The Funding Future of Medicare
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Regular readers of this blog should know by now that I spend a lot of time thinking about Medicare — the 800 pound gorilla in health care in this country. Apparently, I’m not the only one. As previously posted, Peter Orszag, the director of the Congressional Budget Office, is thinking about it a lot. So did David Walker, the former comptroller general of the United States and the head of the Government Accountability Office. As the federal government’s chief accountant (no jokes please), he barnstormed the country, talking to pretty much anyone who would listen about the financial disaster that is and will be Medicare ten or twenty years from now if nothing’s done to change its current revenue and spending trajectory.
Last week, the American Enterprise Institute tossed another log on the fire, issuing a short (5 pages), but powerful report on the financial future of Medicare. It’s full of words like “calamity” and “disaster” and “catastrophe” and “collapse.” And it should be.
Relying on the Medicare Trustees’ recently released report on the financial health of the Medicare program, they calculate the unfunded liability of today’s Medicare program to its existing and future beneficiaries is…85 TRILLION DOLLARS!! They also note that the Trustees report — which was issued a month ago — calculated that since 2007 — which seems like yesterday — Medicare added $10 trillion to its future unfunded liability.
Yawn…
For the better part of twenty years, analysts and policy wonks have been predicting a day of financial reckoning for Medicare, with little or no public support or reaction. Too bad. By the time we face up to the reality confronting us all on this, we’ll probably be past the point at which modest, incremental reforms will work.
In the early 1980’s, around the time the Greenspan Commission was formed to deal with Social Security, I remember hearing that the Part A (HI) Medicare Trust Fund was likely to run out of money by 1988. It kept getting pushed back and is now estimated to be depleted by 2019.
One lesson I’ve learned over and over during a 37 year career on Wall Street is that our economic system is extremely resilient and always seems to find a way to cope with seemingly insurmountable problems. With respect to healthcare costs, tiering of prescription drugs is a worthwhile innovation, which combined with the recent increase in popular drugs going off patent, significantly reduced annual cost growth for drugs. I think the same tiering concept has the potential to reduce cost growth in hospital and physician charges. Physician rating systems, P4P, price and quality transparency, and reducing regional practice pattern variations while not where they need to be yet, all have lots of potential to rein in healthcare costs. Investments in electronic medical records reforming the medical liability system would also be helpful. Growth in the number of hospitalists could help to better control utilization of services within the hospital setting as could an increase in the number of doctors who choose to work for a salary and/or within large group practices instead of solo or in small groups. More widespread and consistent use of living wills and advance medical directives could reduce futile spending on end of life care. If all else fails, we might ultimately have to resort to explicit rationing via QALY metrics or some similar approach.
It is encouraging to note so far this fiscal year, Medicare spending is actually down year-to-year, in part due to technical factors related to the Part D prescription drug program. Even after adjusting for that, however, spending is up only 2.2%. In the meantime, insurers should keep innovating and pushing for changes in financial incentives that will drive provider behavior in the right (cost-effective) direction.
If the whole chicken farm has their heads buried in the sand, none of them will see the pack of wolves roaming in the barn.
I see that you wrote this a couple of days ago. I was looking to see if either you or Paul wrote about the Globe editorial yesterday. Buried in the “John McCain’s Snake oil” editorial was the line: “Medicare effectively covers the elderly and disabled by using a combination of premiums and tax revenues. That proven solution has no place in the orthodoxy of free-market Republicanism.”
I’m not sure by who’s definition Medicare is effectively covering costs. It seems like it creates a bigger and bigger issue for hospitals and insurers each year.
Okay Barry - so maybe I’m being a bit Chicken Littlesque in my concern about Medicare. Maybe. I know enough about how the public sector works to know that it doesn’t like to solve tomorrow’s problem today - even if solving it today would be cheaper than solving it tomorrow. Unless it’s on fire and next to me, it’s not going to get done. That makes me nervous - especially when I look at the three legs of this stool - the actuarial data - which shows us all living longer - the incoming rise in Medicare eligibles associated with the Baby Boomers - and the rise in health care spending generally.
But yes - the economy is resilient and we’re very good muddlers. As someone once said, for the past forty years, we’ve been saying that another 2% growth in the share of GDP taken up by health care will take down the U.S. economy, but the share goes up, and the economy grows.
Crying wolf? Maybe. Time will tell.
Just to clarify on Barry’s comments, in the last 1980s and 1990s there were a number of changes to Medicare’s financing structure, including shifting some costs from Part A to Part B - so the foretold financial collapse of Part A in 1988 just didn’t magical disappear. For example, in 1987 the amount of earnings subject to the FICA tax increased, and from 1988-1990 the tax rate increased. And then after 1993, the part of the payroll tax that goes for Medicare Part A lost its cap so that it now applies to total earnings.
Also, Charlie - Medicare is one of my favorite topics for my blog at http://www.healthpolcom.com/blog
Thanks for the interesting posts.
Marianne - Thanks for the post. Earlier in that same Globe editorial from May 5th, the paper says, “Never mind that Medicare is justly popular for effectively providing medical coverage to elderly Americans for more than 40 years.” Overall, they’re making two points: the program is popular with senior citizens, and it’s been funded for quite a while with a combination of premiums and tax revenues.
Well, I would expect a program that’s funded in part by its beneficiaries, but mostly by everyone else, would be popular with its beneficiaries. What’s not to like about that? And given everything we know about its finances into the future, is that arrangement a viable, long-term plan to pay for its costs?
Secondly, even with all of its existing cross-subsidies, about 2/3rds of Medicare beneficiaries have supplemental coverage - provided by the private sector - which wraps around basic Medicare coverage. I wonder how popular it would be with seniors if they couldn’t access supplemental coverage that goes beyond the baseline product?
Don’t get me wrong. I think Medicare is a great success, but it’s misleading to imply that it doesn’t need to be reformed. It does - and it will. The only question really is how, when and how many times over the next thirty years will it happen.