Monday, January 09, 2012

Medicare: Disaster 20 years in the making.

One of the reasons for Medicare going broke these days is an accounting rule adopted twenty years ago. It required corporations to account for post-retirement employee healthcare liabilities. Here's what Warren Buffet's wrote in his 1992 letter to shareholders:
Another major accounting change, whose implementation is required by January 1, 1993, mandates that businesses recognize their present-value liability for post-retirement health benefits.

A CEO didn't need to be a medical expert to know that lengthening life expectancies and soaring health costs would guarantee an insurer a financial battering from such a business.

In health-care, open-ended promises have created open-ended liabilities that in a few cases loom so large as to threaten the global competitiveness of major American industries.
Concerned with open-ended liabilities, CEOs began dropping healthcare retirement benefits for their employees. As a result Medicare got hit with a triple whammy: 1) the rising costs of healthcare; 2) the rising wave of retiring baby-boomers; 3) a drastic reduction in corporate healthcare available for the retirees.

Now twenty years after the accounting change, Medicare is struggling to sustain the demand. Reduced levels of reimbursements lead to doctor bankruptcies:
Jan 5, 2012. CNN -- Doctors in America are harboring an embarrassing secret: Many of them are going broke. This quiet reality, which is spreading nationwide, is claiming a wide range of casualties, including family physicians, cardiologists and oncologists.

Pentz said recent steep 35% to 40% cuts in Medicare reimbursements for key cardiovascular services, such as stress tests and echocardiograms, have taken a substantial toll on revenue. "Our total revenue was down about 9% last year compared to 2010," he said.
Unfortunately, we don't know the extent of the disaster because the federal and state governments are not required to account for unfunded liabilities. The rules of the game they imposed on private businesses in 1993 do not apply to them.

tags: problem, detection, trend, health, business, finance

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