The Rising Cost of Medicare

Medicare reform: The ugly math

Jeanne Sahadi of CNN Money says that the math suggests Medicare is unsustainable in its current form. While Medicare is financed through a combination of payroll taxes, premiums and general revenue, Medicare spending has been growing faster than the economy. This is projected to continue since the number of people expected to enroll in the program will surge as the population ages and health care costs continue to grow far faster than inflation. In the next decade, the Congressional Budget Office estimates that enrollment will grow by a third and spending per enrollee jump by 50%.  According to data from the Centers for Medicare and Medicaid Services, the agency that runs the program:

  • Between 1975 and 2010, the number of enrollees doubled to 47 million, and the real cost per enrollee quadrupled,
  • By 2040, Medicare will cover 88 million people and the cost nearly three times more than in 2010.

Payroll tax revenue and premiums aren’t keeping pace with the program’s increasing costs, requiring more federal spending:

  • In 1975, revenue and premiums covered 69% of total Medicare disbursements.
  • In 2010, they covered 40%.
  • By 2040, they’ll only cover 30%.

Can It Be Fixed?

Figuring out how to make the program’s finances sustainable over time while continuing to provide quality care and adequate coverage is difficult.  Let’s look at the House Republican budget resolution. It proposes converting Medicare from a fee-for-service program into a “premium-support” system for everyone under 55 today. Here’s how it would work:

  • When enrollees become seniors, they would choose from a Medicare-approved list of private insurance plans.
  • The cost of their chosen plan would be subsidized in part by the federal government (through vouchers).
  • The plan would gradually raise the Medicare eligibility age from 65 to 67 by the 2030s.

The results?

  • The plan would reduce federal health spending commitments, according to the CBO, reducing Medicaid by $1 trillion.
  • The CBO also said “most elderly people would pay more for their health care than they would under the current Medicare system,  and  would assume greater financial risk if their health care needs turn out to be greater than expected.

Robert Reischauer, president of the nonpartisan Urban Institute and a trustee of the Social Security and Medicare Trust Funds, believes that the Ryan plan is a serious overall debt-reduction plan, but is concerned about the the burden it would shift to enrollees:

For one thing, Reischauer said, Medicare today “is not a particularly generous program. Most seniors buy or get supplemental coverage.” Currently, Medicare covers half of seniors’ health costs, said Tricia Neuman, director of the Medicare Policy Project at the nonpartisan Kaiser Family Foundation.

Q&A On the Romney/Ryan Plan

With two plans for Medicare being discussed, what would they mean for people age 55 or older? According to Henry J. Aaron, Senior Fellow of Economic Studies at the Brookings Institution, here is what the Romeny/Ryan Plan would affect you:

Q. What is The Voucher Program?

A. Ryan’s plan would replace the current Medicare program with a voucher program, under which eligible seniors would receive a flat dollar amount that would cover part of the cost of a health insurance plan. The value of the voucher amount would be adjusted annually according to an index. If health care costs increase faster than the index, enrollees will have to bear the extra cost.

Q. How Would The Ryan Plan Affect Costs for People Now Age 55 and Above?

A. Costs for Seniors Could Rise. Although the plan claims that Americans over age 55 today would not be affected, in fact iit is likely to raise the amount they have to pay out-of-pocket for insurance.  While it is true that the premium for those who stay in traditional Medicare under the Ryan plan would be calculated as under current law,  the average cost of serving those who remain in traditional Medicare would increase. This is because private insurers would target those with relatively low anticipated costs by providing them lower premium rates. Medicare would then face the problem of insuring those with higher anticipated costs, and would have to increase average premium costs. Additionally, the financing for traditional Medicare would become progressively less adequate, throwing into doubt Medicare’s survival.

Q. Would A Romney Repeal of the ACA Put Other Benefits at Risk?

The Romney/Ryan health program also seeks to repeal of President Obama’s health reform law, the Affordable Care Act. If that law is repealed, here is a short and incomplete list of the benefits for older Americans would lose:

  • Health reform fixes the infamous ‘donut hole’ in Medicare drug coverage—which is a gap of thousands of dollars of drug costs that the original drug benefit left open. If health reform is repealed, that benefit vanishes.
  • Health reform’s coverage of cost sharing for prevention services would also vanish.
  • The subsidies that will eventually cover 75% of the cost of generic drugs would also disappear.
  • Medicaid benefits for millions of older Americans, working and retired, under the Act’s new  Medicaid expansions would vanish.
  • A 60-year-old who did not work for an employer that offered group health coverage would have to pay high or unaffordable premiums for individual coverage or go uninsured, just as before the law.
  • As the savings that would be achieved under health reform would vanish, the Hospital Insurance Trust Fund would be exhausted in 2016 rather than in 2024, as projected under current law.

Q. Would Romney’s Budget Necessitate Further Cuts for Seniors?

Governor Romney has pledged to hold government spending to 20% of gross domestic product, 4% of which would be reserved for defense. He has also pledged to balance the budget. Governor Romney is not currently proposing to cut Social Security.

All of the many ways to meet these broad budget targets would entail massive cuts in programs affecting older Americans. For instance, if Social Security is left untouched, one alternative would be to cut all government spending 29% by 2016 and 59% by 2022, the last budget year in his second term for which a president Romney would submit a budget. Those cuts would have to fall on every government program, including Medicare and Medicaid, food stamps, supplemental security income, government retirement benefits, and veterans benefits.

Q. What Impact Would Romney’s Tax Program Have on Older Americans?

Since Governor Romney’s tax program includes cuts in tax rates and specific additional breaks for many forms of capital income, he proposes to make up the revenue loss by “base broadening.” This means ending a wide range of deductions, exemptions, and credits, as yet unspecified. A recent analysis by the Urban/Brookings Tax Policy Center points out that if rates are cut as Mr. Romney proposes, all possible scenarios would mean shifting the tax burden from those with incomes above $200,000 to those with incomes lower than that, for young and old alike. This would intensify the impact of Medicare spending cuts for most older Americans.

Q: Does the Romney Plan Address Healthcare Costs?

The deficit watchdog group Concord Coalition in a statement commended Ryan for putting out an overall plan that “fits the magnitude of the fiscal challenge we face.” But it noted that these efforts to control Medicare costs are not paired with efforts to control health costs. and without both, seniors’ ability to afford health care will go down over time. Josh Gordon, Concord’s policy director says:

“While setting spending targets for federal health care programs provides an incentive for efficiency, and increasing out-of-pocket costs for retirees provides an incentive for economizing, we will still need cost controls, delivery system reforms, and research on best practices to have any chance of reaching those targets.”

Reduce Overall Health care Spending To Save Medicare

By 2030, more than a third of the entire budget will be devoted to Medicare and MedicaidReducing Medicare spending means tackling Medical costs across the board, and the best bet for doing that, while preserving coverage and quality and would be to expand, not eliminate, healthcare reform.  The ACA extends Medicare Part A Trust Fund solvency by 12 years to 2029, according to the 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, while the Ryan Plan has no clear projections for doing that. If ACA is repealed, or the Romney budget is implemented, millions more are likely to go without access to health coverage and care, since the Ryan plan doesn’t save money for people with Medicare, or save the Medicare program, and does not help solve the nation’s deficit.
Our nation’s long-term federal budget deficit problem is almost entirely a health care problem. Ten years ago, 17% of the federal budget was devoted to the two largest health care entitlement programs, Medicare and Medicaid. Over the past decade, that share climbed to 21% and is expected to reach 25% by the end of this decade.
The ACA takes the first step toward getting off of our current path and onto a more sustainable one. It does not solve the entire problem, but the plans offer tens of billions of dollars worth of direct deficit reduction plus the prospect of billions of dollars more in savings as the efficiency and modernization provisions kick in. According to The Center for American Progress:

  • “Anyone concerned about our long-term budget situation but opposed to the current health reform effort must answer this simple question: In the absence of health care reform, what other policies do you support that will reduce the deficit by at least $1 trillion over the next two decades? Our deficit problem is a health care problem.

The full budgetary effect of the rise in health care spending is not limited to the direct outlays for Medicare and Medicaid. Because health care spending is such a massive contributor to our current and future federal budget deficits, the ongoing interest payments on the debt that we will incur to cover those health care expenses is another added cost going forward. Interest payments on the debt are expected to nearly triple over the next 10 years. If nothing further is done to address the rising cost of health care, by 2025 the deficit is projected to exceed 9% of GDP with Medicare and Medicaid consuming nearly one-third of all federal noninterest spending. The rest of the budget would amount to a mere 16.1% of GDP.

Bottom line: Health care reform is not the problem. It’s the solution. Gimmicky plans to balance the budget while cutting revenues for the top incomes won’t do the trick. Neither will pandering to the drivers of healthcare costs under politics as usual. It’s not a partisan issue, since the Republicans will exacerbate the problem by doing the former, while the Democrats by failing to stand up to the special interests, won’t do enough.