NOTE: This is the fifth of a series of articles on the Fiscal Cliff crisis facing Louisiana today.
We have discussed previously how our political leaders have grown Medicaid significantly over its original intent, such that it is now bankrupting America, Louisiana and most other state’s financially and morally. In spite of this fact, 31 states — including Louisiana — opted to expand their Medicaid programs based on the Obamacare promise that the federal government would pick up 100 percent of the tab initially, and 90 percent by 2020 going forward. Louisiana is paying $3.3 billion per year (38 percent of the tab) on 1,150,000 residents covered under traditional Medicaid, and has now expanded Medicaid to another 450,000 residents based on the promise that we will only have to pay 10 percent of the tab on this expanded group. What is the likelihood that the Feds will renege on this promise?
Welfare / Medicaid is bankrupting the Federal Government
Medicaid was enacted in 1965 to help the indigent get medical care. Since then it has been expanded to help pay for the elderly and disabled, and even for able-bodied adults with no dependents who qualify because they have chosen to not work. Costs have spun out of control as there was no fixed budget, and spending went to whatever medical bills were submitted. The Fed’s Medicaid outlays have exploded since 2000, increasing from $105 billion to $389 billion today — with projections of $650 billion by 2027. Since 1980 the percentage of Americans on Medicaid has exploded from 9 percent to 22 percent.
Although Medicaid costs have soared, the quality of medical care has deteriorated as more and more providers refuse to accept Medicaid patients. Hospital emergency rooms, the most expensive provider in the entire health care system, have become the “walk-in clinic” of last resort for about 50 million people.
A University of Michigan study points out that from 1998 to 2016 the overall consumer price index increased 47 percent — but prices for medical services increase 101 percent, and hospital services increased 177 percent. The reason why health care costs have increased two to three times more than everything else is because hardly anyone pays their own medical bills. There is no market discipline. More money, worse care — quite a feat!
The Feds do not have sufficient revenue to pay for all the welfare benefits, including Medicaid. Not concerned about deficits, our political leaders have greatly expanded the welfare system (in return for votes) over the last nine years in which we saw the national debt more than double to $20 trillion — and the important Public Debt/GDP Ratio increase from 35 percent to 77 percent. New studies by the CBO project this ratio will increase to 98 percent by 2027. This is “wildly unsustainable!” Is there a tipping point ?
What history tells us about nations with high national debt
Sovereign nations must generate substantial economic growth in order to justify substantial borrowings. Two Harvard economist did a study in 2009, looking at two centuries of public-debt data for sovereign nations and concluded that once the public debt/GDP ratio exceeds 90 percent, the debt starts to suffocate economic growth until an eventual economic death spiral takes place. As stated above, our ratio will exceed 90 percent in about five years.
U.S. debt received its first ever “credit downgrade” in 2012 when our national debt hit $16 trillion. China, our largest creditor at $3 trillion, stopped loaning us money. So who loaned us $4 trillion over the last five years? Would you be surprised to find that it was our Federal Reserve that loaned the Treasury over $3 trillion — and purchased another $2 trillion of mortgaged-back securities to drive down interest rates on all of this debt? The Obama Administration and Wall Street cheered, while savers and retirees cried.
This begs a number of questions. Where do you think the Federal Reserve got $5 trillion from? What will it cost us when interest rates get back to normal? What happens if we go to war and need to borrow a lot of money?
We will close with the story of the fall of the great Roman empire around the end of the first century A.D. When Rome could no longer expand by conquering other kingdoms, and it had its large government and military to support, it was forced to make a decision. Unfortunately, rather than go back to a more modest republic, it chose to tax its citizens more heavily, conscript their labor, and regulate their lives and occupations. Rome soon imploded from within.
Our next treasury secretary may have trouble preserving the full faith and credit of the United States — and paying 90 percent of Medicaid expansion may no longer be such a priority, even if the next election is right around the corner.
Steve Gardes is a Certified Public Accountant (CPA) and Certified Valuation Analyst (CVA) with over 40 years of public accounting experience.