It’s Official: Medicare’s Finances Shadowed by Uncertainty

J.D. Foster /

If you do a quick read of the Medicare Trustees Report, it would seem that Medicare’s finances have dramatically improved since last year. The 2010 report shows that Medicare has a $30.8 trillion shortfall (net present value terms of excess costs over revenues over the 75-year time horizon). Last year it was $38 trillion. Big improvement, right? Not so fast.

Over the past six years, Congresses have twice passed—and two Presidents have signed—major legislation affecting Medicare. President Bush signed legislation creating a new drug benefit that provided an important modernization for the program yet also significantly worsened Medicare’s finances. President Obama signed Obamacare into law, which improved Medicare’s finances only if one assumes that the difficult programmatic changes Obamacare requires will take effect.

As Medicare Chief Actuary Rick Foster clearly indicates, however, that those assumptions are neither reasonable nor realistic. What we are left with then is a report containing projections the Actuary suggests are “poor indicators” of Medicare’s likely finances. In other words, Medicare has the same poor fiscal condition it had last year, but Obamacare has made it harder to project and understand.

Trustees Report Delayed, Devalued by Obamacare

The Trustees Report has come out late in 2010 due to the need to reflect the roughly 165 provisions contained in the Obamacare legislation enacted earlier in the year. According to the report, the enactment of Obamacare “improves the outlook for Medicare substantially.” However, it then goes on to offer so many caveats to that claim as to strip it of all meaning. For example, it quickly follows its rosy assessment of Obamacare’s effects with a discussion of how a new ruse has been constructed for Medicare similar to the now infamous “Sustainable Growth Rate” (SGR), which limits payments to physicians and is habitually overridden with “doc fix” legislation.

Like the SGR, the new Medicare savings ruse involves mechanical downward adjustments to physician payment rates. According to Obamacare, these payment rates are to be adjusted downward to reflect economy-wide productivity gains. However, the historical record is clear, as recounted in the report, that “most categories of health care providers have not been able to improve their productivity to the same extent as the economy at large.”

The implication is that physicians are going to see payment rates steadily ratcheted down to reflect productivity gains they cannot achieve. If allowed to proceed, providers “would eventually be unwilling or unable to treat Medicare beneficiaries.” However, Congress will not allow these steady downward adjustments in payment rates to proceed but will, instead, suspend and eventually repeal them, just as it has done with the SGR.

As the Trustees have tried to warn to the extent their political masters in the Administration will permit, the estimates of savings from Obamacare are not credible. Nowhere is this clearer than in the Statement of Actuarial Opinion provided at the tail end of the report in which the Medicare Chief Actuary states:

Further, while the Patient Protection and Affordable Care Act, as amended, makes important changes to the Medicare program, and substantially improves its financial outlook, there is a strong likelihood that certain of these changes will not be viable in the long range.

He continues further on:

For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare service providers will not be viable).

and:

The current-law projections are poor indicators of the likely future financial status of Medicare.

A “strong likelihood” that the changes required by Obamacare “will not be viable.” The financial projections “do not represent a reasonable expectation for actual program operations.” The projections included in the report reflecting Obamacare’s reforms “are poor indicators” of Medicare’s finances.

What Do the Trustees Reports Really Mean?

Taken at face value, Medicare’s finances seem to have improved dramatically. But the real story is far different, thanks to Obamacare and all its uncertainty, not to mention its rather shameless assumptions forced onto the actuaries. Obamacare has not fixed Medicare; rather, Medicare is still in need of real and urgent reforms.