Medicare Devours the Federal Government
In the last few years, the Medicare trustees' annual financial report has been met with complacency. Because Medicare's fiscal problems appear not to be worsening, people think they can stop worrying. 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 — but its spending amounted to $600 billion, just short of defense- and security-related spending. The program accounts for 11 percent of federal tax and fee revenue but 17 percent of federal spending.
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 deceptive. It is financed by payroll taxes, and for many years the revenue was more than what was required to pay hospital claims. The government spent the surplus on other things. When it took a million dollars out of the drawer labeled "Medicare" and transferred the money to the drawer labeled "Navy," it left a $1 million Treasury note in its place. Absurdly, the pile of notes resulting from these transfers is called the Medicare Trust Fund.
Suppose Mr. & Mrs. Smith put aside some of their income for a college fund for their four kids. Then they decide to spend the money on a vacation. So they replace the money with an IOU 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." Since 2008 payroll taxes have not covered Medicare's hospital claims. So Medicare has been giving "Trust Fund" IOUs back to the Treasury (which the Treasury redeems by issuing more IOUs to investors). The last "Trust Fund" IOU will be turned in by 2030. What then?
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 so that they earned enough to keep seeing Medicare patients, but it made 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, in which 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 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.
John R. Graham is an Independent Institute senior fellow and a senior fellow at the National Center for Policy Analysis.