The Medicare Funding Problem Threatening Medicare’s Future

Robert Moffit / July 30, 2014

Medicare’s true cost is the biggest problem in Washington and the one most ignored.

The long-awaited 2014 Medicare Trustees report is out, and the “spinning “ is well underway. But the media is not yet reporting another big finding – this one by the Medicare Actuary and revealed on the same day: Taxpayers face a Medicare unfunded liability ranging from $28 trillion to $35 trillion, depending on the most realistic assumptions about the future. In other words, Washington politicians have promised seniors that over the next 75 years (the so-called long-term “actuarial window”) they will receive tens of trillions of dollars of Medicare benefits that are not paid for. It is Washington’s biggest, most expensive and most difficult federal entitlement problem. And it is one most politicians—with a few noble exceptions—continue to ignore.

Most of the focus on the Medicare Trustees’ report thus far has been on the relatively “small” stuff. The Obama administration and its allies are touting the news the Medicare Trust Fund now is not projected to become insolvent until 2030—four years later than previous predictions. They also say this means Obamacare is “working…” that things are better.

Some even say the program is “flush” with cash. They point to the continued slow growth in spending, even though, as the Trustees note, that could just as well reflect the slow growth in the economy rather than a permanent underlying trend.

All of which is good spin for the 24-hour news cycle, a feel-good moment for beleaguered taxpayers. But soon enough, the larger truth will sink in: The Medicare trust fund’s four-year extension is no big deal. The trust fund is now projected to run a cash deficit of roughly $14 billion this year. Though, it is projected to run surpluses until 2023; then it’s back to our regular programming of annual deficits and threatened insolvency—this time in 2030.

The Trustees say the Medicare trust fund, under the official actuarial standards, still fails their short- and long-term tests of actuarial balance. And the Medicare future, where a lot of us will live and work, looks positively awful.

Of course, the state of the Medicare Trust fund is only one indicator of Medicare’s financial health. The program is absorbing a huge surge in enrollments, driven by retiring Baby Boomers, projected to reach about 81 million in 2030, when the Medicare trust fund is to be depleted.

Meanwhile, the ratio of working taxpayers per beneficiary to finance this growing Medicare population will continue to shrink from roughly three workers per retiree to two in 2030. And remember that almost nine out of every $10 spent on Medicare is paid for by taxpayers. The year 2030 is not looking good.

Won’t Obamacare help? Make no mistake, the health law is largely a replay of the status quo policy of Medicare central planning and price controls. Of the roughly 165 provisions affecting Medicare, the most relevant are the health law’s Medicare payment reductions. Altogether, according to the Congressional Budget Office, these payment reductions and related changes would amount to $716 billion by 2022.

Of Obama’s Medicare payment cuts, $517 billion will be imposed on Part A providers—hospitals, nursing homes, home health agencies and even hospice care would be profoundly affected if these cuts were sustained. In a July 8 memo, the Medicare Actuary says that, because of the payment policies in Obamacare, “By 2019, up to 5 percent more hospitals would experience negative total facility margins…and [b]y 2040, approximately half of hospitals, two-thirds of skilled nursing facilities and 90 percent of home health agencies would have negative total facility margins.”

Obamacare will seriously damage Medicare. According to the Medicare Actuary, faced with such payment cuts, Medicare providers would withdraw from the program or shift their costs to private payers. Payment cuts for Medicare services that patients depend upon will affect patients, of course, not just providers. As the Medicare Actuary further noted, these financial pressures would increase the “possibility of access and quality of care issues for Medicare beneficiaries.”

Of course, nothing is inevitable. There is a much better way to control Medicare costs without imposing payment cuts that compromise seniors’ access to care. The best option is expanded consumer choice and intense market competition among private health plans and providers. This approach—“premium support” or defined contribution financing—governs Medicare Part D, which is a system of competing private plans that deliver prescription drug coverage.

Its stunning performance has inspired support for a broader reform of the Medicare program based on the same market-based approach. In September 2013, CBO issued a vitally important report that found Medicare premium support, and the intense competition among health plans and providers inherent in this approach, would save serious money for both seniors and taxpayers.

Competition works. Although most conservatives rightly opposed the creation of a universal drug entitlement in 2003, Medicare Part D’s defined-contribution financing has been a dramatic success. The reason: Government payment to private plans on behalf of enrollees is based entirely on market-based bidding outside of traditional Medicare’s rigid price fixing. Between 2006 and 2011, total Part D costs were 48 percent lower than the Medicare Trustees original projections.

CBO’s 2013 re-estimate of Medicare 10-year projections were considerably lower than previous estimates. And, based on the CBO estimates, about 67 percent of the total projected savings in the Medicare program came from the savings in Medicare Part D. No other health care program in the country registers such a strong performance in cost control.

There is a difference between politicians and statesmen. James Freeman Clarke, a famous 19^th-century American clergyman, described that difference: “A politician thinks of the next election. A statesman, of the next generation.”

America needs leadership with the brains and the guts to tackle America’s entitlement crisis. Real Medicare reform, based on the free market principles of choice and competition, would drive innovation and secure higher quality. It would improve the prospects of both taxpayers and seniors and spare them the ugly consequences of doing nothing. We also should do it for the kids.