Why physicians will be sacrificial lambs in future Medicare cuts

This year, total federal spending in the U.S. is projected to be $3.6 trillion. The top three budgetary categories are:

  1. Medicare/Medicaid —  $826 billion
  2. Social Security —  $717 billion
  3. Defense/Wars —  $703 billion

Medicare and Medicaid costs alone account for 23% of total federal spending.

If the magnitude of these projections does not alarm you, let’s look at it from a revenue perspective. This year, the total U.S.tax revenue is projected to be $2.2 trillion. Medicare and Medicaid costs of $826 billion, account for a whopping 37% of total tax revenue! You may logically ask — what about the $1.4 trillion budget shortfall? Not to worry — we can borrow it from China as we’ve been doing for years.

Standard & Poor’s does not have much credibility in my book, but it does make a cogent point. They assert that the U.S. is not in a fiscally sustainable path and that it is essential that we cut $4 trillion from the deficit over the next 10 years. Simply stated, that translates into about $400 billion annual revenue raising and/or budget cutting – an amount that will barely begin to close the country’s budgetary shortfall.

And yet the debt deal reached between the Congress and the President agrees only to a cut of $917 billion over the next ten years, with another $1.4 trillion additional reduction to be determined by a twelve person bipartisan panel.

The good news for physicians and for that matter, anyone in the field of medicine is that the initial $917 billion cut leaves Medicare and Medicaid unscathed. But clearly, this is only a Pyrrhic victory, since there is no way we can extract ourselves from this mess without cutting Medicare/Medicaid, given that it’s the largest budget item and that the other two competing items — Social Security and Defense — are holy cows to Democrats and Republicans respectively.

Worst yet, as the White House made clear in a fact sheet on the debt deal, “Any cuts to Medicare would be capped and limited to the provider side.” In other words, physicians will be the sacrificial lamb again.

The entire U.S. health care system is caught between a budgetary rock and an obligatory hard place. On the demand side, American people are living longer and sicker – judging by the increasing percentage of people who are obese and suffering from chronic diseases. And, in 2014, 15% of the population who are currently uninsured will be added into the health care system, thanks to Obama’s reform. On the budget side, our nation is quickly running out of money to pay health care providers.

If this scenario doesn’t look like a perfect storm for physicians, I don’t know what does.

Michael Zhuang is founder of MZ Capital, an independent wealth management practice specializing in helping physicians achieve financial freedom.

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  • http://www.facebook.com/people/Terence-Ivfmd-Lee/1523282856 Terence Ivfmd Lee

    One logical question that I’m curious to learn is how did doctors ever manage to survive before Medicare was “invented”? Perhaps the answer to that and the line of reasoning that follows may help us understand some potential solutions out of this mess.

  • Anonymous

    Will be sacrificial lambs?  I wouldn’t have written that. We all know that it’s hard to predict what will come out of the political sausage-maker in a few years.  Could be sacrificial lambs?  Definitely.  Prudence would dictate that physicians take steps to make sure that a big decrease in federal payments would not destroy their practices.  Good luck with that.

  • Anonymous

    Sacrifical lambs?

    There’s a variety of things that could happen but my guess is it will go something like this. None of which is pretty.

    An increasingly large number of clinical practitioners will abandon Medicare/Medicaid patients altogether, both because it’s not lucrative (for those out to make money) or feasible (for those who are simply trying to make ends meet). Many docs will have ethical dilemmas with abandoning or refusing care to the poor, but regardless they may not have a choice. I expect there will be a number of practice bankruptcies as well.

    As things become more desperate, the government may decide to tie licensure to whether physicians see Medicare/Medicaid patients, expect a full out revolt by physicians similar to what has happened in Europe from time to time. Physicians will probably go on strike in great number.

    Hospitals will face much greater challenges as they try to balance the financial loss of seeing these patients (along with every other patient who doesn’t have a payer source) who winds up in the ER. As long as EMTALA continues requring all ER visits to be seen regardless of financial standing, hospitals will try to acquire as much revenue from alternative sources, including other patients with insurance. Expect health premiums to continue to rise for everybody. Patients will be unable to afford health insurance anymore. Expect more and more hospitals to cut services and physician pay. I imagine in the next 5-10 years we will see more and more hospitals close.

    Health insurance companies may buckle themselves. This will have to do with rising costs for them, but most notably as Obamacare sets in and makes running an insurance company all the more unbearable. Most people after all will elect to pay the penalty than pay the exorbitant monthly premiums, especially after avoiding new onset pre-existing conditions no longer is a reason to obtain health care.

    I hate to be the harbinger of bad news, but it’s not just docs who will sacrificial lambs. The whole country may be a sacrificial lamb when the entire system fails. I really hope I’m wrong, but I have a bad feeling that I’m not.

  • Jim Jaffe

    seems to me there’s a distinction between having the government get the bet price for everything it buys — including physician services — and characterizing physicians as a sacrificial lamb.  are drug firms the sacrificial lamb because the defense department requires them to bid greatly discounted prices for drug buys.  there’s an ongoing debate about whether physicians are more part of the problem or solution here, but catchy and scary phrases like sacrificial lamb provide more heat than light.

    • http://www.facebook.com/people/Terence-Ivfmd-Lee/1523282856 Terence Ivfmd Lee

      If it is a fair negotiation, meaning that all parties and outside parties are allowed to freely compete and meaning that all participation is 100% voluntary/consensual, then of course government has the right (as do physicians) to negotiate to the best of their ability. That is the just way known as the free market. However, in order to have a truly free market, government has to derive their funds in a freely negotiated manner and not via any form of violent force nor coercion. Then, doctors will receive their fair value. No more. No less. The same holds true from the other side. Doctors will have to relinquish their monopoly hold on delivering health care. Patients and doctors have lost their free-market rights and thus, we have the system that we currently have.

  • Anonymous

    The costs of Medicare/Medicaid can be substantially reduced by increased efficiency instead of bureaucracy, by better attention to evidence-based guidelines, and improved collaboration between physicians and between institutions.

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