Analysis: Mastering labyrinthine Medicare

By ELLEN BECK, United Press International

WASHINGTON, March 26 (UPI) -- Medicare is so complex even analysts who make their livelihoods from studying it often quip they cannot explain it to their mothers. The real challenge facing actuaries and policy experts, who believe the senior health insurance program is in deep financial trouble, may not be how to fix the program but rather how to get the public's attention focused so people can understand it and demand Congress do something about it.

"I think what is needed is terror," said Joseph Antos, a Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute in Washington. "We don't have terror and we're not going to get terror."


That comment produced laughs at this week's AEI conference "March Madness: Has the Drug Benefit Changed Medicare's Long-Term Outlook?"

The dilemma is how to create outrage in people over something that does not relate to their daily lives. "We don't have an easily understood crisis," Antos commented.


For example, Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office, asked if, in the future, Medicare spent, say, $20 trillion and the total value of the U.S. gross domestic product was $912 trillion or $0.9 quadrillion -- "is $20 trillion a big deal?"

The problems are easier to see by breaking Medicare into its two parts. The Hospital Insurance Trust Fund, or Part A, covers inpatient hospital stays and is funded by a payroll tax on individuals and businesses. The Supplemental Medical Insurance fund, or Part B, covers outpatient care, physician visits and other medical services and the new Part D -- the prescription drug benefit. The SMI gets 75 percent of its money from the huge U.S. pot of tax dollars, called general revenue funds, and 25 percent from senior-paid premiums.

All of the numbers are there to show Medicare expenditures rising to the point where Part A becomes technically insolvent in 2019, when the HI Trust Fund runs out of money. At that point, SMI will be consuming ever larger amounts of general revenues.

Though predictions have changed over the years -- the insolvency date was 2026 last year -- this overall Medicare trend of spending growth and revenue deterioration is nothing new. In 1997, the HI Trust Fund actually got within four years of going broke, prompting Congress to take intermediary steps, such reducing reimbursements to healthcare providers.


Despite repeated calls -- now and in the past -- to find a permanent solution to the funding problems, Congress never has viewed Medicare as in enough of a crisis to begin political warfare over senior entitlements.

For one thing, categorizing Part A as going broke, while obviously a concern, is too simplistic. Looking more deeply reveals one reason it is difficult to activate a "crisis" status for the program.

Richard Foster, chief actuary for the Centers for Medicare and Medicaid Services, said Part A in 2003 accounted for only 22 percent of the medical services used by beneficiaries, while Part B accounted for 87 percent -- 41 percent of all spending. Though HI now runs a $7.6 billion surplus, future projected tax revenues will not be enough to meet expenditures. By 2019, according to those projections, the surplus is expected to be gone.

That does not mean Part A shuts down and does not have any money to pay hospitals, however, Foster said. During 2019, tax revenues coming in still would pay for 91 percent of expected expenditures.

Much attention is focused on Part A, but Part B actually may be in worse shape from an overall budget viewpoint, and that could hit seniors in the pocketbook -- usually a catalyst for change.


The SMI is reset each year based on the previous year's expenditures so it cannot go broke, but that continual update makes it more difficult to how see fast the spending is growing.

Fueled by a 9.7 percent projected annual growth for the Part D drug benefit -- a rate that is faster than the growth for the rest of Medicare -- the SMI will go from about 1 percent of gross domestic product now to more than 8 percent over the next 75 years and, combined with Part A, would represent more than 14 percent of GDP, according to Foster's statistics.

Looking at the nearer term, Foster estimates, the SMI is expected to spend about $370 billion a year by 2012 and Part A about $280 billion, for an annual price tag of some $650 billion, compared to $280 billion in 2003. This also is before the bulk of the baby boom generation retires.

The SMI may not go broke but it has overshot its projected spending in the past -- in 2003 by $10.3 billion when healthcare provider pay cuts were scaled back. That same circumstance in 2004 -- as part of the new Medicare Modernization Act -- will create a similar deficit for next year, which could be addressed, for example, by a 17 percent increase in Part B premiums for seniors, Foster said.


"SMI growth has serious implications for seniors because their premiums go up faster than their incomes," Foster said.

There are a number of ways to cure Medicare's troubles. Raising costs or reducing benefits to seniors are two -- albeit unpopular -- ones, along with raising the eligibility age. Congress opted for the age hike option in 1983 when Social Security was in dire financial shape.

Cutting payments to providers has been a popular Medicare quick fix in the past but Congress also could raise the payroll tax, which hasn't been done since the 1980s -- or somehow cap the use of general revenue funds.

The latter is attempted in the new Medicare law and might push Congress to have, as Reischauer put it, that "Eureka! moment," when members are compelled to take action.

The law contains a provision that if SMI spending hits 45 percent of general revenues for two years in a row -- which Foster said it could do for the first time 2012 -- then the president is required to come up with a plan within 15 days to fix Medicare and Congress must consider it by July.

"We've seen these kinds of requirements before so I'm not going to hold my breath that it will result in a change in policy," Reischauer added.


Gail Wilensky, a John M. Olin Senior Fellow at Project Hope and a former CMS administrator under the first Bush presidency, said there are some "sleeper" issues to watch that also could reduce Medicare spending -- buy how much no one really knows, however.

One is income testing for Part B, which will require seniors who earn more than $60,000 per year to pay more for their Part B premium. Wilensky called that an "important precedent for looking at other parts of Medicare."

Another is premium support -- basing what traditional Medicare pays on what private plans in the program bid. That was scaled back in the final Medicare bill to only a demonstration project, which made Wilensky skeptical that it could translate into much help.

"Medicare has a terrible history of taking demonstrations, even a successful demonstration, and translating it into legislation," she said.

The third issue is implementation of disease management programs for chronic diseases. Early results in the private sector are showing success in reducing costs.

Wilensky said, however, the financial crunch still is years away and there is no need for lawmakers to believe Medicare is in immediate crisis.

"There is not a really pressing need" to do something right away," she said, and added Congress has time to consider fully how to pay for the nation's second-largest health entitlement program in the future.


What worries the analysts are the 76 million baby boomers marching steadily toward retirement and Medicare in the next decade. What will they really do to program expenditures?

"And we still haven't done anything meaningful to address that for Medicare," Foster said.


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