The Medicare Myth, Or Why We Can't Trust Anything Our Politicians Tell Us about Health Care Financing

The 2013 Medicare Trustees report is out, and it proves once again that the so-called Medicare funding crisis is a myth that has been manufactured by political leaders more interested in cutting the size of government than in assuring access to health care for all.

Those may seem like strong words, but we have been waiting for a long time for government leaders to tell us the truth about Medicare.  That it hasn’t contributed to our budget deficit.  That its trust fund is solvent. 

And, most important, that it would take only the tiniest of tax increases to preserve Medicare as we know it for everyone who is alive today.

The 2013 report was released last week.  Nearly one in every six (or 50.7 million) Americans is covered by Medicare.  42 million of them are age 65 and over, but 8.5 million are younger and living with serious disabilities.

The combined Medicare expenditures – for parts A, B, and D – were $574 billion in 2012.  Taxes, co-pays, and other income produced $537 billion in revenue.  The remaining $37 billion came from trust funds – not as some politicians want us to believe from general governmental spending.

Furthermore, there were two trust funds to help cover that shortfall.  The one we always hear about – the so-called “HI fund” that supports Medicare Part A expenditures – had $244 billion in it at the start of 2012. 

Was that enough?  The trustees advise that there should be at least one year of reserves in that fund at any time.  At the start of the year, it had 92 percent of that – almost exactly the recommended amount. 

As a result, when its share of the 2012 shortfall came to $24 billion – less than anticipated a year earlier – it extended the life of the fund to at least 2026.  That was the headline in many of the news reports.

But there is more.  Based on current projections, the trustees now expect that there will be surpluses added to the fund between 2015 and 2020 – partially because of the Affordable Care Act and partially because of the lower health care inflation of the last few years.

Only the Heritage Foundation could refer to this as a “bleak future.”

Dire warnings aside, we still should not sit on our hands doing nothing over the next thirteen years, nor refuse to consider containing Medicare costs in the future.

Based on current projections, Medicare spending, which consumes 3.6 percent of GDP today, will grow to 6.5 percent of GDP over the next 75 years. 

Some may call this unsustainable growth.  But another way to look at it is to consider that energy costs alone consumed 8.3 percent of GDP in 2010, and helped lead to the investments and innovations that could lead to American energy independence within the next ten to fifteen years. We can always use that kind of investment and innovation in health services.

And this is the biggest exploding myth of all – how much would it actually take to finance a Medicare program that consumed 6.5 percent of our GDP?

According to the trustees, it would take a tax increase of – are you ready for this? - .55 percent to employees and .55 percent for employers.  This isn’t a typo.  We’re not talking 55 percent or even 5.5 percent - we’re talking about five-tenths of 1 percent to preserve Medicare as we know it for everyone alive today.

This is less than the two-thirds of 1 percent it was projected to cost last year, and much less than the 1.9 percent it was projected to cost just five years ago, before Obamacare.  So even the trend line looks good.

None of this, of course, fits into the “Medicare in Crisis” political narrative of our times, and it is why this report will probably get even less attention than last year’s report.

Because this is the truth.  While our Congress still has some work to do on Medicare – most notably reforming the reimbursement formula that has led to the need for an annual “doc fix” that could still add another 3 percent to Medicare’s draw from GDP – the program is mostly on the right track.

There is no reason to scare Americans into believing that Medicare is in crisis, and even less of a reason to argue that the government can’t be trusted to provide efficiently and effectively for the health care needs of its most vulnerable citizens.

Paul Gionfriddo via email: gionfriddopaul@gmail.com.  Twitter: @pgionfriddo.  Facebook: www.facebook.com/paul.gionfriddo.  LinkedIn:  www.linkedin.com/in/paulgionfriddo/ 

A Little Compromise Will Save Medicare

A person who was unhappy with the outcome of the election suggested that the voters gave President Obama a “Mulligan” on election day – a second chance to do things right.  That’s one way to look at it.

But if you belief that, then you also have to say the same thing about the divided Congress – it, too, was being given at least one more chance to get things right.

That means agreeing to the surprisingly little compromise on which the future of Medicare will depend.

It’s hard to understand how two sides looking at the same reality and sharing the same goals could be so far apart in coming to an agreement about what to do.  Nowhere is this more evident than in the Medicare program debate.

Both sides acknowledge that Medicare is as popular as any entitlement, is as well run as any health insurance program, and addresses a need that is only going to grow in the coming years.

They also agree on certain facts.  The first is that Medicare hasn’t yet contributed to our debt.  The second is that it won’t for at least another 12 years, because there are enough reserves in the Medicare Trust Fund to offset any program deficits for that long.  The third is that the size of the program deficit last year was $19 billion. 

They also agree that on its present course, Medicare will eventually become too expensive to maintain.

There are two down-the-road problems with the Medicare program. 

The first is related to Medicare and healthcare inflation.  On its current inflationary trajectory the cost of Medicare will grow as the cost of healthcare in general grows.  Medicare alone will consume 6% of our GDP by the time today’s young adults become Medicare-eligible, and up to 7% of our GDP by the time babies being born today become Medicare-eligible.

The second is related to the current $19 billion Medicare deficit.  If this deficit isn’t closed, then it will grow over time, wipe out the Trust Fund, and undermine the entire Medicare program.

We need Congressional action to address both of these problems.

Congress has already taken some actions to address the first problem – the long-term inflationary growth in the Medicare program.  

The $716 billion in rate cuts included in the Affordable Care Act reduced Medicare’s long-term projected share of GDP from 10% to 7%.  This is a significant difference, accomplished without cutting a single benefit because the time horizon is so long.

If that were all we needed, Congress could recess before it even convenes.

But $716 billion isn’t enough to prevent the Medicare share of GDP from growing from 4% today to 6% twenty-five years from now.  And one part of that cut – an immediate 30% reduction in some provider rates – will likely be “fixed” at least in part by the new Congress as it has every year since 2002.

So we need another strategy, one that involves compromise. 

And the beginning of that compromise could be in two small steps that Congress and the President might take to address the second problem – closing the $19 billion deficit today. 

One step involves taxes and the other step involves spending.

In 2011, according to the Medicare Trustees 2012 Annual Report, Medicare revenues were $530 billion and Medicare expenses were $549 billion. If that gap were closed moving forward, then the Medicare Trust Fund would remain solvent.  And the Medicare program would be secure no matter what Medicare's share of future GDP is.

Closing a $19 billion gap in a $549 billion program shouldn’t be an insurmountable problem for governmental leaders.  It shouldn’t demand much political posturing.  And it doesn’t require a “grand bargain.”

If it were to be done just through a Medicare tax increase, it would cost every Medicare taxpayer (typically under the age of 65) an average of less than $10 per month.

If it were to be done just through a reduction in Medicare benefits, it would cost each Medicare beneficiary (typically over the age of 65) just over $30 per month.

What if we all shared the burden together?  That might mean an average $7 per month tax increase and an average $10 per month benefit reduction.

The American people might well agree to such a Medicare bargain.  And be thankful for the compromise. 

Happy Thanksgiving!

Ending the Medicare Debate

If you care about Medicare, then who lost last week’s Presidential debate?  Perhaps we all did.

That’s because both candidates favored some cuts in the Medicare program.  And cuts translate into a real impact on real people.

But no cuts could mean something even worse - unsustainable levels of spending in the Medicare program.

The question is what’s the lesser evil – a cut in payments to providers or a cut in benefits to individuals?  That’s the choice President Obama and Governor Romney gave us.

President Obama favored cuts in payments to providers.  Governor Romney favored cuts in benefits to individuals.  The difference in their positions became clear as Romney pressed his point about the $716 billion in “cuts” that Obama supported in the Affordable Care Act.

The “cuts” Obama favored actually fell into two categories that are built into the law – provider rate reductions and cuts to private insurers offering Medicare Advantage plans. 

The provider rate reductions arguably hit doctors the hardest, because ACA presumed that the so-called “doc fix” won’t happen anymore beginning next year.  The “doc fix” has had bipartisan support every year since 2002, because it corrects a provision in the Medicare reimbursement formula that would immediately reduce reimbursement by around 30%. 

The other provider cuts are realized by limiting the increase in future Medicare reimbursements to 5% per year – less than the 5.7% health care costs are expected to grow.

Romney was emphatic during the debate that as President he would restore not just these provider dollars, but the private insurers’ administrative dollars, too.

But Obama pointed out that these savings were used in part to finance the closing of the Medicare donut hole and new Medicare prevention benefits.

More significantly, they also change the trajectory of Medicare spending significantly over time.  According to the 2012 annual report of the Medicare Trust Fund trustees, even with the savings the overall cost of Medicare will grow from just under 4% of GDP today to just over 6% in around thirty years, and then grow a little higher through 2085 (those are the green lines in the chart). 

So Obama just cuts away at the increase.

Romney’s position is more extreme.  Because without the savings, the cost of Medicare will grow to 7% of GDP by 2040, and then skyrocket to over 10% (those are the red lines in the chart) by the time babies born today hit retirement age.

If we had to borrow to cover that, it could bankrupt America.

Romney obviously doesn't want to bankrupt America.  But he did say that he favored leaving Medicare alone for people age 60 and above. (Note: The Ryan plan says 55, but Romney said “60” in the debate.)

For everyone else, Romney wants to reduce the projected cost of Medicare by changing it to a voucher program. 

He would give a health insurance voucher to everyone when they turn 65, and let them use it to purchase either “traditional” Medicare or private insurance through a federal Medicare exchange. 

The value of the voucher will be tied to the second-cheapest plan available, and won’t keep up with health care inflation.  The Medicare recipient will have to pay the difference out of pocket, negotiate with a doctor to accept less, or ration their own care.

Romney made a good argument for at least doing the “doc fix” again by arguing that many doctors won’t be able to absorb a huge rate cut, and will drop out of Medicare if the rate reductions are put into place.  But Obama made an equally valid point that the vouchers could be even worse for recipients. 

If the arguments are left standing there, as they were in the debate, then something has got to give, and everyone's going to lose.

So why not give voters a different choice – one that could end the debate with everyone a winner?  Because there is another option that could save Medicare for our grandchildren without resorting either to borrowing or to huge provider cuts or to Medicare vouchers. 

We have all enjoyed a 2% payroll tax “holiday” for the last couple of years to help stimulate the economy.  When this holiday comes to an end, all we need to do is to dedicate 1.33% back to the Medicare Trust Fund.

If we did this, then Medicare would be solvent for the next seventy-five years.

That's a choice about taxes we all should be offered.  Maybe we’d vote no, but at least we’d be voting with our eyes open.

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