Sources of Medicare Funds (Graphic) and the Looming Disaster

I recently showed you the reality of hospital profit margins from Medicare. It's not pretty. The average hospital loses about 5% on every Medicare patient that shows up to be served. On average, most hospitals wouldn't survive on Medicare alone.  So Medicare must be swimming in cash, right?  Not so much.  How does it really look on the other end? Where is all that Medicare money coming from? Page 12 of  the March 2011 Report To The Congress Medicare Payment Policy by MedPAC gives us this interesting graphic on the sources of funds for Medicare expenditures.

As you can see from below, almost 40% of Medicare expenditures are not funded by payroll taxes or contributions from beneficiaries. In fact, just 23% of Medicare expenses are actually funded by contributions from beneficiaries.  Where exactly is this general fund money coming from?  This is the conundrum we find ourselves in.  The general fund pays for education, infrastructure, military, security.  You name it.  Everything you think the government should provide comes from tax money or borrowed money in the case of our current reality.  We are entering a point of no return with regards to government debt and the ability to service that debt.  We are heading straight for the Storms on the Horizon that President and CEO  of the Federal Reserve Bank of Dallas Richard W Fisher spoke of in 2008.  If you haven't read his comments, I highly encourage you to take some time to get enlightened.  It is an eye opening reality.

Source:  2010 annual report of the Boards of Trustees of the Medicare trust funds.

Here's the problem without a solution:  How are we going to fund daily government operations and entitlement programs while simultaneously trying to service the debt we are accumulating at an accelerating rate? Some folks believe  our total debt to GDP obligations are approaching unmanagable levels. Some folks believe we have already reached that point of no return.  By some accounts, in less than ten short years, based on current projected debt financing, if interest levels approached 10% (less than their 1970's crisis), 100% of all current  tax revenues would be required to pay just the interest  on accumulated debt (to avoid default), leaving nothing for daily government obligations.  That means there will be no general fund to cover the  37% of  unfunded Medicare mandates for our senior citizens.  Without default or devaluation (both devastating options) the only alternative is to raise taxes across the board, for everyone, an action that will stunt growth for here to eternity (also a devastating option).

That's the reality we find ourselves in.  What happens if the Canadians or British or Chinese decide loaning me and you 1.5 trillion dollars a year is just not worth 4% interest anymore, a level that is artificially low by all accounts given the potential risks going forward.    What if they decide that the value of the dollar, declining in value as it is, would require an interest payment of 5%, 6%, 7%, 10% as a risk premium to default?  Think that can't happen here?  Look only toward the PIGS of Europe (Portugal, Ireland, Greece, Spain)  and understand why we can't continue down this road.  As a nation, our Congress spends days  arguing  over 6 billion dollars in spending while we look at nearly 100 trillion dollars of unfunded obligations.

At what point do we say enough is enough?  When is that day actually going to come?  Do we wait until it's too late?  Or do we do something about it now.  Some people argue that senior citizens paid in all their lives and are entitled to all the benefits of health care as they grow older.   I'm here to tell you your government lied to you, is lying to you now and will lie for ever and ever and ever.   What you receive in benefits far outweighs any possible contribution you or your fellow citizens are funding for you.  It's a Ponzi scheme of epic proportion and it's Medicare that will ultimately destroy our ability to continue as a viable economic force in this world.    At some point we are going to have to say enough is enough.  The question is who will have the political will to do that and how long is it going to take.  It will happen, eventually, when the bond vigilantes say it will. We can do it on our terms or on theirs.  But it's going to happen because the market always wins in the end.   By then, it will be too late and we are all going to be in a world of hurt.