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How Health Reform Helps Treasury Cut Losses

Changes in assumptions about future health-care costs help the Treasury Department record better results.
Alix Stuart, CFO.com | US
January 17, 2012

While most financial executives are elbows-deep in compiling their 10-Ks right now, the Treasury Department delivered its latest annual report to Congress and the President just before Christmas, thanks to a September 30 fiscal year-end.

The numbers are just about as depressing as you might expect — "poor and deteriorating," in the words of former Government Accountability Office comptroller general David Walker — but those who take the time to wade through them may find a new appreciation for the power of health-care reform.

The bottom line: the U.S. government lost about $1.3 trillion last year, the same as it lost the year before. While revenues increased only slightly, driven by higher personal income taxes and tempered by corporate income taxes, which declined by 2.5%, costs decreased fairly significantly — by more than 10% on a gross basis and even more on net, in fact.

Such cost-cutting efforts ought to warm the heart of any CFO, no matter how bad the bigger picture looks. But while federal employees may have taken such standard money-saving steps as printing on both sides of a sheet of paper, turning off the lights at night, and minimizing overtime, none of those really mattered compared with the magic that changes in assumptions about future health-care costs were able to accomplish.

In their financial statements, two of the largest government employers, the Department of Defense and the Office of Personnel Management, decided that medical costs would not rise as fast over time as they expected last year. "Some people are assuming that the [Patient Protection and] Affordable Care Act is going to hold down costs," Walker told CFO. It's an assumption he and others consider dubious.

The DoD dropped long-term medical cost increase estimates from 5.65% to 5.25%, while the OPM (which handles civilian federal employees) dropped its estimate from 4.4% to 4.35%. Wrapped together with some lower estimates of military pension costs and future civilian salary increases, new actuarial assumptions about postemployment liabilities cut more than $400 billion in costs, comprising two-thirds of all cost savings.

And the optimism about future health-care costs trickles into another giant obligation that is technically off-balance-sheet for the government: Medicare. According to the Treasury Department, Medicare underfunding is around $24.6 trillion; according to the chief actuary of Medicare, it's $37 trillion.

The lower number is largely based on the productivity improvements in the health-care system that are supposed to arise out of the PPACA, as well as the reduced Medicare payment rates that are currently mandated (but generally overridden by Congress), the report says.

That $12 trillion (larger than the estimated Social Security shortfall and the current federal debt) is "a huge difference," says Walker, and one of the reasons the GAO can't render an official opinion on the report.

The report makes no bones about the squishiness of the numbers, and is clear about the fact that such estimates may not be so favorable in years to come. (During 2010, it points out, increases in actuarial costs swung the other way and accounted for 65% of increases in the government's net cost.) Still, that's a lot of money saved from changing a few numbers around — and a luxury no company in America has in its own financial statements.




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