Medicare’s Plunge Toward Insolvency

12 years from now, you may be one of the millions of seniors enrolled in Medicare who see their hospital or nursing home benefits cut drastically because of the expected bankruptcy of the Medicare Part A trust fund.

Question 9. Ask the Candidate:

To help address the looming financial crisis for Medicare Part A, would you require seniors to pay premiums for their Part A coverage if they have the ability to bear such costs?

Medicare Part B primarily covers outpatient services; Part C is the private insurance option to Part A, B, and D; and Part D is the prescription drug program.

All Medicare taxes are paid into the Medicare Part A trust fund, which pays primarily for inpatient hospital and nursing home care for seniors. Part A trust fund surpluses, combined with ongoing Medicare taxes, should be sufficient to pay all scheduled benefits through 2023. But the surpluses are expected to be exhausted in 2024, when, without reforms, Medicare taxes alone would be sufficient to pay only about 83% of scheduled benefits.

One fair, and significant, way for seniors to help address this shortfall would be to pay premiums for Part A coverage if they can afford to do so.  

Some Preliminary Observations

 Addressing Health Care Costs Generally. The problems posed for Medicare Part A are part of two fundamental issues this country must address in the face of rising, unsustainable costs of health care for all Americans. First, who should pay for the costs? Second, how can we bend the curve on those costs, which threaten future federal budgets as well as Medicare?

The Option to Privatize Medicare. The Romney/Ryan presidential ticket would turn to private market, competitive solutions as the best way to address Medicare costs. Under their plan, workers eventually could opt out of Medicare to acquire private insurance with the help of tax-free government vouchers. The Obama administration rejects privatizing Medicare. It proposes to slow the growth of health care costs and address the Part A funding problem through the Affordable Care Act of 2010—“Obamacare”--and other reforms. But Obamacare, as presently written, extends the life of the Part A trust fund only from 2016 to 2024.[1]

Even the most enthusiastic advocates of privatization recognize that it is unlikely to gain Congressional approval soon, if ever; and never would survive a presidential veto if Obama is re-elected. Moreover, even if a privatization plan became law, current proposals envision that Medicare would continue for seniors who don’t opt out, and the choice to opt out wouldn’t be available for years.

All of which means that addressing the Part A shortfall must be a top priority of Congress.

Medicare Part A

You may receive Medicare benefits at age 65 although you have not reached the normal retirement age—currently age 66—to be eligible for full Social Security benefits.

The Program. Medicare’s central program, “Part A,” pays primarily for inpatient hospital and nursing home care[2] for qualified seniors—typically someone 65 or over who has paid Medicare taxes for at least 40 quarters. Spouses who are at least 65 also are covered, even if they never paid Medicare taxes. The Medicare tax is 1.45% of your wages, matched by a 1.45% tax paid by your employer, all paid into the Part A trust fund. Unlike the Social Security tax, the Medicare tax applies to all wages, even if you earn millions.[3] On the other hand, once you have paid Medicare taxes for only 40 quarters, you and your spouse are entitled to full Medicare benefits, the same as someone who pays Medicare taxes for 400 quarters.

As mentioned in the discussion of Social Security, employees effectively pay the employer’s tax because employers generally reduce wages and benefits by the amount of the tax.

The Funding Problem. Since the inception of Medicare in 1965, once you qualified for Medicare, you’ve been entitled to Part A benefits without having to pay any premium. [4] And since 1965, the Part A trust fund has developed surpluses that helped cover Part A costs. But the bad news is that, without reforms, the Part A trust fund will be bankrupt by 2024. Then, Medicare taxes, which must carry the entire Part A burden alone, are expected to cover only 83% of hospital and nursing home costs, and progressively less over time.[5] So just 12 years from now, if you have a $50,000 hospital bill that Medicare now would pay in full, it might pay only about $42,000; you may have to pick up all or a portion of the remaining amount.

The Part A crisis is more urgent than the crisis for Social Security, whose trust funds are estimated to be exhausted 9 years later.

Warnings about the Part A long-term funding crises should have set off alarms long ago on Capitol Hill. After all, Congress has known the demographic trends for years:

Each year that Congress fails to address the problem only makes solutions more drastic. Congress should act now.

What Congress Should Do

While all Medicare programs face serious challenges, we’ll address here one important step Congress should take to help put Medicare Part A on a path toward long-term solvency.

Pay Premiums for Medicare Part A benefits. Seniors, let’s face it: One reason the Part A trust fund is in such bad shape is that the Medicare tax we paid before we retired (and seniors of earlier generations paid) was too little in relation to the vast benefits Part A provides. Secondly, no one who has qualified for Medicare has ever been required to pay a premium for Part A benefits.[6] They should now, except lower-income beneficiaries who cannot afford the payment.

What the Part A premium should be, and who can afford it, are challenging questions ripe for debate. Remember, however, that Congress has imposed upon current and future workers about 75% of the cost of the very expensive Part D prescription drug program adopted in 2003, even though many of us who are seniors never paid a nickel for it before we retired.       

Other Necessary Reforms that Seniors Should Accept. These reforms should include higher co-payments for routine care, a modest reduction in benefits, and limits on expensive end-of-life care. All will be politically difficult to adopt.

An Increase in the Medicare Tax. Some increase in the Medicare tax, phased in over time, also will be necessary. But the increase should be modest. Global competition, the declining quality of our public schools, the weakness of unions, and other factors are likely to severely limit real wage increases for ordinary Americans in the coming decades and thus their capacity to absorb higher Medicare taxes.

Extending the retirement age to 67.  Extending the Medicare eligibility age to 67 over the coming years, like the formula for Social Security, would reduce the drain on the Part A surplus but would not reduce the nation’s health care costs overall. Seniors, while they were 65 and 66, would require medical assistance from private insurance companies or from Medicaid, which we can assume would be at least as expensive as Medicare coverage. In short, extending the Medicare eligibility age only would shifts costs. The problem of addressing those costs would remain.

Some Final Thoughts on Curtailing Costs

The size of any Part A premium would be influenced by the government’s ability to slow the growth of health care costs generally. Without reforms, total Medicare expenditures alone are projected to grow, for the 75 year period from 2011 through 2086, from 3.7% of our gross domestic product (GDP) to a staggering 6.7%, exceeding even the costs for Social Security,according to the Medicare trustees.[7]

Our aging population is part of the explanation. The United States also has, by far, the most expensive health care system, per capita, in the world. Yet health outcomes often are inferior to those in countries that spend considerably less per capita. Experts across the political spectrum agree that about one-third of our health care costs are wasteful and inefficient.      

This suggests that we carefully consider what other countries have done to control their costs, even if their methods may sound “un-American” to free-market advocates. As some health care experts have written, “Global budgets, fee schedules, systemwide payment rules, and concentrated purchasing power may not be modern, exciting or ‘transformational.’ But they have the advantage of working.”[8] A little tort reform wouldn’t hurt either.

Finally, the framework for all reforms should be a form of universal health care, which at last would establish basic health care as a right, not a privilege. Then, the United States no longer would be the only developed nation in the world that fails to guaranty basic health care for all its citizens.  

[1] 2012 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, 36

[2] Part A also covers hospice care and home health care.

[3] Until 1993, Medicare taxes applied to wages up to a certain level. But legislation in 1993, to help address the long-term Part A shortfalls, removed the threshold, making Medicare taxes applicable to all wages.

[4] If you’re 65 or over and haven’t paid Medicare taxes for sufficient quarters, you may be able to receive Part A benefits by paying a monthly premium.

[5] Ibid.

[6] Medicare-eligible persons who do not have 40 or more quarters of Medicare-covered employment may purchase Part A for a monthly premium.

[7] See endnote #2, 2.

[8] Marmor, Theodore and Jonathan Oberlander, “From HMOs to ACOs: The Quest for the Holy Grail in U.S. Health Policy,” The Tampa Times, August 18, 2012.

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