Legislative AlertMedicare's Money Troubles: The
Medicare Trustees have just issued their annual report, and,
no surprise, they say that Medicare is in financial trouble. We
all know that. We also know that the trouble is rooted in the
structure of Medicare as an open ended-entitlement, governed by
perverse incentives that encourage cost explosions, and also
encourage cuts in reimbursement to doctors, hospitals and other
medical professionals. Here are the basic facts for 2003:
#1. The Hospitalization Insurance (HI) program, the
part financed by payroll taxes that pays hospital bills, will go
broke in 2026, four years earlier than predicted last
One perspective is that 2026 is still a long way off, and we
can still muddle through until then using the same old gimmicks:
flat-out payment reductions; new fee schedules for hospital
payment; or switching coverage for certain items, like home
health care, from Part A into Part B, where the costs will be
picked up through draw-downs on general revenues (a semi-clever
way to try to hide the true costs of the program from the
ordinary taxpayer). Look for Congressional champions of the
status quo to utter such sentiments. The late Rep. Sam Gibbons
(D-FL) once famously noted that he never really paid much heed to
those Medicare Trustee reports anyway. No point in getting
A more reasonable approach is to observe that, wow, Medicare
goes broke at the most inconvenient time, just when that massive
77 million baby boom generation is fully into retirement, no
longer working and paying the payroll taxes to sustain it,
meaning that 2026 is really different than previous dates, when
the Trust Fund solvency was a constant irritant rather than a
full-blown financial crisis.
An even more reasonable perspective is that the 2026 date
is, in fact, nothing less than the end of the projected process
of Medicare financial deterioration, and that the beginning of
the end is indeed closer than we realize. Why? Because the
Medicare Trustees tell us that the HI program starts running in
the red, paying out more than it is taking in, in 2013, rather
than 2016, just three years into the first wave of the big baby
boomer retirement. Feeling a bit edgy yet?
#2. The financial issue is not the solvency of the
Medicare HI Trust Fund, but the growth in Medicare spending and
its consequences for taxpayers and seniors.
The Trust Fund is just an accounting device for a pay-as-
you-go system, the entire structure of which is in deep trouble
because of demographic and other changes.
The demographic trends alone are daunting. According to the
Congressional Budget Office (CBO), from 1990 to 2010 the number
of workers in the American economy will have grown by 33 million,
but the number of persons aged 65 and older will have grown by
only 8.3 million. But between 2010 and 2030, the growth in the
number of workers will slow to only 14.4 million while the number
of persons 65 and older will grow by an estimated 30 million,
double the rate of workers to retirees. While today there are
almost 4 workers for every retiree, by 2030 there will be
slightly more than 2 workers for every retiree. In other words,
regardless of the state of the Medicare HI Trust Fund, the real
financial pressure is the accelerating burden of Medicare
spending, and what it will mean for taxpayers, the federal
budget, and the premiums of seniors. Next year, Medicare
beneficiaries will face a premium increase of more than 12%, a
harbinger of things to come. But for taxpayers, you ain't seen
#3. Expect big future tax increases to keep Medicare
Part B, which pays doctors and reimburses outpatient
medical services, is funded by premiums of which seniors pay 25%
and taxpayers, 75%. While today, Part B expenditures account for
42% of all Medicare spending, Part B is growing faster than Part
A, and that means a progressively larger bite of income tax
revenue. How large? According to Professor Tom Saving of Texas
A&M University, a member of the Social Security and Medicare
Board of Trustees, by 2026, the year that Medicare HI Trust Fund
goes broke, Medicare will consume 20% of federal income tax
receipts. If Congress were to add a modest drug benefit
to the program that would cover just 25% of Medicare patients'
drug costs, that would jump to 24% of all federal income taxes.
With a very generous prescription drug benefit, paying for 75% of
beneficiaries drug costs, the take would amount to 35%. As
Professor Saving notes, if you add the projected shortfalls
facing the Social Security system, the income taxes taken to make
good on the unfunded political promises of both programs would be
44% of total federal income taxes in 2026. No problem.
The CBO expects that the Medicare spending will continue to
accelerate, long after the baby boomers are in retirement,
largely because of the demand for medical services. So the line
doesn't dip when the last baby boomer draws his last breath.
CBO states that if Medicare is consuming a mere 2.4% of GDP
today, it will consume 9.2% in 2075, the out-year limit of
projections normally made by the Medicare trustees.
As Douglas Holtz-Eakin, the new Director of CBO, recently
told the Senate Special Committee on Aging: "If the Medicare
program's costs today accounted for 9.2% of GDP, they would equal
half of what is now spent under the entire federal budget. If the
program's higher costs were added to what is now expended, total
federal receipts (which currently absorb about 18% of the GDP)
would have to be one-third larger. And if those increased costs
were paid for entirely through a payroll based tax, the rate now
set at 15.3% on the earnings of most workers would have to more
than double a rise equal to roughly $6,000 per worker (that is,
$3,000 each for the worker and his or her employer)."
Practically speaking, what does this 75-year projection
mean? For most of us who are baby boomers, this is not a problem
we will face at least directly. It's the problem facing the
grandkids. Keep that in mind. Those who defend the status quo,
and keep promising something for nothing, including artificially
cheap Medicare prescription drugs, have quietly, without much
fanfare, muttered a few choice words for the taxpayers of the
next generation: Go to Entitlement Hell. After all, why should
they care for future generations? How many future generations are
going to vote for them?
And Yet, "Medicare Controls Costs"
... even better than the private sector! That is the
substance of the argument presented by Marilyn Moon, the Urban
Institute's prominent health policy analyst. (See Cristina
Boccuti and Marilyn Moon, "Comparing Medicare and Private
Insurers: Growth rates in Spending Over Three Decades,"
Health Affairs, March-April 2003). Moon argues that
Medicare performed better than the private sector in "controlling
the rate of health care spending growth" largely because of
Medicare's ability "to price aggressively for the services it
Pricing "aggressively" in Medicare means imposing and
enforcing price controls. OK. We get it. On sector A of the
economy you impose price controls; on Sector B of the economy,
you don't. Sector A's costs don't grow as quickly as Sector B's.
And water is powerfully wet.
Moon and Bocutti's analysis covers three decades. They base
their calculations on enrollee spending, compare like services,
and do a comparative analysis of cumulative spending for Medicare
and the private sector. On March 17, Moon presented her findings
at a Washington conference sponsored by the Alliance for Health
Reform. Joseph Antos, a health policy analyst with the American
Enterprise Institute and former Assistant Director of CBO, notes
that Moon's basic point is well taken on the raw numbers, but her
analysis doesn't tell the whole story. As Antos recounts, it is
not only what you are spending that counts, but also what you are
buying for the dollars spent. Over the period 1970 to 1999,
private medical insurance spending did grow faster than Medicare
overall, but the content of private coverage grew even faster.
According to Antos, while private spending increased 44.8%, the
private sector benefits grew by 80.2% over that period. In other
words, the value of private insurance grew even faster than its
Antos also makes the standard economic argument against
price controls. They are inefficient inherently. Medicare's
aggressive pricing is not at all related to local market
conditions, and in Medicare the adoption of new medical
technologies is slowed, regardless of demand for these services.
For doctors, Medicare's alleged efficiency resulted in a fee cut
of 5.4% cut in 2002, and a projected 4.4% cut in 2003, which was
only corrected by Congressional intervention. Medicare may
formally pay for something, but Medicare patients won't get it
unless they find a doctor, hospital, or clinic who can offer it
at the government-controlled price, sustain the financial loss,
and still stay in business.
And on this point, Congress should start to worry. According
to a survey sponsored by the Medicare Payment Advisory
Commission, the percentage of doctors accepting all new Medicare
patients dropped from 76% in 1999 to 70% in 2002. The reasons are
not hard to fathom. About 77% of physicians expressed concern
about Medicare payments, and about 75% had concerns about
Medicare rules and paperwork.
Breaking Ranks in the House of Representatives?
House Democratic leaders proposed a comprehensive Medicare
prescription drug benefit that would cost between $800 billion
and $900 billion over a ten-year period. Signed on to the
gigantic proposal are Minority Leader Nancy Pelosi (D-CA); Rep.
Charles Rangel (D-NY), ranking member of Ways and Means; and Rep.
Steny Hoyer (D-MD), House Minority Whip. The Bush Medicare drug
proposal is "too meager" and competitive markets are anathema.
In a move sure to upset the Leadership, two House members,
Rep. Cal Dooley (D-CA) and Rep. Rahm Emmanuel (D-IL), a former
domestic policy wizard in the Clinton White House, proposed that
Congress target low-income seniors for help with drugs, rather
than creating a universal benefit. Under the Dooley-Emmanuel
plan, Medicare would pay 80% of drug costs greater than $4,000 in
a year. The benefit could be delivered through private plans,
retiree plans, or state pharmaceutical assistance programs, and
would cost approximately $400 billion over ten years, roughly the
same as the Bush proposal. Under the Dooley-Emmanuel proposal,
the $4,000 deductible would not apply to seniors who had incomes
less than 200% of poverty. CBO estimates that 17% of the elderly
will have drug expenses that exceed $4,000 per year.
Dooley and Emmanuel got the support of 16 of their
Democratic colleagues. Politically, this is big stuff. In effect,
on the crucial prescription drug issue, they have forged a "New
Democrat" block, which, given the tight margins in the House,
will quickly emerge as another serious power block.
The Left Attacks the President's Model for Reform
In a direct counterattack on the President's model for a
future Medicare system, Families USA recently published a
monograph, widely distributed on Capitol Hill, spelling out why
the Federal employees plan is a bad model for Medicare. The
reasons: 1. Medicare beneficiaries are less healthy than FEHBP
enrollees. (Fact: FEHBP also covers retirees.) 2. The program
would face adverse selection problems. (Fact: the FEHBP does not
have a significant adverse selection problem because of its
design). 3. Poorer Medicare beneficiaries may not be able to
afford higher premium for generous health plans. (Fact: ditto for
federal retirees. The answer: means test the program.) 4.
Medicare beneficiaries will have difficulty making informed
decisions. (Tacit Premise: You are not as smart as federal
retirees.) 5. Plans could withdraw, and that would be disruptive.
(Fact: FEHBP plan withdrawals have not resulted in disruption of
coverage for workers or retirees.)
The FEHBP is the largest group health insurance in the
world. It has solid coverage and high rates of satisfaction. The
left has been frustrated with the program because it has been an
embarrassing showcase of how ordinary individuals can make sound
choices. In 1993, the Clinton Administration called for its
abolition, and proposed instead to fold federal employees into
the Clinton Plan. Federal workers and retirees never to be
trifled with protested vigorously.
During the great August 18, 1994, debate on the Clinton
Health Plan, Sen. Carl Levin (D-MI) said: "Madam President, I
think we have hit a sensitive nerve this afternoon on this
Federal employees insurance.... It is not just us, it is 9
million Federal employees and their families who have this
insurance. If it is good enough for us, why is it not good enough
for the rest of the people of America? ... The American people
are entitled to an answer. If we voted it in for ourselves and
the 9 million Federal employees and their families, why will we
not provide them the same protection? That is the question they
are asking.... Call up the office of your Member of Congress and
say, `I would like to take a look at that plan that you folks
have provided for Federal employees and yourselves'." Got it?
Robert Moffit is a prominent Washington health policy
analyst and Director of Domestic Policy at the Heritage