, value. We still confuse this with cost, but again I have to ask “how much is a doctor worth when you’re writhing around on the floor having a heart attack?” I think infinite. So how can a market fairly “value” this?
    It can’t. Instead we have a futures market that masquerades as insurance. We buy and sell death and disease like pork bellies. We’re no longer sharing the common good and the common risk.
    Yes, costs can’t balloon, but nor can we set free the invisible hand of the market on something which is a fundamental need. Housing? We see how well that works. Water? We’ll see that soon enough. A doctor’s care? We’re seeing now what happens when someone speculates in that: People die from neglect.
    Notice I said need. Not right, but requirement. We all need air, water, food, shelter, clothing, and, when we fall down, someone to stitch us up.
    These things have human value. Why can’t we start with that premise for once, instead of offering “incentives” to do the right thing?
    Nah. That’d be crazy talk. No one wants communism. No one wants “lefty” thought. No, we want people to PROVE to us that they deserve to live. Right? Isn’t that the current thought?
    Not for long. We’ve let Reaganistic “screw you, I’ve got mine” thought run us for close to 30 years and we now have a near-depression. Let’s try something new. Let’s give a damn about each other.

  15. How investment business has been absorbing an ever larger share of the economy, but has been destroying value, not creating it, does sound familiar!
    I remember last year, investment industry giant John Bogle’s analysis explaining the broader aspect of The Carlyle Group’s buyout of Manor Care nursing homes. More and more money managers were taking control over corporations on Wall Street, making Main Street pay the price.
    Bogle explained that the financial sector takes $560 billion a year out of society. Banks, money managers, insurance companies, and certainly annuity providers. They’re all subtracting value from the economy.

  16. Unfunded liability? Unfunded mandate? Same thing. I think the spiraling cost of healthcare has more to do with how many hands land on a patient’s wallet than what kind of treatment the patient is getting.
    The admin costs, even with the rise of IT, are massive. I think that rational thinking is required here, in addition to a long, hard look at how much ‘managed care’ has managed to cost us. Medicare is the O.G. on managed care, and we can see how well that’s working out.
    This is the danger of making promises involving $$ that last for generations. Making access to medical care – which is, IMHO, a basic human right – into something that’s funded across the board by tax dollars is…well, nuts.
    The path to getting people to manage their health, and health care, is getting them to understand the cost of their decisions. Easiest way to get that point across is to take out the middle-man (the insurers) and have consumers paying for their own basic care, and have the insurers provide catastrophic coverage only.
    End of sermon.

  17. Welcome back Eric, haven’t heard from you in a while. Not many right wingers left to bash.
    Actually; our headlong march into catastrophic climate change is an “unfunded liability”, our failure to tackle pollution is an “unfunded liability”, our failure to convert from fossil fuels and invest in conservation is an “unfunded liability”, our failure to protect our oceans is an “unfunded liability”, our waste and exploitation of declining fresh water is an “unfunded liability”, the dismantling of our manufacturing sector to countries with zero labor and pollution laws for short term cheap labor is an “unfunded liability”, consume debt, liar loans and securitization fraud was/is an “unfunded liability”. Get in line Eric, the basis for this country’s economic foundation is all about “unfunded liabilities” past to future generations for short term gain.

  18. Dear Eric: I guess this is one of those “blink” moments. Paul Krugman’s editorial this morning in the NYT asks the question “How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?” He then goes on to describe how the investment business has been absorbing an ever larger share of the economy, but has been destroying value, not creating it. Sound familiar?
    I have been wondering for some time now how prices and value were measured in the health care industry, and whether or not we’re creating net value or not. Certainly these two concepts have to be related, and yet how can they get so out of whack, to the point you describe here at which the obligations to pay out are an orders of magnitude beyond our capability to pay up?
    Thanks for your post. DCK

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