Medicare Devours the Federal Government
(A version of this Health Alert was published by RealClearPolicy.)
Every year, the Medicare Trustees issue a report on the program’s financial status. Reaction to the last few years’ reports has been complacency. Because Medicare’s fiscal problems do not appear to be getting worse, people have the misconception that Medicare’s finances are improving. Nothing could be further from the truth.
Indeed, the Trustees themselves insist that: “Notwithstanding recent favorable developments, current-law projections indicate that Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.”
In 2014, Medicare’s taxes and premiums added up to $342 billion dollars, just 11 percent of federal tax and fee revenue of a little over $3 trillion. However, its spending of $600 billion comprised 17 percent of $3.5 trillion of federal spending. This is just short of defense and security-related spending, which amounted to $615 billion.
Medicare’s finances are unnecessarily confusing because of the artificial distinction between the Hospital Insurance Trust Fund (Part A) and the Supplemental Medical Insurance Trust Fund (Part B, for physician payment, and Part D, for outpatient prescription drugs).
The Hospital Insurance Trust Fund is the most deceptive. This is financed by payroll taxes. For many years, the federal government’s revenue from the payroll tax was more than required to pay hospitals’ claims. The government spent the surplus on other parts of the federal government. When it took a million dollars out of the drawer labelled “Medicare” and transferred it into the one labelled “Navy,” it inserted a one-million dollar Treasury note into the Medicare drawer. Absurdly, the pile of notes resulting from these transfers is called the Medicare Trust Fund.
Suppose Mr. & Mrs. Smith put aside some of their household income for a college fund for their four kids. Then they decide to spend it on a vacation. So, they replace the money with a note stating “the Smith family will pay its kids’ college tuition.” Nobody would consider that an asset. The money is gone.
Remarkably, even with no real money in the Trust Fund, it is going bust. According to the Trustees, “the HI trust fund has not met the Trustees’ formal test of short range financial adequacy since 2003.” By 2030, the Hospital Insurance Trust Fund will be depleted – run down to zero. Since 2008, the payroll taxes have not covered Medicare’s hospital claims, and the chickens are coming home to roost.
And then there is Part B, financed primarily by beneficiaries’ premiums, which pays (among other costs) physicians’ claims. Until this year, payments to physicians were governed by a fantasy formula called the Sustainable Growth Rate (SGR). At least once a year, Congress passed a short-term boost to physicians’ pay. This meant that physicians earned enough to keep seeing Medicare patients, but made the long-term spending projections a laughingstock.
Earlier this year, Congress passed a long-term increase, hiking doctors’ pay for ten years and adding $141 billion to the deficit. But this so-called fix is still unrealistic because it merely kicks the can down the road a decade. According to the Trustees, the bonuses “…… are scheduled to expire in 2025, resulting in a significant one-time payment reduction for most physicians.”
“In addition, the law specifies the physician payment update amounts for all years in the future, and these amounts do not vary based on underlying economic conditions, nor are they expected to keep pace with the average rate of physician cost increases.”
By 2025 at the latest (and perhaps as early as 2018, by my reckoning), organized medicine will once again declare the payment system broken and demand more, deficit-financed, pay hikes.
For this, and other reasons, the report also includes an “illustrative alternative” (that is, “realistic”) scenario, which estimates long-term Medicare spending will be 50 percent higher than the official estimate – 9.1 percent of Gross Domestic Product in 2089, instead of “just” 6.0 percent.
Okay, that is 74 years from now. However, Medicare has been with us for half a century, and its fiscal problems have been recognized for decades. Neither the people nor the politicians have taken the first step to fixing its finances. The complacent response to the latest Trustees’ report suggests its warnings will pass unheeded once again.
Further, if I am remembering correctly, debt that the government owes to itself (e.g., the “trust” funds) are NOT included in the ~$18 trillion “public” debt that many believe is as great a threat to our national security as any foreign antagonist.
This is not correct. About 40% of federal debt is held by government trust funds, the Federal Reserve and other entities. Publicly held debt is currently a bit over $13 billion, not $18 billion. That difference amounts to over 28% of GDP, a significant number.
Would you do me the huge favor, then, of explaining where am I misunderstanding this:
“Today’s Federal Debt is about $18,151,160,625,000.
The amount is the gross federal debt issued by the United States Department of the Treasury since 1790. It doesn’t include state and local debt, and it DOESN’T INCLUDE the so-called unfunded liabilities of entitlement programs like Social Security and Medicare.” (caps added)
http://www.usgovernmentdebt.us/
State and local debt is a separate issue and is tiny as a percentage of GDP. Unfunded liabilities of entitlement programs are also different because the number is influenced by assumed rates of return and the liabilities can also be mitigated by changes in the law to reduce benefits in the future.
The gross federal debt of $18 billion includes the trust fund and Federal Reserve holdings as well as some other entities. Interest credited to that debt is a bookkeeping entry, not actual cash that has to be paid to investors.
State and local governments do not fund Medicare, so are not a topic of this entry.
Doom and gloom for Medicare has been predicted for decades, yet the day of reckoning keeps getting pushed out into the future. Further, it is not the nature of politicians to leave government programs alone, especially one as large as Medicare, so we can anticipate changes that will alter any longer term predictions.
Rep. Kevin Brady has now announced his intent to formalize premium support in legislation to be introduced in the House – aiming for 2017 – though polls suggest that converting Medicare to premium support and privatizing it are not popular policies. But that would “save” Medicare by shifting more of the costs to the beneficiaries – likely the reason that the concept has not gained traction.
A more popular concept is improved Medicare for all, as introduced by Rep. John Conyers (and McDermott and Sanders). It would save Medicare by combining our entire national health expenditures into a single universal risk pool, spreading the risk, while controlling spending through administrative efficiencies and public administration. That would reduce the rate of health spending increases down to levels more typical of OECD nations. But the politics are not in alignment. If they had been we would have a single payer system instead of the Affordable Care Act.
At any rate, because of our dynamic political processes, Medicare won’t go broke. Rather the question is how intense and rapid will be the transformations that take place within Medicare or its successor.
You suggest that “spreading the risk” would somehow have a beneficial impact on Medicare spending. That’s first cousin to the laughable notion that spreading the risk under Obamacare would somehow make health care “affordable”.
It’s also first cousin to the laughable notion that the federales can somehow be trusted to produce administrative efficiencies in Medicare while at the same time “improving Medicare”.
The country desperately needs physician leadership in health policy. Sadly PNHP does not provide such leadership.
The portion of the population qualified for Medicare has comparatively high health care costs. Including them in a universal risk pool would dilute the costs for the Medicare population, of course raising the costs for healthier individuals. Instead of being concerned about future costs of Medicare, our concern would be over the rate on growth of our national health expenditures. Medicare, as structured, would not be a source of savings. But Medicare that is expanded to cover everyone and then is converted into a well designed single payer program – an improved Medicare for all – would slow the growth rate of health care costs, improving affordability.
The administrative efficiencies in Medicare have been well documented. See:
http://jhppl.dukejournals.org/content/early/2013/02/11/03616878-2079523.full.pdf+html
PNHP is meticulous about basing our statements on facts. Doesn’t that show leadership?
Because for years I have advocated for physician leadership in health policy, I am truly sorry to say I think PNHP does not offer that leadership. Leadership requires figuring out where we should be heading. I think PNHPs agenda is 180 degrees wrong.
Getting facts, as difficult as that can be, is not leadership. As Mark Twain famously observed, “Get the facts first, you can distort them later”.
Which I think is part of PNHPs method. PNHP pounds its own opinions and agenda just like any other special-interest lobbying group.
Example: it’s a leap of faith, not factual, to believe Medicare – as loosely-managed and costly as it is covering 50 millon people – would somehow become “well designed”, cost-efficient and able to “slow the growth rate of health care” if only it were expanded to cover 325 million people. And still designed and managed by the same Congress and bureaucrats, too! Those are not fact-based beliefs. They fly in the face of Medicare’s factual history.
Spreading Medicare costs across the general population would merely obscure ever-increasing Medicare costs and encourage cuts in other areas that might actually be life-changing. It sounds like a scaled-up version of the usual government shell game. But I’m sure it would give politicians more room to cater to the senior lobby.
As to the well-documented administrative efficiencies of Medicare, don’t they include things like using services of other government agencies such as the IRS, and then pretending those services were obtained at zero cost?
Search on “Medicare efficiency myth” to find articles by Avik Roy and others.
Plus, the costs are already largely “spread” over the general population: Clearly so for Parts B and D, and deviously so in the case of Part A.
Many of these other expenses are included in the calculations of Medicare’s administrative costs. See Table III.B1 on page 45 of the Medicare Trustees report:
https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2015.pdf
Thank you, Dr. McCanne. I approve of premium support for Medicare, but wonder why this is a priority over the repeal and replace of Obamacare for House Republicans?
I’m always surprised when someone who has witnessed the disgraceful, incompetent,screwed up implementation of Obamacare thinks that giving all of healthcare programs to the Federal government to run is a good idea. It isn’t. What we have to do is re-privatize as rapidly as possible before Medicare reinforces the Craziness of Medicaid and just drives the rest of the doctors out of their professions. The very story in this blog about the mess created by how Medicare is funded is a gigantic illustration of how our form of government, formed in the early years of our country, does not serve us well in the 21st Century. Especially, our lawmakers are ignorant, corrupt and just wholly oriented to the past, and next to incapable of fitting policy to the future.
I would not trust theme with 20% of the economy, one that depends on knowing what you’re doing.
Commentators should promote step by step renewal.
Wanda Jones
San Francisco
Medicare is broke
The taxes including FICA taxes go to the Treasury’s general fund
To replace the lost so called dedicated taxes Treasuries are issued
However the Treasuries are an asset to the Medicare trust fund and a liability to the Treasury
These figures net out to zero
So there are zero dollars in the Medicare trust fund
This is proved because every so called dollar withdrawn from the trust fund adds to the federal debt
It comprises intergovernmental debt which is part of the $18 trillion of debt
Don Levit
Why talk about risk pooling when the government insurer is a sham
with zero dollars in reserve to pay claims
Don Levit
Sham? Zero dollars in reserve to pay claims? Social Security beneficiaries receive their checks each month and have been for eighty years. Medicare beneficiaries have their medical bills paid for them, as they have been for fifty years. Since they’ve been able to fund these with “zero dollars in reserve,” it seems like we should establish even more government programs, like maybe a single payer national health program.
I did not say benefits were not paid
Every dollar paid increases our debt
Medicare is no different from a budget perspective than any pay as you go expense like battleships
Sure the government can spend taxes on battleships but because battleships are not prefunded it takes extra debt to pay for extra battleships
Don Levit
The only way to save the Medicare program without cutting benefits or increasing premiums and taxes is to completely privatize Medicare through the existing Medicare Advantage programs and force all Medicare beneficiaries to enroll in a private MA Plan in order to receive benefits. In turn, all private MA Plans should be financially encouraged by CMS to partner with local IPA’s who provide Care Coordination, Physician Network Management, Utilization Management and Case and Disease Management services. All profits or savings that typically result from these local partnering (risk-sharing) arrangements should then be shared by the Health Plans with the Medicare Trust Fund. Various methods are available for this. The ACO animal created by the ACA already accomplishes this shared savings model. This will actually reduce the ongoing cost to the Trust Fund on a Per Member Per Month (PMPM) basis and this will counter the increased cost generated by the growing Medicare population.
I’m currently writing about ways to encourage providers to boost the efficiency of Medicare. I will pick your brain when I get further along.
Great Devon. Looking forward to seeing your work.
Single payer advocates keep pounding away at the potential for large administrative cost savings. They conveniently ignore fraud which is widely perceived to be rampant, though impossible to quantify with precision, in both Medicare and Medicaid. Fraud is especially prevalent in areas including nursing homes, home healthcare, physical therapy and durable medical equipment. If Medicare spent more on administrative expenses such as for data analytics, there might be a lot less fraud. Private insurance is far better at mitigating fraud than either Medicare or Medicaid are.
Medicare also administers (dictates) healthcare prices which vary by region based on medical input costs and even within regions by paying more to teaching hospitals than to community hospitals. Medicare underpays for many services, tests and procedures and underpays for others. It can’t possibly get every price right in every region as well as a more market based system could. Moreover, it’s a cost based system that pays for volume instead of value.
A single payer system would also lock in all of the rigidities of the current system according to even liberals like Ezekiel Emanuel and others. There would likely be a significant adverse impact on innovation as well.
I think we need significant improvement in areas like price and quality transparency so patients can make better and more informed judgments about where to seek care. We also need better care coordination and case management especially for the sickest 1% of patients who account of 20% of healthcare costs in any given year. Sensible tort reform including safe harbor protection from failure to diagnose lawsuits for doctors who follow evidence based guidelines and protocols where they exist could help to reduce expensive defensive medicine which is a much more significant problem in the U.S. than in other developed countries. Finally, we need a better approach to end of life care to reduce futile and marginally useful expensive care. This is also a bigger issue in the U.S. than elsewhere.
Finally, a single payer system would be easiest to implement in Vermont with its relatively small population and handful of hospitals but even they scrapped the idea because it turned out to be far more expensive than they thought it would be. We need more market friendly solutions to reduce the growth rate of healthcare costs.
My favorite source for challenging PNHP’s assertions of administrative cost savings is Ben Zycher, “Comparing Public and Private Health Insurance: Would A Single-Payer System Save Enough to Cover the Uninsured?” Medical Progress Report No. 5. Manhattan Institute for Policy Research (October 2007). Available online.
We certainly have problems with Zycher’s report. My response at that time is available at the following link (please ignore my intemperate language but look at the substance of my comments):
http://www.pnhp.org/news/2007/october/zychers_dishonest_r.php
Entitlement programs like Social Security’s future benefits – not including the current year or the trust fund balances – are not part of the debt because the government does not consider those future payments as a liability
While taxpayers must pay in to the fund the government does not guarantee benefits beyond the current year for the program can be changed – including termination – once a year
Don Levit
You have the kernel of a solution. Congratulations. Let’s all promote it and provide draft legislation.
Wanda Jones
San Francisco
For Social Security, the second best solutions may be to allow it to go broke and future benefits to be reduced by 30%. At least at that point it will have become a true pay-as-you-go system. For younger taxpayers who have many years to contribute before collecting anything, avoiding a payroll tax hike should be well worth the lower benefit.
The only thing better is to be proactive and begin trimming benefits now for a softer landing. But that’s just me. The current system pits compassion against fairness, and I would like to an attempt at fairness. There’s already a separate means-tested system for the truly poor.
Medicare is a tougher problem because all of the parties involved. Recipients never see the money– providers do. And reducing reimbursements doesn’t seem to work. So I don’t know what real spending cuts would look like.
“…would like to see more of an attempt at fairness.”
Let me make a general comment.
When America had a baby boom, most cities saw increases in property taxes to pay for schools. The need for new revenue was obvious to all, or at least to a majority of voters.
Now we are entering to some extent a senior boom as we not only have more people turning age 65, but also longer life spans for some of the very old.
Would it not be kind of logical to raise the Medicare tax rate on all incomes (not just those over $250,000) That tax rate has been a total of 2.9 per cent for several decades, I believe.
I just finished reading a history of FDR’s presidency. When he entered office, veteran’s pensions constituted 25% of the federal budget. That is not terribly relevant today, but I bring it up to suggest that raising taxes to support the old need not destroy us fiscally.
It could be that the taxes to sustain the current version of Medicare are much larger than a few per cent of payroll. I have not been convinced of this, but I would listen.
We also have to go beyond payroll taxes. The number of workers is growing less fast than the senior per cent of the population, and salaries in general are not growing fast at all.
Bob –
A couple of years ago, the Medicare portion of the payroll tax was increased by 0.9% for both wage income above $250K and investment income above that level as well. Back around 1993 or 1994, the Medicare portion of FICA taxes was applied to all wages whereas before it was capped at the same wage level that the social security portion of FICA taxes applied to. If you want to raise the tax rate on the middle class from 2.9% to the 3.8% that applies to higher income people and / or raise it beyond 3.8% for everyone, I think it would be a mighty tough sell.
The fact that the retirement of the baby boom generation is increasing the number of Medicare beneficiaries by a faster percentage than the overall population is growing does not necessarily mean that Medicare spending will accelerate. Perhaps seniors turning 65 today are significantly healthier today than their counterparts of 20, 30 or 40 years ago were and they may not start to incur significant healthcare costs until a much later age. Perhaps most of the healthcare costs that seniors do incur will be concentrated more toward the end of life because the number of years of healthy life increases. Finally, perhaps seniors in the future will make more sensible choices about end of life care so there is much less money spent on futile or marginally useful care than in the past. Maybe we’ll even get sensible tort reform that reduces defensive medicine.
The point is that there are lots of ways that healthcare spending could potentially slow. I don’t think we need to raise payroll taxes anytime soon though we may have to restructure Part B and Part D to increase beneficiary premiums enough to cover 30% or even 35% of the total cost of those programs instead of 25% that premiums cover now.
Barry, your points are well taken. However I was thinking that if a huge percentage of actual voters was over 65 or getting close to 65 (as happens right now in non-Presidential years), then raising payroll taxes by a per cent or two would not be a ‘hard sell’ at all.
I suppose then that my real complaint is with the dialogue about taxes in American politics in general.
There seems to be little or no rational discussion in the sense of “We want this program, this program costs X, so we need to raise X in revenue.”
(at least not on a national level. Local school districts talk in this language all the time.)
This may not be a good comparison, but after the fall of the Berlin Wall, the German Bundestag met and in short order they instituted a tax increase to pay for the integration of East Germany.
Bob, you suggest that “raising payroll taxes by a per cent or two would not be a ‘hard sell’ at all”
Would clarify what you mean by “a percent or two”.
As Barry Carol notes, the present middle-class Medicare tax rate is 2.9%. Are you suggesting that rate be raised to 2.96% (that is, the present rate plus 2%)?
Or are you suggesting the rate of 2.9% be raised to 4.9% (that is, the present rate plus 200 basis points)?
If the latter, that of course would not be increasing the tax by “a percent or two” but by nearly 70%. I suspect that is why Barry thinks it would be a hard sell – and if that is in fact your proposal, I would agree with him.
Are you comparing our seniors to citizens of communist-occupied Germany? Hmm…..
These comments are really encouraging regarding the containment of health care costs
Regarding the funding of those costs there is no dedicated funding of Medicare as the FICA taxes go into the Treasury’s general fund just like income taxes
Increasing the Medicare tax merely provides more dollars for general government spending which Medicare is a part of
I guess one could say that Medicare receives its pro rata share of those dollars
Don Levit
I have not researched the most recent numbers, but I recall reading a couple of years ago that the number of Social Security Disability Insurance (SSDI) beneficiaries has increased by some double digit percentage under this administration. Absent some verifiable epidemic of physical/mental disease that might cause such a thing, one might surmise that some of these new beneficiaries are making fraudulent claims, claiming SSDI as they fall off unemployment, or some such. And remember that few SSDI beneficiaries ever exit the program.
All of which is a lead-in to a comment that we also need to recall that every SSDI beneficiary, no matter his age, is also eligible for Medicare after a 24-month qualifying period. The first 24 months of disability benefit entitlement is the waiting period for Medicare coverage.
I imagine that this SSDI increase may also put unexpected pressure on Medicare costs.
Don –
I’ll offer a couple of thoughts about the Medicare and social security trust funds. First, when Alan Greenspan was Federal Reserve Chairman, I remember at least once when he was asked point blank by a Congressman during Fed testimony whether or not the trust fund balances were “real assets.” Greenspan’s response was that they were which means the long running promise to pay benefits creates a strong moral obligation to convert trust fund balances to actual cash as needed by selling regular Treasury bonds, notes and bills to investors both foreign and domestic to redeem the trust fund balances in order to pay benefits.
Second, there is an explicit provision in the law governing both Medicare and social security which states that benefits can only be paid to the extent that there are balances in the trust funds. What this means as a practical matter is that once the trust fund balances reach zero, current year benefits cannot exceed current year dedicated payroll taxes unless the law is explicitly changed to tap general revenue to the extent needed to pay promised benefits.
A good part of the longstanding political support for both social security and Medicare stems from the fact that taxpayers believe they paid for them over the course of their working lives through the FICA taxes deducted from their check each payday. To tamper with that in a significant way could significantly erode that political support going forward.
Significantly increasing the tax rate in either program would be burdensome for the middle class which has already faced years of wage stagnation. Adjusting benefits over the long term with an adequate lead time and phase-in period is probably the most practical way to restore balance. For the Medicare program, efforts to reduce the long term healthcare cost growth rate would be the most preferred strategy in my opinion.
The notion of holding a politician to a “moral obligation” is quite a stretch, I’d say. Plane ticket to Athens, anyone?
Barry
The strong moral obligation to convert trust fund numbers to cash thru redeeming Treasuries increases the federal debt for every dollar redeemed
Paying for Medicare is no different than paying for any pay as you go program
The public needs to know the trust fund and other trust funds are accounting mechanisms
They are notional accounts which are not prefunded
In practice the dollars dedicated to Medicare have been spent on General appropriations
A moral obligation has nothing to do with future benefits which are not considered liabilities
If an item is not a liability how strong is the moral obligation to pay for these future benefits?
Don Levit
Don –
Of course converting trust fund balances to cash by selling regular Treasury securities increases the debt. From a taxpayer and general economic policy standpoint, the debt that matters is the debt in the hands of outside investors on which the Treasury must pay interest in actual cash (electronic payments in most cases). Interest paid on the federal debt in any given year, currently in the $20 billion per month range, I think, is an important component of total federal spending. Total federal spending is currently averaging about $300 billion per month or $3.6 trillion per year..
The annual deficit is best evaluated as a percentage of GDP. If the deficit as a percentage of GDP for a given year exceeds nominal dollar GDP growth for that year, it means total federal debt outstanding held by the public will increase as a percentage of GDP. If the current year deficit is a lower percentage of GDP than the nominal dollar growth in GDP that year, then total outstanding debt will shrink as a percentage of the economy.
Finally, total debt owned by the public as a percentage of GDP is an important metric to monitor because it speaks generally to our ability to service it. At the end of World War II, for example, the federal debt peaked at 122% of GDP virtually all of which was held by the public as opposed to government trust funds. The current federal debt held by public investors is about $13.5 trillion of 76% of GDP.
That’s a very manageable number though I personally would like to see it lower – certainly below 60% and ideally below 50% because that would give us plenty of reserve firepower to respond to future crises. Very high levels of federal debt increase politicians’ incentive to create inflation which will significantly and pretty quickly reduce the value of the outstanding debt in real terms. Investors who bought the bonds expecting a fair inflation adjusted rate of return will not like that and it could adversely affect their willingness to buy our debt securities in the future. That’s one of numerous reasons why prudent fiscal management is a good thing.
You are alluding to Ricardian equivalency, which is indisputable in its arithmetic. If The government issues debt to fund itself and Americans buy the debt then the government will collect the taxes from our coupon income down the road.
Nevertheless, William Niskanen diagnosed that such financing leads to big government, as citizens are using their credit card instead of paying cash.
Note to John, then Barry:
I am talking about full percentage points increases in the payroll tax, say from 2.9 to 3.9 or 4.9%.
Whether one calls that a one/two percent increase or a 33% increase is somewhat a question of political rhetoric.
Not a small point, but I am not going to debate what is the right definition at this point.
I would not agree with Barry’s comment that such an increase would cause hardship to the middle class.
Let’s posit a middle class taxpayer, age 45, who makes $50,000 a year.
A one percent increase in the payroll tax is $500 or about $40 a month.
In exchange for $40 a month over the next 20 years, this taxpayer can be more confident that he will have nearly-free health insurance from age 65 onwards.
I have sold retirement annuities, and believe me, if I could hypothetically sell such an annuity, people would buy it eagerly. It is a great deal, not a hardship.
“Whether one calls that a one/two percent increase or a 33% increase is somewhat a question of political rhetoric. Not a small point, but I am not going to debate what is the right definition at this point.”
Really, Bob?
I think you’re mistaken, and not just about arithmetic. It’s a smart move on your part to assert it, and to avoid debating it,
My opinion? Your idea is a political non-starter of such magnitude that it would likely end your (up to now) promising political career.
What amounts to two percent of GDP is not a trivial amount. And as a percentage of an individual’s disposable income it’s much more than 2 percent.
You would also need considerable faith in Washington to deliver on the promise of nearly free health insurance several decades down the road. You’re proposing a sure 2 percent today for a not-so-sure benefit later. I’d be more inclined to wait and see what happens when the trust fund is exhausted. Maybe the senior lobby will be powerful enough by then to force Congress to make up the difference out of the general fund.
And even if it were a good deal for a majority of today’s voters, this simply means that someone else is getting a not-so-good deal. For an entire demographic to expect to get back more than it puts in, someone– presumably the next generation– has to get stuck paying the difference. Which is the original LBJ scam in a nutshell, except that there are fewer people to stick it to than there were 50 years ago.
(relatively fewer, of course).
Bart, you are correct that younger workers are basically paying for the relatively gold-plated medical benefits received by senior citizens.
Let me bring up a second point however.
The young worker pays (effectively) 2.9% in payroll taxes, and another 5% or so in income taxes to cover Medicare shortfalls in Plans A and B.
(senior citizens pay income taxes too, so some of this burden is shared).
Anyways, my second point is that this expenditure by younger workers is not all money down the drain.
Younger workers have more money to buy houses and cars precisely because the government is protecting their parents.
I am a baby boomer, very middle class. I cannot think of one acquaintance who has had to support his parents in any significant way. This was not true before Medicare.
My own father had to postpone buying a house in the 1950’s because he was paying some medical bills for his father.
In addition, because seniors largely do not have to worry about medical bills (except for long term care), this means that seniors have more money to spend on domestic travel, restaurants, home improvements, et al. This spending employs younger workers, not to mention the millions of jobs in health care itself that are held by younger workers.
I do not have the time or the academic skills to determine whether all these effects balance out. But I would suggest that these intergenerational transfers might go both ways.
“relatively gold-plated medical benefits received by senior citizens”
It’s been widely reported that in 2015 Medicare Advantage enrollment is 31% of the Medicare-eligible population, and that Medicare Supplement enrollment accounts for 21% more. In other words, more than half our senior population has figured out that Medicare A plus Medicar B do not provide adequate medical insurance, and are able to purchase additional coverage at their own expense.
Remember, Bob, that number includes you. You have stated on this site that you have Medicare Advantage. It seems Medicare is not sufficiently gold-plated for you. That’s fine with me, and you certainly have a lot of company, me ‘frinstance. At the same time, your own Medicare Advantage enrollment does cast doubt on your statement that Medicare is “relatively gold-plated” as you do not seem to believe that yourself.
Bob –
I don’t think Medicare benefits are as gold plated as you suggest. There is a deductible of $1,200 or so for each hospitalization. Medicare Part B has a modest deductible but 20% coinsurance with no out-of-pocket maximum limit. Part D has a $310 deductible and 25% cost sharing, then the donut hole where the patient pays the entire cost and finally, the catastrophic coverage zone where coinsurance drops to 5% of the cost which can still be a lot for certain very expensive specialty drugs. I read not too long ago that the actuarial rating for a standard Medicare policy is only 56%. Under the ACA, the lowest cost Bronze level plans have a 60% actuarial rating.
While both social security and Medicare do help to support our parents in their old age, I think you grossly underestimate the extent to which family members provide care for elderly parents and / or disabled children over 18. The economic value of this care is estimated to be north of $400 billion per year probably based on an hourly rate of $20 that a home health aide would likely cost. This is why proposals to have Medicare cover long term custodial care would be backbreaking for taxpayers. People would come out of the woodwork by the millions to claims benefits. You can find more details about this issue here:
https://caregiver.org/selected-caregiver-statistics
Medicare costs about $110 a month for Part B (for the vast majority of seniors), and a Plan F Medigap policy (which pays about 98% of all other medical costs) will run
about $240 per person in most states. Part D drug plans run from $15 to $30 a month in general.
Whereas an individual in any state from ages 55 to 65 cannot even buy a policy for $380 a month. I sell policies on and off the ACA exchanges, so this is as they say current testimony.
Also I do not know of any corporate group policies that run $380 a month or even close.
This is why I call Medicare gold-plated.
But let’s move on, I have asserted this point before.
Barry makes a good point about custodial care that is provided for elderly parents. However I think that younger workers also provided such care before Medicare, AND they had to help pay medical bills for their parents.
So the overall burden is less today.
By “gold-plated” you mean “taxpayer-subsidized” as I’m sure you know.
Bob –
Back in the pre-Medicare days, life expectancy was significantly shorter than it is today, especially for those in the upper half of the income distribution. Medical costs were far lower because there wasn’t nearly as much that medicine could do for us. Most of the expensive wonder drugs and medical devices on the market today didn’t exist then. Also, the cost of paying for the kids’ college education, if they went to college, was also far less onerous than today. When I graduated from University of Pennsylvania in 1967, my entire four years including tuition, room, board, books, and miscellaneous expenses cost $14,000. When my son graduated from the same school in 1999, it was $140,000 and today’s it’s around $250,000. Meanwhile, the CPI increased “only” 6-7 times during that period.
As for the cost of Medicare, I think we should more fully explore strategies to cut the growth rate in healthcare costs before we resort to higher taxes to shore up the Part A trust fund. The long term secular trend is away from hospital based care in any case. If I’m going to pay higher taxes, which I’m already doing under the ACA, I would rather pay them to help take care of the uninsured including expanding Medicaid eligibility up to 200% of the FPL as John Fembup proposed on another thread and eliminating the 400% of FPL income ceiling for subsidy eligibility to buy a policy on one of the exchanges.
Agreed, however live expectancy at age 65 (Medicare eligibility) has not grown as much. Between 1950 and 2013, life expectancy at birth (U.S.) increased from 68.2 years to 78.8 years, an increase of 10.6 years. During the same period, life expectancy at age 65 increased from 13.9 years to 19.3 years, an increase of 5.4 years (from 78.9 years of age to 84.3.)
Pending something dramatic in medical innovation, I think most experts believe we are bumping up against our natural limit.
Is it really a “point” to assert Medicare is relatively gold-plated because its highly-subsidized net premium for seniors is less than private insurance premium for people not even eligible for Medicare? Anyway, are you speaking of coverage, cost of benefits, or premiums? Who can tell?
“But let’s move on, I have asserted this point before”
In this case, you assert Medicare is relatively gold-plated, but it’s questionable whether you believe that yourself. If otherwise, you would be satisfied with Medicare. Instead you choose to purchase Medicare Advantage. That seems an awkward position to take, for a senior who sells medical insurance to other seniors.
Awkward. That’s all.
It makers perfect sense, because nobody sells traditional Medicare to seniors. If I were buying an MA plan I’d want the seller in MA too. (Are commissions higher on Medigap or Medicare Advantage?)
I am astounded that no one, including Bob, has yet explained that Medicare Advantage (MA)is indeed “Gold plated” as compared to traditional unmanaged Medicare and commercial insurance plans. I agree that traditional Medicare is NOT gold plated at all. Bob has presumably chosen an MA Plan because it offers far better benefits and much lower Part B and Part A cost than traditional Medicare. Most MA Plans also now offer robust physician and Hospital networks as well. This is why MA enjoys an ever increasing market penetration year after year – even with the Obama administration attacking it year after year! MA penetration is now 32% (it was only 22% when Obama took office in 2009) and I predict that it will be over 35% by January 2016. Why?… because MA Plans have discovered that they can improve access to care and quality of care (thus improving their market penetration) for their beneficiaries through partnering with local Independent Practice Associations (IPA’s). IOW’s, the MA Plan’s have learned that they can grow their business and profits through local risk-based partnering with organized physician-based network management and care coordination companies (typically IPA’s).
I totally agree with Barry Carol about the lack of any current need to raise the Medicare tax to fund the Medicare program. The growth rate in Medicare expenditures has been close to zero for several years in a row and the growth rate will continue to slow on a Per Member Per Month (PMPM) basis as a result of the local care coordination efforts now being made across the nation to improve patient behavior and improve population health. I predict that the continued improvements in population health and in more rational patient behavior across the country combined with a pro-growth Administration in 2016-2020 will actually lower Healthcare expenditures as a percent of GDP to around 50% and this will save the Medicare program. However, we are over bedded in most parts of the country and many hospitals will suffer as a result because promoting more rational behavior in our Medicare beneficiaries includes much less utilization of hospital ER’s. The current trend of hospital expansion is being fueled by low interest rates and aggressive promotion of hospital based ERs. This expansion will stop and will fail from its own weight very soon and hospital closures and consolidation will be the next wave. This will also actually improve population health and significantly lower cost.
Even if Medicare’s cost per person is held flat, as Barry and Larry suggest, the number of persons on Medicare is going to climb dramatically in the next 15 years. The rate of persons turning 65 each year is much higher than the rate of seniors who die.
My only point is sheer demographics might call for higher taxes. If 75 million seniors and disabled persons are on Medicare in 2030, that is a huge “chunk of change” to come up with.
Paul Ryan’s defined-contribution voucher program for Medicare is one potential solution. Ryan is not a saint, but I believe he has looked carefully at the numbers. If we do nothing, I think we will need higher taxes.