Medicare--The 800lb Gorilla in the room

From a federal budget standpoint, there is an 800 lb gorilla in the room. It isn't earmarks, it isn't defense spending, or even social security. It's Medicare. Anyone looking at the pure mechanics of the Medicare problem know that this is the tidal wave that has been sitting off our shores for years, it is coming in. And our judgement cometh right soon...

Let's break it down, and figure out what we can do to solve this growing issue.

What is Medicare?
According to Wikipedia, Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over, or who meet other special criteria. Medicare operates as a single-payer health care system (administered by the Federal Government only) It was originally signed into law on July 30, 1965, by President Lyndon B. Johnson.

How is Medicare Paid For?
Medicare is partially financed by payroll taxes imposed by the FICA and the Self-employment contributions act of 1954. In the case of employees, the tax is equal to 2.9% (1.45% withheld from the worker and a matching 1.45% paid by the employer) of the wages, salaries and other compensation in connection with employment.

Who is eligible?
In general, individuals are eligible for Medicare if:

• they are a U.S. citizen or have been a permanent legal resident for 5 continuous years, and
• they are 65 years or older, or
• they are under 65, disabled and have been receiving either Social Security or the Railroad retirement board disability benefits for at least 24 months, or
• they get continuing dialysis for end stage renal disease or need a kidney transplant, or
• they are eligible for Social Security Disability Insurance and have Amyotrophic Lateral Sclerosis (ALS-Lou Gehrig's disease).

How many people are on Medicare?
In 2007, Medicare provided health care coverage for 43 million Americans. Enrollment is expected to reach 77 million by 2031, when the baby boom generation is fully enrolled

What are the Primary "Parts" of Medicare?
The Medicare program primarily provides for the following:

• Part A (Hospital Insurance)
• Part B (Medical Insurance)
• Part D (comprehensive drug coverage). All Medicare benefits are subject to medical necessity.

How Big is Medicare?
Medicare contracts with regional insurance companies who process over one billion fee-for-service claims per year. As of 2003:

• Medicare accounted for almost 13% of the entire federal budget.
• Based on the CMS projections, 33 cents of every dollar spent on health care in the U.S. is paid by Medicare and Medicaid (including State funding).
• 61 cents of every dollar spent on nursing homes, 47 cents of every dollar received by U.S. hospitals, and 27 cents of every dollar spent on physician services is funded by Medicare or Medicaid

Why should I be concerned about Medicare?
Here's a few reasons:

• Medicare spending is growing steadily in both absolute terms and as a percentage of the federal budget. Total Medicare spending reached $440 billion for fiscal year 2007, or 16 percent of all federal spending. The only larger categories of federal spending are Social Security and defense.
• According to the 2008 report by the board of trustees for Medicare and Social Security, Medicare will spend more than it brings in from taxes this year (2008).
• The Medicare hospital insurance trust fund will become insolvent by 2019
• Spending on Medicare and Medicaid is projected to grow dramatically in coming decades. Rapidly rising medical prices appear a more important cause of projected spending increases.
• The Congressional Budget Office (CBO) has indicated that: "...total federal Medicare and Medicaid outlays will rise from 4 percent of GDP in 2007 to 12 percent in 2050 and 19 percent in 2082—which, as a share of the economy, is roughly equivalent to the total amount that the federal government spends today. The bulk of that projected increase in health care spending reflects higher costs per beneficiary rather than an increase in the number of beneficiaries associated with an aging population."

Now here's the Ugly Truth:

1. We DON'T Have the Plan Funded--Richard W. Fisher, President of the Federal Reserve Bank of Dallas has remarked that in order to "cover the unfunded liability" for the Medicare program today over an infinite time horizon, "you would be stuck with an $85.6 trillion bill" which is "more than six times the annual output of the entire U.S. economy", and noted that "Medicare was a pay-as-you-go program from the very beginning."[27]
The present value of unfunded obligations under all parts of Medicare during FY 2007 over a 75-year forecast horizon is approximately $34.0 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years.[28]

2. The Population is Aging--The fundamental problem is that the ratio of workers paying Medicare taxes to retirees drawing benefits is shrinking at the same time that the price of health care services per person is increasing.[29][30] Currently there are 3.9 workers paying taxes into Medicare for every older American receiving services. By 2030, as the baby boom generation retires, that is projected to drop to 2.4 workers for each beneficiary. Medicare spending is expected to grow by about 7 percent per year for the next 10 years.[31] As a result, the financing of the program is out of actuarial balance, presenting serious challenges in both the short-term and long-term.[24][21]

3. Medicare Fraud and waste--Part of the cost of Medicare is attributable to fraud, which government auditors estimate costs Medicare billions of dollars a year.[32][33] The Government Accountability Office lists Medicare as a "high-risk" government program in need of reform, in part because of its vulnerability to fraud and partly because of its long-term financial problems.[34] A Washington Post story from June of 2008 reported that Medicare fraud is a growing problem. Limited resources mean that fewer than 5% of Medicare claims are audited. The annual cost to taxpayers of Medicare fraud is estimated to be over $60 billion.[35]

4. People paid in will get more than they paid/People paying in today will not--In 2004, Urban Institute economists C. Eugene Steuerle and Adam Carasso created a Web-based Medicare benefits calculator.[36] Using this calculator it is possible to estimate net Medicare benefits (i.e., estimated lifetime Medicare benefits received minus estimated lifetime Medicare taxes paid, expressed in today's dollars) for different types of recipients. In the book, Democrats and Republicans - Rhetoric and Reality, Joseph Fried used the calculator to create graphical depictions of the estimated net benefits of men and women who were at different wage levels, single and married (with stay-at-home spouses), and retiring in different years. No matter what the wage level, marital status, or retirement date, a man or woman can expect to receive benefits that will cost the system far more than the taxes he or she paid into the system.

5. Medicare is not at the top of the priority list...YET--This could be the biggest problem of all. Popular opinion surveys show that the public views Medicare’s problems as serious, but not as urgent as other concerns. In January 2006, the Pew Research Center found 62 percent of the public said addressing Medicare’s financial problems should be a high priority for the government, but that still put it behind other priorities.[41] Surveys suggest that there’s no public consensus behind any specific strategy to keep the program solvent.[42].

WOW. That's enough to spoil my Christmas dinner. So what to do about it?

Possible Solutions

1. Start to work on Medicare Fraud and Waste--This is a $60B issue. A GAO or Audit Firm investigation, and set of controls to prevent further frauds would be a start. It won't solve the problem, but even preventing $10-20B of fraud and waste each year would be a start.

2. Means testing--no one likes this as a possibility. However, a solvent Medicare solution, to start eating away at the potential $34 Trillion liability over the next 75 years will probably mean that some people at the top of the tax brackets will have to look at their current payroll taxes as a sunk cost. It's not a pretty sight, and I don't think it's ideal, but it will probably be part of the solution. The question will be where the line is drawn. Will it be $1 million households, or $150k households?

3. Up the Payroll Tax--this is a realistic solution, but political suicide. On the other hand, come 2012, this may be more of a realistic solution than previously thought. People bemoan Medicare and entitlement programs, until they themselves draw from them. AARP and other similar organizations will become the most powerful lobbies in the nation, and solutions such as a 4-6% payroll tax may not be out of the question.

4. Universal Health Care/Socialized Medicine--If the mountain won't come to Mohammed, let Mohammed go to the Mountain. If we can't fix Medicare for Seniors, perhaps a Universal health plan for all Americans, with a more appropriate tax rate for all, could be better served. The dirty little secret about Medicare is that it is actually more efficiently run than most Private Health plans, since it doesn't have to spend $.15 on the dollar in advertising costs. Can the Medicare Framework handle the larger US population? I am not sure, and it may not be politically viable. On the other hand, by 2012, it could be the only viable solution left.

5. Scrap the entire system--Going in the entirely opposite direction, we could scrap the whole system, and try to figure out a way to provide health care for seniors that doesn't include payroll taxes. This would be entirely unfair to the people who have paid into the system all these years, and the Government doesn't have the dollars to refund the taxpayers for their payments over the past 33 years. But like option #4, there may not be a lot of good choices over the next 10-20 years.

Postscript

In the end, this article is really more of a wake up call. This issue is THE domestic issue for the next 10 years. I am not suggesting it would supersede a terrorist attack, or something of that magnitude. But from a domestic economic standpoint, this is the immovable object. Fix Medicare, and everything else becomes achievable. I am putting this article out there, primarily because I would LOVE to hear people's viewpoints on this, and figure out how we all can get smarter on this issue, and come up with a solution.

Note: It was surprisingly hard to get a good background, and analysis of Medicare. In the end, Wikipedia had to supply most of the baseline background, and all facts that I cite here come from that source (hence the bracketed numbered facts. It's been a while since I had to write a footnote sourcing set of references, so just note here that all facts cited with brackets can be linked back to Wikipedia).