We founded WealthVest Marketing to focus upon products which are guaranteed. We predicated this bias for three reasons. The first is painfully straightforward—after over a decade of flat equity market performance, Americans will likely reduce their exposure to equities for their discretionary savings. The experience has been painful for some and not what they anticipated. It is obvious to us that fixed annuities and fixed index annuities are perfect for this change in investment behavior.
The second reason is also straightforward. We believe that the baby boom generation is rapidly transitioning from accumulation products to products better suited for income. Again, fixed index annuities, fixed annuities, and single premium income annuities are very well suited for this need change.
Thirdly, we believe the long bull market in bonds is near its end. The current phase is actually scary, because it has elements of deflation (excess manufacturing capacity, excess labor capacity and falling consumer prices), however we must all believe that the Fed and Congress will fight to not let this tragedy occur.
Implicit in the final point is two thoughts. First, our economy will recover and interest rates will naturally rise to higher levels. The second point is a broad question about the social safety net, our changing demographics, and America’s ability to reconcile these pressures. Europe, as evidenced in Greece, France, Spain and Portugal has serious conflicts between their expressed guarantees to their citizens, and their changing demographics. They have simply made promises that exceed their ability to pay in light of their aging society and the global competitive pressures. If India, China, Brazil, Eastern Europe and other economic competitors do not need to price pensions, or broad-based health insurance into their products, then they have a competitive advantage. In fact this is the case.
Finally, the overall need to contain health care costs—whether paid by companies or governments, is a driving financial concern for the developed world. As their societies age, the health care costs rise disproportionally and this is the great fear. This was the heart of the health care debate—America’s essential need to reduce our investment in health care. Our government costs are high because of Medicare, CHIPS, and Medicaid. Our it is our overall societal costs that are the concern.
This blog focuses on health care costs. We will feature a series on our public policy issues.
One of the largest segments of the health care debate was centered on the overwhelming costs in terms of implementation and individual spending. Paul Krugman elaborates on the problem at hand in the New York Review of Books “ The Health Care Crisis and What to Do About It.” “The US health care system is more privatized than that of any other advanced country, but nearly half of total health care spending nonetheless comes from the government. Most of this government spending is accounted for by two great social insurance programs, Medicare and Medicaid.” To remedy the expensive problem that Krugman touched on, the United States created both an incredibly comprehensive and costly reform.
The projected government spending on health care reform is a staggering $ 829 billion. Well what does that mean in total expenditures? To quantify these numbers there are some startling statistics. In 1960 health care spending accounted for 5% of the United State’s GDP, today it represents roughly 16% of our total GDP.
The Congressional budget office states that health care reform will lower our budget deficit by $81 billion dollars by 2019. Despite this estimate from the very institution that controls and regulates bill spending, 81% of the American public believes that health care reform will increase the deficit. The major problem facing Washington is trying to explain to the American public that the reforms being made will increase frugality. The creation of the Independent Medicare Advisory Board (IMAB), the “bundling” of Medicare programs and the presence of a truly transparent and competitive insurance has helped to reduce overall health care costs.
Social Security and Medicare respectively are the two largest annual expenditures of the United States Federal Budget. Some say the real business of the U.S. Government has become a money redistribution machine moving funds from young to the old. Social Security costs $730 billion annually and Medicare costs roughly $491 billion annually.
Furthermore, the prices are estimated to rise exponentially as our society ages. The Graph below comes from the 2009 report from the Social Security and Medicare Boards of Trustees.
If these projections are accurate, then there is an obvious impending crisis. The best way to fix the issue at hand is to radically change the institutions responsible for Medicare spending. The creation of the Independent Medicare Advisory Board is a good first step in curbing Medicare costs. Prior to the Independent Medicare Advisory Board, there was the Medicare Payment and Advisory Commission, an organization with little institutional power and no track record of success.
The IMAB on the other hand is an independent fifteen-person board that is chosen by the president and approved by the senate. Their task is to write proposals that will improve the current state of Medicare. Congress cannot modify or filibuster these proposals. It can make a counter play but it has to of equal cost of the IMAB’s proposal. This is essential to reducing costs.
As Newsweek stated in its article How Health Care Reduces The Deficit in 5 Not So Easy Steps, “Making the process of passing tough reforms easier is the single most important thing you can do to make sure tough reforms actually happen.” However, the IMAB is only going to have this much oversight for a temporary period of time. But beginning in 2020 their political clout would be significantly limited. Jacob Goldstein of the Wall Street Journal elaborates, “ Leonhardt notes, the commission would only intervene to reduce spending if costs for each Medicare beneficiary rose faster than non-Medicare health spending — which may not be enough to keep Medicare solvent in the absence of significant tax increases.”
Another component of health care reform that has lowered overall costs is the bundling of Medicare programs. John Reichard the CQ HealthBeat Editor reports that, “Medicare ran a similar program from 1991 through 1996 to test bundled payment for cardiac bypass surgery at seven hospitals. Medicare estimated savings of about 10 percent on bypass patients treated in participating hospitals. Savings for the program totaled $42.3 million while Medicare patients and their insurers saved another $7.9 million.”
Essentially the objective of Medicare bundling is that the individual will pay for health care in terms of total care provided instead of individual related treatments. The best example of someone who would benefit immensely from “bundling” is a diabetic. Diabetes is obviously an illness many different side affects. Instead of paying for individual treatment for each one of those individual, the diabetic would be paying for treatment as an overall package.
One of the largest benefits of the current health care reform is that it makes the market more competitive. Right now the connotation of Health Insurance competition is negative. Insurers fight over getting the healthiest clientele and those who really need coverage are often given the short stick. Several of the changes made by health care reform make the industry more competitive and transparent. Newsweek magazine furthers in “ How Health Care Reform Reduce the Deficit in Five Easy Steps”,
“The insurance “exchanges” imitate the market in which federal employees (including congressmen) purchase their health care insurance. Participating insurers can’t discriminate based on pre-existing conditions, they have to answer to regulators if they attempt to jack up premiums, and consumers will be able to rate their insurers, a rating that everyone else will see when shopping for their insurance. If all goes well, consumers will be able to log onto the exchange’s Website, compare insurance plans, and choose their favorite. That means insurers will have to compete for customers.”
I believe more market incentives should be added in future reform. The greater individual consumers feel the cost of health care decisions (including life style choices), then cost-consciousness will rise. Perhaps health premiums and their tax benefits should be more transparent. Clearly, health savings accounts and their success at bringing pricing decisions to the individual should be our stated public policy. Anything that can drive further competition by insurers on a national basis should be attempted.
These reforms would lower prices and increase quality. If consumers are able to rate and compare plans there is a much greater degree of transparency and consumer knowledge. Consumers will try to find a plan that offers a good balance of costs and quality. Insurance companies will transition to this balance saving the consumer money.