Bob’s Journal for 5/5/2022

Medicare Could be Changing Without Action by Congress

Become familiar with these terms and acronyms, and look for them in any communication from the Centers for Medicare and Medicaid Services (CMS) or involving Medicare late this year or early in 2023.

There’s the Accountable Care Organization (ACO) and the medical care model it is part of, ACO REACH, which stands for Accountable Care Organization, Realizing Equity, Access, and Community Health. Another term to look for is Direct Contracting Entity, or DCE.

You’re aware that today there are two main choices for Medicare beneficiaries. You can enroll in original Medicare and add Medicare supplement and Part D prescription drug insurance policies.

Or you can enroll in a Medicare Advantage program.

DCOs have been under the radar for a while. They operate in an experimental program in which health care provider groups contract with CMS to provide care to original Medicare beneficiaries for a flat fee per beneficiary.

The idea is that the medical providers allied as a DCO will provide coordinated coverage and work together as teams to provide better care to beneficiaries.

There are two main criticisms of the DCO program. One criticism is that the model converts original Medicare into another form of managed care similar to Medicare Advantage.

The other criticism is that many DCOs often aren’t owned by insurance companies or physician groups. Instead, they’re owned by private equity firms, Special Purpose Acquisition Companies (SPACs) and other investment groups with no history of providing medical services. Critics are concerned the DCOs put profits ahead of quality care.

This should concern you because of what CMS did in February.

CMS canceled the program the DCOs were part of and announced a new program, ACO REACH, to begin January 1, 2023. Firms can apply to be ACOs and enroll in the program. Existing DCOs will be ACOs if they agree to meet the new ACO requirements.

In addition, beneficiaries of original Medicare could be notified that they automatically are aligned with an ACO if their primary health care provider is part of an ACO. To opt out of ACO REACH, you’d have to change your primary medical provider to one not affiliated with an ACO.

Critics are concerned this is a backdoor way to enroll all Medicare beneficiaries in some kind of managed care program. In fact, some CMS officials are on record saying they expect all Medicare beneficiaries to be enrolled in ACOs by 2030.

CMS says original Medicare beneficiaries would retain all their rights, coverage and benefits, including the freedom to see any Medicare provider. It says ACO REACH prohibits limited networks, prior authorization, or any other means of restricting care.

CMS also expects beneficiaries will be happier with ACOs because they should see improved medical care and increased services.

It is hard to see how ACOs will provide more services, better care and make profits while saving Medicare money without adopting restrictive policies similar to those of Medicare Advantage plans and health maintenance organizations.

Medicare Advantage plans are popular, currently enrolling about 42% of Medicare beneficiaries. But enrollment is voluntary, and people can switch to original Medicare during open enrollment each year.

As we approach 2023, Medicare beneficiaries need to be alert for notifications that their medical providers are ACOs and the beneficiaries are now part of ACO REACH. Then, decide if you want to remain in the program or find a new primary care provider.

Traditional Diversification Isn’t Working

The traditional diversified portfolio is failing investors.

Investors don’t build portfolios that are 100% stocks, because they’re concerned about bear markets. They want to limit losses in the downturns by owning assets that decline less than stocks, preferably assets that hold their value or increase when stocks are falling.

The traditional diversified portfolio is 60% stocks and 40% bonds. When stocks are declining, the bonds earn interest and often rise in value. At a minimum, the bonds lose less value while earning interest.

But the traditional diversified portfolio doesn’t always work, and that usually happens when investors really need it to work.

Today, bonds aren’t paying much interest. In addition, they’re losing value as interest rates rise. At the same time, stocks are falling. The balanced portfolio is failing investors.

For example, the Vanguard Balanced Index (VBAIX) was down 8.17% in April. It’s also down 6.85% over three months and 12.17% so far in 2020.

Vanguard 500 Index Investor (VFINX) was down 10.71% in April, 6.46% over three months and 12.96% so far in 2020.

The 60/40 portfolio hasn’t helped investors this year.

This is the worst performance for the traditional portfolio since the financial crisis and one of the worst since World War II.

A key problem this time is that bonds performed worse than in any other period when stocks also were down. In addition, the losses in bonds are among the worst during any period on record.

Most of the time the 60/40 portfolio works well for investors. But the times when it doesn’t work well are the ones when investors are likely to need the benefits of diversification the most. That’s why in our Retirement Watch portfolios I developed the True Diversification portfolio that has a number of funds with low correlations to the major stock and bond indexes. It is more than stocks and bonds.

Target Date Funds Losing Support

Target date funds (TDF) have been the go-to default investment for 401(k) and similar plans for years.

TDFs promise a pre-packaged asset allocation that changes as investors age. You pick the target retirement year, and the fund invests in an appropriate allocation. When retirement is decades away, the fund primarily is in stocks. As retirement nears, the stock allocation is reduced and the TDF becomes more diversified.

But in the real world TDFs don’t always work as theorized.

Before the financial crisis, the main TDF sponsors competed with each other for the highest returns. Most sponsors steadily increased their stock allocations as stock indexes rose, even for those whose retirement dates were near. The TDFs didn’t do well in the financial crisis.

Plan sponsors and investors are starting to recognize the problems with TDFs. In the latest TIAA Retirement Insights Survey, 75% of 401(k) plan sponsors thought TDFs helped plan participants in an age- and risk-appropriate way.

That seems like a high approval rate. But in 2020, 87% viewed TDFs favorably. There was a similar decline in support among plan participants. And the survey was taken when stock indexes were doing better than they are now.

I looked at the TDFs of the largest mutual fund companies with 2025 target retirement dates. All had around 55% in U.S. and non-U.S. stocks and were down more than 10% so far in 2022. Losing more than 10% of your nest egg only a few years before retirement can really disrupt your retirement plan.

I’ve long favored a custom asset allocation, especially as someone nears or is in retirement. In addition, TDFs don’t offer a guaranteed lifetime income component, such as a Single Premium Income Annuity, which should be a part of most retirement portfolios.

While TDFs are easy and convenient, they’re not the best option for many as retirement approaches.

The Data

Job openings reached a record high of 11.5 million in March, according to the JOLTS (Job Openings and Labor Turnover Survey) report. There were 11.3 million openings in February.

This means that in March there were almost two job openings for everyone reported to be unemployed and looking for work.

In addition, the number of times people quit their jobs in March rose to the highest monthly level ever, 4.5 million.

Private sector job growth slowed in April according to the ADP Employment Report. There were 247,000 new jobs in April compared to 479,000 in March.

Businesses with 500 or more employees added 321,000 positions, but smaller businesses had a decline in workers.

GDP declined at a 1.4% annualized rate in the first quarter of 2022, but the data are a bit misleading because of the way GDP is computed.

Normally, a decline in GDP means economic activity declined. But in the first quarter, imports surged because domestic economic production wasn’t high enough to meet demand. Imports rose for both consumer spending and business investment.

This translates into lower GDP in GDP accounting.

Personal consumption, for example, increased 2.7%.

In addition, businesses continued to spend to increase their inventories. But because inventories increased less than in the previous quarter, in GDP accounting that translates into lower growth.

In short, demand remained strong for both goods and services. But because of various supply constraints, the domestic economy wasn’t able to meet that demand. Because consumers turned to imports to satisfy demand, GDP growth was negative.

A positive sign in the report was that business investment surged in both nominal and after-inflation terms.

The Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Price Index, increased 0.9% in March, rising from a 0.5% rate in February. The PCE Price index increased 6.6% over the 12 months ending in March. That’s the highest 12-month rate of increase since January 1982.

The core PCE Price Index, which excludes food and energy, increased 0.3% in March and 5.2% over the 12 months ending in March. That’s a little lower than the 5.3% rate recorded at the end of February.

The growth rate of manufacturing declined a little in April, according to the ISM Manufacturing Index. The index declined to 55.4, down from 57.1 in March.

The PMI Manufacturing Index didn’t decline as much. It came in at 59.2 in April, compared to 59.4 in March.

New unemployment claims fell by 5,000 to 180,000 in the latest week.

Continuing claims dipped a little to 1.4 million.

Personal Income increased 0.5% in March. February’s increase was revised higher to 0.7%.

But spending, as measured by personal consumption expenditures, surged, increasing 1.1% in March. February’s spending was revised higher to a 0.6% rise.

But a lot of the higher spending was the result of increased prices. After adjusting for inflation, spending rose only 0.2% in March. That indicates consumers are able to increase spending at a higher rate than inflation, though incomes are rising slower than inflation. We’ll see how long that can continue.

Some of the higher spending is the result of consumers using savings. The savings rate declined to 6.2% in March, the lowest level in nine years.

Growth in the services sector slowed a little in April, according to the ISM Services Index. The index declined to 57.1 from 58.3 in March.

But the PMI Services Index rose to 55.6 in April from 54.7 in March.

The Kansas City Fed Manufacturing Index in April was reported at 25, down from 37 in March.

Factory Orders increased 2.2% in March compared to a revised 0.1% increase in February.

Orders for non-defense capital goods excluding aircraft — considered a good measure of business investment — increased 1.3%.

The Employment Cost Index increased 1.4% in the first quarter of 2022 after rising 1.0% in the last quarter of 2021. Over 12 months, the index increased 4.5%, the highest 12-month jump since 2001 (the earliest data for the index).

The Chicago PMI dropped to 56.4 in April from 62.9 in March.

Consumer Sentiment, as measured by the University of Michigan, declined a little to 65.2 in April from 65.7 in March.

The Markets

The S&P 500 rose 0.07% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.36%. The Russell 2000 climbed 0.40%. The All-Country World Index (excluding U.S. stocks) added 1.85%. Emerging market equities gained 3.60%.

Long-term treasuries lost 3.46% for the week. Investment-grade bonds fell 1.71%. Treasury Inflation-Protected Securities (TIPS) declined 1.50%. High-yield bonds decreased 0.65%.

In the currency arnea, the U.S. dollar gained 1.13%.

Energy-based commodities increased 0.55%. Broader-based commodities rose 0.10%. Gold declined 1.77%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.