3. Once upon a time a country called the United Skates was concerned that the growth of entitlement programs for an aging generation of baby boomers would cause an unsustainable growth of the Federal Budget deficit and would eventually bankrupt the country. It was decided to spend $75,000,000,000 (at time zero) to set up The Commission for Health Care Rationing for the Aging. After a debate on the Senate floor it was decided to rename the organization The Commission for Preservation of Quality Health Care for Seniors (no change in objective though). The simplest plan called the Obamanation Plan would simply fix an amount that could be spent each year and would charge a group of 15 highly paid bureaucrats to cut payments to health care providers. While the plan forms the baseline against which all other alternative programs will be compared there is question as to whether it will be real or whether there will be an endless parade of annual Doctors fixes to raise payments so that medical facilities dont loose money treating senior citizens and consequently just stop servicing the senior population at all. The cash flow against which others must compare is given below. (fist negative at time 0 is -$75 Billion) The commission would like to find a way to make more targeted cuts that would preserve the availability and quality of care for millions of healthy seniors who otherwise find it difficult to find a doctor or hospital willing to take them. Alternative #1 is to raise the eligibility age for Medicare to 67 to match the age for full Social Security Retirement. While the change would reduce the number of people eligible for Medicare by 10% it would be the healthiest part of the population that would be removed and those whos health simply would not let them work to age 67 would end up diverted into Medicares disability program. The cash flow estimated for Alternative #1 is shown below. Commissioner Adolf proposes alternative #2. Medicare roles contain over 20% of people who are on disability and not even retirement age. These are people who should be working but are defective and not able to pull their weight in society. Commissioner Adolf proposes that secret SS teams round these individuals up and take them to secret camps for execution. There would be an initial cost but then substantial savings. The Congressional Budget Office estimates that the magnitude of these savings will fade with time as the disabled find ways to hide in other welfare programs to avoid execution. Adolfs cash flow is shown below. Alternative #3 is called The Preservation of Dignity Plan. One out of every 8 seniors is believed to suffer from Alzheimers disease, a disease that will over time reduce seniors to vegetables as they starve to death unable to remember even how to swallow. The plan would advertise the horrors of Alzheimers disease and offer seniors turning 65 a $20,000 bonus for signing a living will that if they develop Alzheimers and reach a hopeless state of confusion and lack of cognitive abilities that they will be painlessly euthanized. Their survivors will also be given 90% of their Social Security for one year and they will be provided with free funerals. The cash flow for alternative #3 is shown below. The last plan was developed by a Trekie (a fan of the Star Trek series). In one episode the Enterprise visits a planet where people live healthy lives until the reach a certain age and then they have a party called the resolution where they kill themselves before they become old and feeble. The Trekie Plan calls for Seniors to be given enhanced Social Security payments (since they wont live as long but they will live better). Then at age 75 all seniors are required to kill themselves or be assisted by agents of the commission. The cash flow for the Trekie plan is shown below. A- The governments long term borrowing rate is about 4% but the cash flows above are all real cash flows and the inflation rate associated with the governments 4% long term borrowing rate is 2.5%. If the government wishes to use their long term borrowing rate to evaluate the cash flows, what numeric rate should they use to be compatible with the real cash flows above? Show and explain how you got your answer (yes your answer will be a number). B. This problem contains one of the following land mines that could cause you to miscalculate a value or answer. Which one does it contain? After making your selection indicate what you need to do about it. 1- Cash flows of unequal Length ___ 2- Sunk Cost ___ 3- Unconventional Cash Flow ___ 4- Mutually Exclusive Investments ___ 5- No Land Mine at All Your just trying to sucker me ___ What should you do about it? Explain below. C. Is any of the alternative plans proposed above more effective at containing the cost of healthcare for Senior Citizens that the Obamanation Plan which would price all senior citizens into a charity market looking for any Doctor or hospital that would treat them? If so, which plan is the most cost effective? Show your work to establish how you can tell. D. What kind of problem is this? a. An invest and earn problem _____ b. An All Cost Alternatives Problem _____ c. A Comparative Investment Problem _____ d. An Incremental Investment Problem ______ e. A Unit Cost Problem _____ Why do you believe it is the type of problem you indicated above?
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