HIRB’s Robustness Over a Range of Interest Rates
Interest Rate Sensitivity Analysis
Each of the following three examples illustrates the summary impact of different interest rate scenarios. The numbers are from three different HIRB models. All are based upon the State of California demographic and financial profile data when HIRB was first formulated. All data used in each of these three models are identical, other than the following scenario variations:
The first scenario uses a 3 percent bond rate and 3 percent for the earned interest rate.
The second scenario uses 5 percent bond rate and 5 percent for the earned interest rate.
The third scenario uses 1 percent bond rate and 0.40 bps (bps means basis points; 100 bps = 1 percent) for the earned interest rate. This is a -60 bps negative spread between the bond rate and the earned interest rate.
You will see the positive impact of higher interest rates and tolerance under low interest rates with a negative spread. Even considering “pushing the interest rate envelope” in either direction, HIRB program produces positive results financially, and therefore fiscally and economically.
Contrary to conventional wisdom and practices in public finance, higher interest rates are exponentially far more favorable than lower interest rates.
Contrary to conventional wisdom and practices in health financing, borrowing to fund health-care benefits can cost less than conventional methods of health financing.
The HIRB program is no panacea for addressing the problems with health care in the United States, but we think it’s a fair imitation.
“If you can’t bend the curve on health-care cost, then bend the curve on the cost of funding (TM
First Scenario
Interest Rate used 3 percent for bond rate and 3 percent earned interest rate.
Source of funds |
Dollar amount |
Allocation (%) |
Federal payments |
$70,980,000,000 |
13.17 |
State payments |
64,545,000,000 |
11.97 |
Pvt. Sector plan sponsors |
360,722,323,740 |
66.92 |
New revenue |
41,443,044,878 |
7.69 |
Earned interest |
1,347,998,957 |
0.25 |
Total: |
$539,038,367,575 |
100.00 |
Use of funds |
||
Medicaid liability |
$141,960,000,000 |
26.34 |
Pvt. Sector liability |
396,685,576,560 |
73.59 |
Bond interest paid |
359,017,814 |
0.07 |
HIRB operations expense |
33,773,200 |
0.01 |
Total: |
$539,038,367,574 |
100.00 |
Results |
||
Real $ Savings |
$955,207,942 |
Earned interest $1,347,998,957 |
Operating expenses |
33,773,200 |
Bond interest -(359,017,814) |
End balance |
1 |
|
*Net gain/(cost) |
$988,981,143 |
$988,981,143 |
• Gain = 18 basis points as a percentage of total liabilities
Note: Savings to the state or federal government are not reflected in this summary.
Second Scenario
Interest Rate used 5 percent for bond rate and 5 percent earned interest rate.
Source of funds |
Dollar amount |
Allocation (%) |
Federal payments |
$70,980,000,000 |
13.16 |
State payments |
64,545,000,000 |
11.97 |
Pvt. Sector plan sponsors |
360,722,323,740 |
66.89 |
New revenue |
40,786,136,422 |
7.56 |
Earned interest |
2,249,077,778 |
0.42 |
Total: |
$539,282,537,940 |
100.00 |
Use of funds |
||
Medicaid liability |
$141,960,000,000 |
26.32 |
Pvt. Sector liability |
396,685,576,560 |
73.56 |
Bond interest paid |
603,188,179 |
0.11 |
HIRB operations expense |
33,773,200 |
0.01 |
Total: |
$539,282,537,939 |
100.00 |
Results |
||
Real $ Savings |
$1,612,116,398 |
Earned interest $2,249,077,778 |
Operating expenses |
33,773,200 |
Bond interest -(603,188,179) |
End balance |
1 |
|
Net gain/(Loss) |
$1,645,889,599 |
$1,645,889,599 |
*Net savings/(Cost) |
||
• Gain = 31 basis points as a percentage of total liabilities
Note: Savings to the state or federal government are not reflected in this summary.
Third Scenario
LOW INTEREST RATES minus 0.60 percent basis points (60 bps) negative spread—using 1 percent for bond rate and 0.40 percent bps for the earned interest rate.
Source of funds |
Dollar amount |
Allocation (%) |
Federal payments |
$70,980,000,000 |
13.17 |
State payments |
64,545,000,000 |
11.98 |
Pvt. Sector plan sponsors |
360,722,323,740 |
66.95 |
New revenue |
42,371,177,408 |
7.86 |
Earned interest |
179,546,104 |
0.03 |
Total: |
$538,798,047,252 |
100.00 |
Use of funds |
||
Medicaid liability |
$141,960,000,000 |
26.35 |
Pvt. Sector liability |
396,685,576,560 |
73.62 |
Bond interest paid |
118,697,491 |
0.02 |
HIRB operations expense |
33,773,200 |
0.01 |
Total: |
$538,798,047,251 |
100.00 |
Results |
||
Real $ Savings |
$27,075,412 |
Earned interest $179,546,104 |
Operating expenses |
33,773,200 |
Bond interest (-118,697,491) |
End balance |
1 |
|
*Net gain/(Cost) |
$60,848,613 |
$60,848,613 |
• Gain = 1 basis point as a percentage of total liabilities
Note: Savings to the state or federal government are not reflected in this summary.
A Brief Comment
A few comments in reference to each of the three preceding “Sources and Use” summaries are given here.
The currency market is the largest unregulated market in the world. Billions in currency trade every day. In the currency trading business, the profit or loss on any particular trade is measured in “Pips”—One (1) Pip = 1/1,000 (0.0001) of one cent (0.01). Thus, what currency traders keep their eyes on is the fourth digit to the right of the decimal point of any currency pair exchange rate because this is how they measure their profits or losses on every trade. When this is applied on such a magnitude of trades, the profits or losses realized may be measured in very small fractions which can translate into substantial nominal profits. The HIRB program produces a very similar result though in a very different context. Though the savings may be measured in small fractional percentages, such fractions translate into substantial nominal dollar amounts.
The mechanisms may be different though the physics (as we previously commented near the beginning of this Part V) never changes. All that ever changes is our understanding. It is the only thing that ever does.