P.S. Are We Sure that Medicare Spending Is Still Outstripping GDP Growth?
In yesterday’s post, I said that Wall Street was getting nervous about the stalemate over raising the debt ceiling—and the possibility that the U.S. Treasury would run out of the money needed to pay its bills. If the world begins to lose confidence in the full faith and credit of the U.S., it loses confidence in U.S. government debt (i.e. Treasuries)—which means that investors lose confidence in the dollar. Looking for a safe haven, they begin to buy gold. This morning Bloomberg reported that gold futures have risen to a record $1,631.20 an ounce. Meanwhile, the dollar fell to a record low against the Swiss franc. Among paper currencies the Swiss franc is considered a relatively “safe haven.” This afternoon both gold and the dollar appeared to be correcting.
Wall Street abhors uncertainty, and uncertainty is seeping into the market. “Government securities, the traditional area of safety, are now at risk, so that’s why you’re seeing gold grind higher,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, told Bloomberg. “The level of U.S. government borrowing has caused the erosion of the dollar and adds more fuel to the metal’s rally.”
Wall Street’s rating agencies may lower the nation’s credit rating. “I’m pretty certain that the government is going to see a downgrade by at least one agency,” Kathleeen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund said yesterday in an interview on Bloomberg Television’s “Street Smart.” She offered some reassurance: “Treasuries will continue to be a large, liquid market whether it’s AAA or AA.” (Gaffney is a seasoned investor. As Bloomberg notes her bond fund returned 14 percent in the past year, beating 98 percent of its competitors.)
What a Downgrade Could Mean For You
Nevertheless, “the longer-term implications are that a downgrade could be bad for our currency and this could raise our borrowing costs,” warned Stephen Walsh, the chief investment officer of Western Asset Management, the Pasadena, California-based fixed-income unit of Legg Mason Inc.
If Treasuries become less appealing to the world’s investors, they will demand a higher rate of return, which means that interest rates will rise. This is what President Obama was referring to Monday night when he cautioned that if politicians cannot break the deadlock on the debt deal, “Interest rates could climb for everyone who borrows money: the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand.” This, in turn, “could cost us jobs,” the president observed.
Vote Delayed Until Thursday
Late Tuesday afternoon the Congressional Budget Office (CBO) told Republican leaders that the savings package proposed by Boehner would cut spending by only $850 billion over the course of a decade—roughly $150 billion less than the $1 trillion increase proposed for the debt ceiling. This sent Boehner’s staff scrambling to revise his plan. The House vote on his proposal has been postponed until Thursday—at the earliest. Meanwhile, the Tea Party nation appears to be turning on Boehner.
Democrats received better news. CBO told them that the package proposed by Senate Majority Leader Harry Reid would produce $2.2 trillion in savings over 10 years—enough to raise the debt ceiling. This assumes that Congress is willing to include savings that will flow from winding down the wars in Iraq and Afghanistan. Republicans balk at that suggestion. The GOP has ridiculed using those presumed savings as a “budget gimmick.” Democrats note that House Republicans used similar assumptions for the wars in the budget they passed earlier this year.
According to the New York Times, Senator Harry Reid of Nevada, the majority leader, is saying that “with modest ‘tweaking’ his proposal could now form the basis of a ‘true compromise. For Reid, the question is whether he can attract the seven Senate Republicans he needs to cut off a threatened filibuster and claim bipartisan backing.
“‘I think we’re going to solve this,’ said Senator Richard J. Durbin of Illinois, the assistant Democratic leader, but he called the latest delay ‘a bitter lesson’. . . What we’re facing here is a Republican caucus that is basically showing its political bravery by giving up Medicare benefits for elderly people, by increasing the cost of student loans for working families, by cutting money for medical research,” Durbin told the Times.
While Reid’s plan leaves entitlement programs untouched, Boehner would make deep cuts to Medicare. As the Congressional Budget Office explains, “Boehner’s plan [also] would eliminate the subsidized loan program for graduate students.” Today, borrowers are not required to pay interest on their loans while they are still in graduate school, but “beginning July 1, 2012, the bill would eliminate the interest subsidy on subsidized student loans for almost all graduate students while a borrower is in school, in the post-school grace period, and during any authorized deferment period”. . . . Because borrowers would be responsible for the interest accrued on those loans while in school, CBO estimates that “this provision would reduce direct spending by $8.2 billion over the 2012-2016 period and $18.1 billion over the 2012-2021 period.” (The current annual and cumulative loan limits for unsubsidized loans would be adjusted to permit students to borrow additional funds in the unsubsidized loan program, but they would be required to pay interest while still in school.)
Despite talk of finding a compromise between Boehner’s and Reid’s plans, I doubt that the financial markets will accept Boehner’s two-step proposal, which requires that Congress go through another debt-ceiling debate next year. Investors want closure on this issue. If they don’t get it, I am afraid that we will pay the price, not only on Wall Street, but on Main Street. Late this afternoon, both the S&P 500 and Treasuries were sliding, while interest rates were rising.
Has Medicare Already Broken the Inflation Curve?
Much of the debt debate has pivoted on one question: do we really need to cut Medicare and Medicaid? After all, the Affordable Care Act is designed to rein in health care inflation. And in fact, this may already be happening on the ground.
A few days ago, Standard & Poor’s reported that over the past year, Medicare spending has slowed considerably. In the twelve months ending May 2011, Medicare claim costs rose at an annual rate of just 2.64%, as measured by the S&P Healthcare Economic Medicare Index. I wrote about this in May when I reported that, according to S&P, as of April 1, Medicare spending was climbing at an annual rate of only 2.78%—the lowest rate posted for the Medicare Index in its six-year history. As of May, reimbursements had slowed further.
Today, I talked to David Blitzer, the chairman of Standard & Poor’s Index Committee, who said “I’m hesitant to say that this is a clear long-term trend. But I think it’s more than a blip on the screen.” He noted that we tend to get data from the Centers for Medicare and Medicare about 1 to 1 1/2 years after the fact; this is why there is a widespread perception that Medicare spending is still rising 2% faster than GDP. S&P is trying to giving us more current numbers, and while the S&P index is “is not perfect,” Blitzer says, “it’s good.”
Tomorrow I’ll write more about our conversation, and other signs that Medicare inflation may not be the problem that conservatives claim.
Certainly, there is waste in the Medicare system. But as I have explained, the ACA will squeeze some of that waste out of the system by reducing overpayments to Advantage insurers, refusing to pay for some preventable errors, trimming annual increases in reimbursements to hospitals, nursing homes and other institutional providers, and changing the way we pay for care—rewarding providers for better outcomes, rather than for “doing more.” If Medicare’s reimbursements are now increasing by just 2.64 percent a year it will not be difficult to rein in Medicare’s outlays so that they are growing no faster than GDP.