Medicare’s Plunge Toward Insolvency
Eleven years from now, you may be one of the 60 million people enrolled in Medicare. If you then have surgery or are in a nursing home, Medicare Part A is likely to cut your benefits by 21%, and by more thereafter, unless it is reformed and health care costs are controlled.
Question 10. Ask the Candidate:
To help address the looming financial crisis for Medicare Part A, would you require retired seniors to pay premiums and accept higher co-payments for Part A coverage, and would you require workers to pay a higher Medicare tax?
Background. Seniors vote, the young do not (or haven't, until this year), and politicians notice. And boy, do those politicians respond. In 2003, with Medicare long-term deficits skyrocketing, Congress added a prescription drug program ("Part D") for seniors, yet seniors are to pay only a small percentage of the massive costs. Congress wants the balance to be paid from general revenues--taxes primarily on people who are not seniors, most of whom struggle to cover their own medical bills and prescription costs. From 2007 through 2016, Part D of Medicare is likely to cost the government over $600 billion.[1]
And consider this: Budget projections now indicate that, by 2045, costs for the two major federal programs for seniors--Medicare and Social Security--plus interest on the federal debt will have grown so large that almost no federal tax revenue will remain for any other program, including for national defense, criminal justice, highways and bridges, disaster relief, anti-poverty programs, the environment, and education. Commentators have warned of a future generational war, pitting the elderly against the young in a fight for federal funds.[2]
Total Medicare expenditures alone are projected to grow, for the 75 year period from 2006 through 2081, from 3.1% of our gross domestic product (GDP) to a staggering 11.3%.[3] (Social Security expenditures are to rise far less: from 4.2% of GDP to 6.3%.)[4] To put this claim on our GDP in perspective: The federal government's revenue from individual and corporate income taxes currently amounts to about 11.3% of our GDP. Imagine if all of it were spent on Medicare!
The Medicare figures are, of course, projections, not predictions. No one knows today what will happen to Medicare costs in 20 or 30 years, let alone 75 years. Medicare actuaries arrive at their projections on the basis of a whole lot of assumptions, including, most importantly, that health costs of seniors will continue to rise as a share of our economy. Whether they will is a matter of conjecture. Congress's failure so far to address them is not conjecture.[5]
Medicare Part A. At a minimum, these Medicare estimates indicate an urgent need for reform. Given the course we're on, even Medicare's central program, "Part A," will face dire fiscal straits. This is the program that pays inpatient hospital and nursing home costs for qualified seniors--people 65 and over who are eligible for Social Security benefits.[6] Medicare trustees, who oversee Medicare's Hospital Insurance trust that receives all Medicare taxes, have warned that the trust's assets are likely to be exhausted by 2019--just 11 years from now (making the crisis for Medicare Part A far more immediate than the one for Social Security, whose trust funds are estimated to be exhausted by 2041). After 2019, monthly Medicare taxes will cover only 79% of Part A's benefits, and progressively less over time. For example, if Medicare previously would have paid $50,000 of your hospital bill, it might pay less than $40,000 in 2020, leaving you to pick up the remaining $10,000 plus.[7]
The trustees' report should set off alarms among the electorate, and all over Capitol Hill. Yet Congress remains paralyzed. No wonder. If Congress chose to make Part A financially sound over the long run, just listen to some chilling alternatives the trustees enumerated: Increase the Medicare payroll tax immediately from 2.9% of wages to 6.5%, which would put the entire burden on working households; or cut Medicare hospital and nursing home benefits immediately by 51%, which would put the entire burden on seniors; or adopt some combination of the two.[8] Or it could pursue more gradual remedies, as considered shortly.
None of these estimates comes as a surprise. Congress has known the demographic trends for years: (a) the number of Medicare beneficiaries is expected to double by 2050, reaching 91 million; (b) the number of workers compared to the number of seniors will continue to diminish; (c) the fast-growing population of seniors will drive medical costs upward because seniors require far more medical assistance than do younger people; and (d) seniors are living longer and longer.
What Congress Should Do
While all of Medicare's programs face serious financial programs, we'll address here what Congress should do to put Medicare Part A on a path toward long-term solvency.
Health care costs are a huge and intractable issue, the focus of much of the political debate. A solution to that problem would go a long way toward solving Medicare's woes. But not entirely. And that solution may be a long time coming. In the meantime, here are some reforms that need to be adopted to help keep Medicare Part A viable.
Pay a premium for Medicare Part A benefits. People who retire no longer pay Medicare taxes. With few exceptions, they also do not pay any premium for Part A benefits. This means they no longer contribute to the hospitalization and nursing home program. They should.
Currently, their bills are to be paid mainly from taxes imposed on our children, grandchildren, and other future generations of workers. You might not object if you believe that workers' wages will continue to rise at a level that makes these payments affordable for them.[9] But if you believe, as I do, that global competition, the declining quality of our public schools, the weakness of unions, and other factors will severely limit real wage increases for most Americans in the coming decades, then it seems only fair that all retirees should pay a monthly premium for Part A.
Pay Higher Co-payments. The highest priority of Part A should be to cover major expenses. As part of the cost-cutting exercise, seniors ought to bear increased copayments for routine care.
Increase the Medicare payroll tax. Any solution must include a gradual increase in the Medicare payroll tax. Otherwise, we will continue the process by which each generation of workers imposes upon future generations an excessive share of the cost of benefits for retirees.
A Final Observation
Achieving a fair and responsible Medicare program will require extraordinary bipartisan collaboration between Democrats and Republicans. It also will require an extensive dialogue with the public about ethical choices and costs. The choices will be difficult for candidates. Each choice will trouble, even offend, some constituency. That, of course, explains Medicare's predicament today. Our elected representatives have opted to look the other way, while expressing profound concern about the future of Medicare, and voters have been willing to go along. Why should candidates behave differently? Maybe because this time voters will insist on answers.
[1] 2007 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2007, 115. The report indicates total government outlays of $860 billion, but some unidentified (and relatively minor) portion is from states. Thus, I have conservatively approximated the federal portion at around $800 billion.
[2] See Laurence J. Kotlikoff and Scott Burns, The Coming Generational Storm. Cambridge: MIT Press, 2004.
[3] "Status of the Social Security and Medicare Programs: A Summary of the 2007 Annual Reports," Social Security and Medicare Boards of Trustees, http://www.ssa.gov/OACT/TRSUM/trsummary.html. See also 2007 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2007, 3.
[4] See "A Summary of the 2007 Annual Social Security and Medicare Trust Fund Reports, Social Security and Medicare Boards of Trustees," http:www.ssa.gov/OACT/TRSUM/trsummary.html.
[5] No leading presidential candidate, for example, has advocated a single payer, universal health care system as adopted by every other developed country, yet a number of experts believe that universal health care systems have demonstrated far more success in restraining the growth in overall medical spending. See Theodore R. Marmor and Jerry L. Mashaw, "Understanding Social Insurance: Fairness, Affordability, and the ‘Modernization' of Social Security and Medicare," Health Affairs, March 21, 2006. At this writing, President Bush's proposed 2009 budget would significantly curtail outlays to hospitals, nursing homes and other health care providers.
[6] Medicare Part B is the supplemental, optional medical insurance program that pays for outpatient care, such as visits to your doctor. Seniors who elect to participate acquire private insurance, but the premiums cover only about 25% of total costs. The other 75% is financed out of general government revenues. Medicare trustees project that the government's costs for Part B, currently 1.3% of our gross domestic product, will at least triple, to a frightening 4.0% of GDP, by 2081. Medicare Advantage Plans, often known as Medicare Part C, are private alternatives to Part A and B.
[7] 2007 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2007, 18.
[8] Ibid., 18. The figures are so drastic because Part A costs (to be distinguished from all Medicare costs) are estimated to rise from the current level of 1.4% of GDP to 5.0% by 2081. Ibid., 3.
[9] See Baker, Dean and Mark Weisbrot, Social Security The Phony Crisis. Chicago: University of Chicago Press, 1999.