Wisconsin has been a focus in the news, not as the only state with unfunded expenses in their budget, but as one that is the further down the road to the ugly solutions that must be employed by all public servants who have the fiduciary responsibility of managing public money. Those ugly solutions all involve material losses to some segment of the state population or another.
Wisconsin has been considering changing their retirement system from defined benefit (which guarantees a certain dollar level of payout at retirement) to a defined contribution plan (where the amount allocated to a retirement plan is defined, but not the investment results to fund a retirement income). This is the same type of plan that most for-profit companies have. Why? Many businesses learned in the 1970s and 1980s that you can’t predict how businesses will perform, so guaranteeing a pension level that relies on actuarial assumptions which cannot be relied upon simply increases the chances that the businesses will fail. It’s like committing to a 30 year lease of office space, at a fixed escalator each year, even if revenues fluctuate widely during that span of time. It’s a dumb business model. It caused many industries to send manufacturing overseas because foreign labor did not have such provisions built into their wages, nor the high wage rates of the United States.
The union agenda since inception of collective bargaining has been to systematically increase the level of compensation for members, no matter what the impact might be on the competitiveness of the employers, thus forcing employers to reduce the level of employment in what were traditionally middle-class careers. It is ironic that collective bargaining succeeded for a couple of generations, but failed terribly in the long run to protect jobs and whole careers for those that followed. Unions, like many very highly paid corporate thieves now spending quality time in prison, got greedy and short-sighted.
Municipalities, state and county governments, and certainly our federal government, are nose to nose with an inescapable reality: current revenue rates do not support current expenses, including funding retirement plans. Nor will this change any time soon. There is limited ability to raise revenue outside of hoping for an improving economy’s contributions to collected taxes. And there are limited ways to cut expenses, all of which must be considered.
Default on bond debt is not one of them to consider. The markets for municipal and state bonds, and their derivative securities, would fall apart. Lack of confidence in Treasuries could not be far behind that trend, and we all know what happens when the world quits buying our federal debt.
Retirement plans of states and their health care subsidies are a significant portion of expenses. The majority of federal deficits in the decades to come are from Social Security, Medicare and Medicaid. There are only a couple of things that can be done to reduce the future expense rates that cannot be sustained through tax revenues. One is to extend the age of eligibility, so the overall payout is less since lifespan won’t be automatically increasing to match the delay. Another strategy is to reduce payouts to future recipients. I think both of these will be done at the state and federal level. We have no choice. The borrowing chicken has come home to the much more modestly appointed roost.
Over the next couple of decades, the cuts in Medicare reimbursements for eligible services and products will form the largest single buying factor in the health care industry. Baby Boomers (people born between 1946 and 1964) comprise 51 percent of the working population. The oldest segment of this demographic group has just reached Medicare eligibility. In 10 years, millions more will join them. In 20, most Boomers still alive will be drawing Medicare benefits. So the approved reimbursements must be reduced to match our tax revenue rate and lesser ability to borrow. This will force all health care providers to lower their costs while still making a profit. Which means that there will be less profit, lower compensation for professionals in health care companies, fewer investors looking for the proverbial “home run” in health care businesses and a drive towards quality that costs less to deliver.
This is why I’m optimistic about our country’s ability to weather the budget crises of the next two decades. When you can’t borrow your way out of a problem, you have to actually learn how to balance expenses with revenue. You have to figure out how to do more with less. You start coming up with all kinds of innovative ideas on how to make money in a health care business without applying the same investment, business model and pricing structures that were customary when money flowed like hot chocolate syrup.
I heard of a biopharmaceutical company recently that is developing a therapeutic for a fairly prevalent and difficult-to-treat disease. The drug, if successful in humans, has the potential of saving every life otherwise snuffed out by this disease. A year’s worth of the drug will cost $100,000. The speaker who informed me of this said proudly, “And that’s at 98 percent gross margin! The cost of goods sold is 2 percent of the sales price, or $2,000 per year for one patient.” This type of markup, which funds an overhead rate that one could argue is a tad fatter than necessity would indicate, is going to be an endangered species of future health care models.
Retirees, workers, politicians and business leaders should get used to the mantra of the next two decades: “Better quality, lower cost, no money to waste, little to borrow, longer to retire, less money to spend and quit whining.”
Friday, March 25, 2011