Medicare / Medicaid and the rule of 72

If present trends continue US Government expenditures for Medicare and Medicaid are on track to consume 100% of government revenues in the not too distant future.

2011 Facts:

  • Government revenues totalled $2.3 trillion.
  • Government expenditures for Medicare and Medicaid totalled $835 billion.
  • Medicare and Medicaid spending has been growing at a rate of 8% per year and with the increasing demands that the aging baby boomers will place upon these programs there is every reason to believe the growth rate will continue (and likely increase) going forward.

The Rule of 72:

The rule of 72 is used to calculate how long it will take something to double at a given rate of interest. To use it you simply divide 72 by the annual rate of interest and the result (quotient) is the doubling time in years. For example, to determine the doubling time for 8%:

72 / 8 = 9 years doubling time.

Projecting Medicare and Medicaid expenditures into the future:

Since we know Medicare and Medicaid spending was $835 billion in 2011, and we know spending for these programs has been growing at a rate of 8% per year (which works out to a 9 year doubling time) we can make the following projections:

  • By 2020 Medicare and Medicaid spending will be double what it was in 2011. That works out to $1.67 trillion.
  • By 2029 Medicare and Medicaid spending will double again to $3.34 trillion, which is about $1 trillion more than 2011 US Government revenues.

So when will Medicare and Medicaid expenditures consume 100% of US Government income? I don’t know but I doubt we’ll get there, for what cannot be sustained will not be.

It’s unlikely the problem can be solved by tax increases, and cutting off the growing number of people who are relying on these programs is heartless. Perhaps we could reduce the cost of health care by establishing price transparency and empowering consumers to actually shop the cost of their medical services. Price transparency would seem a refreshing step in the right direction as there’s nothing like free market competition to drive down prices and improve efficiencies.

For example,  The Surgery Center of Oklahoma is pioneering price transparency in American health care by publishing all-inclusive package prices for various surgical procedures. If you need to have some work done they’re worth a look:

“If you have a high deductible or are part of a self-insured plan at a large company, you owe it to yourself or your business to take a look at our facility and pricing which is listed on this site.  If you are considering a trip to a foreign country to have your surgery, you should look here first.  Finally, if you have no insurance at all, this facility will provide quality and pricing that we believe are unmatched.”

Ultimately however I think it’s going to take a new monetary system to get at the root of the problem of government finance. Barring hyperinflation, there’s just no way to borrow enough Federal Reserve Notes into existence to fund the Government’s projected expenses, much less pay anything toward the $17 trillion dollar debt.

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This entry was posted in Money and Banking, Richard C Gessford and tagged , , , . Bookmark the permalink.

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