President Johnson signed Medicare legislation in July 1965. By 2028 the Medicare program will be out of money and only able to pay for 87% of what it covers today falling to 79% by 2040. Unlike Social Security fixing Medicare is not easy.
But, let me allay any fears you might have because on page 48 of the Medicare Trustee’s 2016 Report it states, “The Trustees project that both the Part B and Part D accounts of the SMI trust fund will remain in financial balance for all future years because beneficiary premiums and general revenue transfers will be set at a level to meet expected costs each year.” BALONEY! Even with substantive changes, we still can’t fully fund the program.
We are currently spending $12,500 a year per Medicare recipient in total. That’s the key thing to remember i.e. in total. The Government reports funding in a disaggregated manner that enables them to make the statement quoted above. But in the aggregate Premiums only pay for 13% of the total cost. Payroll taxes account for 38%, but the largest amount, 41%, comes from income taxes and other revenues together referred to as the general revenue of the Federal Government! The remaining 8% comes from a variety of incidental revenue sources. (Data Source: 2016 Medicare Trustee Report)
What the Trustees really are saying is, “don’t worry, be happy;” we’re just going to keep on taking on more debt and raising taxes to pay for all this. That is bad government!
Using the Trustee report for 2015, $273 billion came from general revenue transfers, not from premiums or payroll taxes! That is the only way we can operate an insurance program that is not properly funded. Despite what the Trustees say, this is not sustainable and they admit that when they tell us they are running out of money. In point of fact, they are talking out of both sides of their mouth.
For Medicare to operate without using general revenue transfers we must find $273 billion right now and then increase premiums and payroll taxes every year consistent with future Medicare spending increases. Alternatively we could also increase the age before individuals become Medicare eligible and/or drastically reduce benefits.
Regardless of what we do it is going to be painful for everyone. That is what the Trustees are not telling us. The only good news is that we could, potentially, reduce the annual Federal deficit materially if we reduce Medicare’s reliance on general revenue transfers and we don’t let the President or Congress spend the money we save on other things!
Importantly, all of my numbers to follow are estimates. There are all kinds of ideas for how to improve Medicare funding but very few actually have financial outcomes assigned to them. We are going to do that.
Our first few steps are painless. Big Pharma got legislation passed that does not allow Medicare to bid out drug costs. That needs to be repealed immediately! The VA bids out their drug plan and it saves 20% compared to Medicare. That’s $15 billion a year and it’s a have to do! (The Trustee Report breaks out expenses for every category so this calculation is likely accurate)
Second, Medicare fraud is estimated at somewhere between 3 and 10% by the FBI. The Congressional Budget Office says, however, that we can’t really measure fraud. BALONEY! Imagine a bank saying it had no idea what their fraud losses were. No one would accept that and we should not either. We need proper enforcement! At the midpoint fraud represents roughly $40 billion a year! We have to cut that in half for starters and then more from there. Thus we’ll use $20 billion as our savings and that gets us to $35 billion.
From here on, it becomes much more difficult. As with Social Security, the centrist is opposed to reducing benefits. Medicare has issues but in combination with Medigap the consumer can be certain that their health care costs will be contained. Additionally the program has contained cost increases better than the market in general. While physician participation is an issue in some areas in most States the majority of doctors and hospitals continue to accept Medicare. Thus, what it does for people is a good thing and we should not be reducing those benefits.
I am also opposed to increasing the age for Medicare for one very important reason. Too many retirees cannot afford market rate insurance once they retire. A 2012 Kaiser Foundation study showed that half of Medicare beneficiaries only earned $22,500 a year. Funneling them to Obama Care simply means we hide the subsidies they would receive somewhere else in the budget. We need to understand rather than obfuscate our costs so that we can deal with them.
That leaves us with funding this program the way any health insurance program is funded through premiums which in this case includes payroll taxes. That is really the only way we can insure that the program is on solid ground today and into the future. To do that, we need to find $238 billion a year to break even.
The current payroll tax is 2.9%, paid 50 % each by employers and employees. We generated $241 billion in revenue in 2015 from that tax. Thus, it would require doubling the payroll tax to fully resolve the problem. Ouch!
Premiums only accounted for $85 billion in 2015. They would have to increase 4 fold to fully fund the shortfall. Medicare would become unaffordable for at least half of all seniors at that point.
Nevertheless, it is clear that both must rise in some proportion that is manageable for everyone. Increasing the payroll tax rate to 3.9% (Split 50/50 employee/employer) would generate about $80 billion in revenue. (This number is pretty accurate using current revenues at 2.9% as the base) Raising premiums on average for Medicare recipients by $100 a month and adding a $500 annual deductible would raise another $70 billion. (This number is an estimate. It assumes all will pay but the amount would be graduated by income so that those with higher incomes pay somewhat more than those with less)
These increases will seem modest to some and egregious to others but even with that we are still $90 billion short of properly funding Medicare. That is, we still need $90 billion in general revenue transfers to fully fund the program. That’s a lot!
But by taking these actions it would reduce the Federal deficit by 34% for 2016 while resolve 66% of the Medicare funding problem at the same time. It ‘ain’t’ perfect; but it is a damn sight better than where we are today. Equally important, it would give us a substantial period of time to address overall health care costs. That is necessary for our society as a whole and would lessen the costs of Medicare as well.
But, the longer we wait to act, the deeper the problem becomes. Congress is certainly not acting. They are afraid to raise taxes or premiums for fear of not being reelected. The candidates for President are behaving similarly. Everyone is just waiting for a crisis to act. That is neither leadership nor good government!
So the Centrist urges you to speak up! If not for your own self, do it for your children. We all get old eventually!