Is Medicare Bankrupt?

Well, if you know people on Medicare, the answer is obviously no. The government is still picking up the tab of at least a majority of their health care day in and day out. From what I hear from doctor friends, Medicare even pays more promptly than private insurance. Still, we’ve been hearing the “Medicare is bankrupt” canard on cable and reading it on protesting signs in town halls all summer. I’m not sure I understand the through-line of the argument, but my guess is that if Medicare is having financial difficulties, it proves we shouldn’t rely on government to solve our health care dilemma and should instead look to salvation from the free market. Except all available data suggests the single best thing we can do for Medicare is not to turn Medicare over to the free market. We tried that. It made things worse.

Call me old-fashioned, but I define bankruptcy as being insolvent -- your debts exceed your assets to such an extent that you can never pay them. That’s not the case this year for Medicare, nor the next, nor the next. Based on the actuarial projections of the Medicare Trust Fund, which is tasked with annually reporting to Congress on how the bottom line looks, the point where Medicare will pay out more than it takes in -- even by a penny -- won’t occur until somewhere between 2014 to 2028. But that presumes no changes in how Medicare income or spending. Either could be adjusted well before that point. Both have been adjusted at various times in the past well before the point of insolvency. Put another way, the Department of Defense budget is raised every year, usually in lieu of asking it to cut its budget substantially, but when’s the last time someone said the DOD was bankrupt?

But why is Medicare’s current financing structure insufficient in perpetuity? Kaiser Family Foundation has an excellent primer on this topic, based on the Medicare Trustee Report, the Congressional Budget Office, and the reports of the Medicare Payment Advisory Committee, going back for years. The reasons why are pretty obvious. None of them have to do with the bugbear of government incompetency.

The major reason is that health care costs have gone up for all payers, public and private, and dramatically so. Since 1970, health care costs have gone up for Medicare by 8.5% annually – but for private insurance, it’s 9.7%. Unlike private insurance, Medicare doesn’t have the option of pricing its product out of reach of new beneficiaries, dropping coverage on existing beneficiaries, or finding reasons not to accept new beneficiaries who look like they might have future health problems. Medicare has a lot of trouble controlling health care costs, and that’s largely driven by geographic variance in payments to doctors and physicians and the perverse incentives of fee-for-service payment, which incentivizes more care instead of better care. Guess what? Private insurance has the exact same problems. (Hey pot, it’s the kettle – you’re black!)

Medicare is also growing pretty quickly thanks to the baby boomers -- about 587,000 per year. The number of people with employer-based insurance has been on a slow but steady decline.

Luckily, we’ve known about this future problem for a while, and we were, er, lucky enough to have champions of the free market and conservative principles in Congress and the White House when we set about tackling the problem over the past decade. One solution was the institution of Medicare Advantage plans, where beneficiaries could opt-out of traditional Medicare and enroll in an HMO. As mentioned on this blog many times, the problem is the Medicare Advantage plans cost 14% more per beneficiary than traditional Medicare for no demonstrably better outcomes – and now we have about 11 million Americans enrolled in them. That waste adds up. As stated in the Kaiser report, “strictly from the perspective of program financing it is undisputed that Medicare Advantage payments have added to the cost of Medicare borne by the government.”

Much, much worse has been the prescription drug programs. It was supposed to use private drug plans in competition to drive down costs, until all kinds of pharma-friendly provisions were added in by the likes of Rep. Billy Tauzin – the same Billy Tauzin who went on to become president of PhRMA. Again, from the Kaiser report, “Two-thirds of the $72 billion increase in Medicare expenditures from 2005 to 2006 resulted from the implementation of Part D.”

And yet, Medicare’s financing is solvable. If the annual rate of growth was a mere 1% above the growth in GDP instead of our current pace of +2.5%, we’d cut our spending in half by 2038. You can imagine how good our Medicare Trust report would look then. As it just so happens, we have a plan on the table to accomplish exactly that – and benefit those in the private insurance system as well. It’s called health care reform, and we need it to pass this year.

(Photo credit: http://www.flickr.com/photos/flem007_uk/ / CC BY 2.0)