Planning for Life

How Bankrupt is Medicare? - Massachusetts

Posted by Harry S. Margolis on June 4, 2013

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By Harry S. Margolis

In their annual report, the Medicare trustees recently extended their projections of Medicare solvency from 2024 for 2026, basing their slightly increased optimism on a slower growth of Medicare spending and the improving economy that has increased Medicare tax revenues.

According to secretary of Health and Human Services Kathleen Sebelius, Medicare expenditures per beneficiary have increased just 1.7% per year since 2010. This is in contrast to an average increase of over 6% per year over he prior two decades. Some of this slow down in the growth of spending can be attributed to the Affordable Care Act which is projected to trim Medicare spending by $500 billion over this decade, though some question whether some of the cuts -- such of those for doctor payments -- will be able to stick. Click here to read more about the Medicare trustees' report.

A recent article in the NAELA Journal expands on the true solvency situation with Medicare. It's not quite as bad as some have charged, but still needs to addressed, the sooner the better.

Under current projections, Medicare has enough funds to meet its costs for the next decade, and will be able to pay 87 percent of costs after that. Medicare costs are already exceeding revenue and the program has begun to draw on its reserve built up in prior years. That reserve will be depleted in 2026.

After 2026, payroll taxes will cover approximately 74 percent of Medicare Part A costs. This difference can be made up increasing payroll taxes, limiting benefits, or reducing payments to providers. If adjustments are made sooner, the Medicare trust fund may last a bit longer, which would permit somewhat less severe changes in future years.

Medicare Part B won't become insolvent, but could become increasingly expensive. Rather than being covered by payroll taxes, three quarters of Part B benefits are paid for by the federal government and one quarter by beneficiary premiums. This year the premium is $104.90 per month for individuals with taxable incomes of up to $85,000 a year and couples whose income is below $170,000 a year. Higher earners pay higher premiums, with those making above $214,000 ($428,000 for couples) paying $335.70 a year.

The problem is that health care costs keep going up, even if at a slower rate than in previous decades, and the number of Medicare beneficiaries is also going to rise dramatically as baby boomers continue to reach the eligibility age of 65. Approximately 10,000 baby boomers are crossing that threshold every day. The number of beneficiaries grew from 39 million in 2000 to 47 million in 2010, and is expected to reach 64 million in 2020 and 81 million in 2030.

Fortunately, the growth of Medicare costs per enrollee have decreased dramatically over the past decade and are lower than the growth of spending per private insurance beneficiary as shown on the following chart.

Annual Increases in Health Care Costs

 
 

Medicare

 

Private Insurance

 

2000-2005

 

7.2 percent 9.1 percent

2006-2011

 

4.2 percent 4.5 percent

2011-2020

Projected

2.7 percent 4.9 percent

Nevertheless, both due to the fact that health care spending is huge to begin with and the number of new beneficiaries coming into the system, Medicare spending grew over the last decade from 1.7 percent of gross domestic product to 3.7 percent. This trend is likely to continue.

The Affordable Care Act instituted a number of changes intended to bring to Medicare-covered health care costs. Many of these are aimed at making hospitals and other providers accountable for the care they provide, for instance by penalizing them for hospital readmissions. The idea is both to improve quality and cut spending.

The Center for Medicare and Medicaid Services (CMS) recently released information of what hospitals charge Medicare for various procedures and what Medicare actually pays, the idea being that shedding more light on costs will influence provider charges as well as patient choices. CMS is also making substantial innovation grants to foster experimentation to lower costs and increase quality of care.  Click here to learn more about these grants.

In short, while solvent today, Medicare insolvency continues to face us in about a dozen years. If we do nothing to remedy the situation before then, we will have to cut benefits by a quarter or increase premiums and payroll taxes by a third. (The reason the cuts are smaller as a percentage than the increases is because the ratio is based on a larger number. A cut of $25 from $100 is a 25% cut.  An increase of $25 on $75 is a 33% increase.) Changes of this magnitude would have a draconian effect on both beneficiaries and providers. It will be much easier for everyone to adjust if we can phase in the changes over time.

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Topics: Medicare

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