The Financial Status of Medicare

The American Enterprise Institute hosted a panel discussion on Monday concerning the financial status of Medicare and highlighting the Medicare Trustees? Report. Joe Antos of AEI moderated the discussion, which included a Medicare trustee and other experts.

Richard Foster, chief actuary for the Centers for Medicare and Medicaid Services, outlined the Medicare Trustees? Report. The outlook for the Hospital Insurance (HI) trust fund has been well documented, with expenditures surpassing revenues in 2013 and reaching insolvency in 2026, four years earlier than predicted last year. But these dates are based on ?intermediate cost? assumptions. Under ?high-cost? assumptions, the HI trust fund would reach insolvency in 2015.

Referring to the Supplemental Medical Insurance (SMI) trust fund, Foster said, ?Compared to last year, it?s not very pretty.? Despite a 4.8% reduction in provider payments, overall Medicare payments to doctors actually increased 7% last year because of higher volume. Foster said we should expect about a 12% increase in beneficiary premiums and a comparable increase in general revenue financing when SMI refinances for next year. That would bring the Part B monthly premium to about $66, up from $58.70 this year.

Thomas Saving, a Medicare public trustee and professor at Texas A&M University, discussed the effect on the budget if Social Security and Medicare are taken together, without changes to current law. Together, Social Security and Medicare would account for about 16% of GDP by 2075, up from about 7% in 2003. Medicare and Social Security shortfalls together would require nearly 80% of the projected federal income tax revenues in 2075. Saving said it is important to point out that funding shortfalls would have to be covered by general revenue transfers, to the detriment of other programs. If a prescription drug benefit were added to Medicare that covered 25% of drug costs for seniors, Medicare and Social Security shortfalls together would require about 90% of projected federal income tax revenues in 2075. However, if a prescription drug benefit covered 75% of seniors? drug costs as some would advocate, the Medicare and Social Security shortfalls would require 110% of projected tax revenues in 2075. ?The debt will eventually come due,? said Saving.

To describe just how costly a Medicare prescription drug benefit could be, Jagadeesh Gokhale of AEI presented an AEI analysis of Congressional Budget Office (CBO) projections of the long-term cost of two specific proposals congress considered last year. H.R.4954, also known as the House Republican bill that was passed by the House last summer but that died in the Senate, would have had a 75-year cost of about $5.5 trillion and an infinite-horizon cost of about $12 trillion. The Senate Democratic bill, S.2625, would have had a 75-year cost of about $10 trillion and an infinite-horizon cost of about $21 to $24 trillion. Gokhale said these estimates were conservative.

Steve Lieberman of CBO made the point that the projected growth in Medicare of GDP + 1% is more favorable than actual experience and is based on an unrealistic assumption. On a real income basis, Medicare costs grew by GDP + 2.8% between 1970 and 2002.

Len Nichols of the Center for Studying Health System Change said that Medicare is growing at about the same rate as health care spending overall, and that the rate of Medicare growth relative to GDP is actually slowing. He said spending growth per beneficiary has also slowed. Nichols pointed to three possibilities to keep the program solvent: Dedicated tax increases in either the payroll tax or income tax, increased beneficiary cost-sharing, or broader changes to the structure of the program. Nichols counseled against the extremes saying, ?Realism will be required to solve the long-term financial problem.? Instead, Nichols argued for Medicare to become a more powerful purchaser of health services.

Joe Antos of AEI said Medicare has the same problem as the health care system as a whole: The incentives are aligned wrong. In the private health care system, it?s because of the tax incentives for employment-based health insurance; in Medicare, it?s the perverse incentives in the traditional fee-for-service program.

–Joe Moser
Galen Institute

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The American Enterprise Institute hosted a panel discussion on Monday concerning the financial status of Medicare and highlighting the Medicare Trustees? Report. Joe Antos of AEI moderated the discussion, which included a Medicare trustee and other experts.

Richard Foster, chief actuary for the Centers for Medicare and Medicaid Services, outlined the Medicare Trustees? Report. The outlook for the Hospital Insurance (HI) trust fund has been well documented, with expenditures surpassing revenues in 2013 and reaching insolvency in 2026, four years earlier than predicted last year. But these dates are based on ?intermediate cost? assumptions. Under ?high-cost? assumptions, the HI trust fund would reach insolvency in 2015.

Referring to the Supplemental Medical Insurance (SMI) trust fund, Foster said, ?Compared to last year, it?s not very pretty.? Despite a 4.8% reduction in provider payments, overall Medicare payments to doctors actually increased 7% last year because of higher volume. Foster said we should expect about a 12% increase in beneficiary premiums and a comparable increase in general revenue financing when SMI refinances for next year. That would bring the Part B monthly premium to about $66, up from $58.70 this year.

Thomas Saving, a Medicare public trustee and professor at Texas A&M University, discussed the effect on the budget if Social Security and Medicare are taken together, without changes to current law. Together, Social Security and Medicare would account for about 16% of GDP by 2075, up from about 7% in 2003. Medicare and Social Security shortfalls together would require nearly 80% of the projected federal income tax revenues in 2075. Saving said it is important to point out that funding shortfalls would have to be covered by general revenue transfers, to the detriment of other programs. If a prescription drug benefit were added to Medicare that covered 25% of drug costs for seniors, Medicare and Social Security shortfalls together would require about 90% of projected federal income tax revenues in 2075. However, if a prescription drug benefit covered 75% of seniors? drug costs as some would advocate, the Medicare and Social Security shortfalls would require 110% of projected tax revenues in 2075. ?The debt will eventually come due,? said Saving.

To describe just how costly a Medicare prescription drug benefit could be, Jagadeesh Gokhale of AEI presented an AEI analysis of Congressional Budget Office (CBO) projections of the long-term cost of two specific proposals congress considered last year. H.R.4954, also known as the House Republican bill that was passed by the House last summer but that died in the Senate, would have had a 75-year cost of about $5.5 trillion and an infinite-horizon cost of about $12 trillion. The Senate Democratic bill, S.2625, would have had a 75-year cost of about $10 trillion and an infinite-horizon cost of about $21 to $24 trillion. Gokhale said these estimates were conservative.

Steve Lieberman of CBO made the point that the projected growth in Medicare of GDP + 1% is more favorable than actual experience and is based on an unrealistic assumption. On a real income basis, Medicare costs grew by GDP + 2.8% between 1970 and 2002.

Len Nichols of the Center for Studying Health System Change said that Medicare is growing at about the same rate as health care spending overall, and that the rate of Medicare growth relative to GDP is actually slowing. He said spending growth per beneficiary has also slowed. Nichols pointed to three possibilities to keep the program solvent: Dedicated tax increases in either the payroll tax or income tax, increased beneficiary cost-sharing, or broader changes to the structure of the program. Nichols counseled against the extremes saying, ?Realism will be required to solve the long-term financial problem.? Instead, Nichols argued for Medicare to become a more powerful purchaser of health services.

Joe Antos of AEI said Medicare has the same problem as the health care system as a whole: The incentives are aligned wrong. In the private health care system, it?s because of the tax incentives for employment-based health insurance; in Medicare, it?s the perverse incentives in the traditional fee-for-service program.

–Joe Moser
Galen Institute

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About the author