In Spite of Medicare's Latest Trustees Report, Medicare Is Still In Trouble

As a policy wonk, I find that certain things simply want to make me nerd out because that's how much I'm attuned to public policy. One of those moments is when the Medicare Trustees Report is released, much like it was earlier this week. Medicare is a government-run social insurance program that promises to provide health care to Americans 65 and older who have paid into the Medicare system. Given the influx of Baby Boomers retiring, the expenditures of Medicare become more and more important when discussing the federal budget. The good news from this report is that the Hospital Insurance (HI) Fund [that pays for Part A of Medicare] will not have its funds exhausted until 2030, which is four years later than expected in the last Trustees Report (p. 25). Furthermore, the Supplementary Medical Insurance (SMI) Fund, which pays for Parts B and D of Medicare, are looking to remain in financial balance for the remainder of the projection (p. 42). I was hoping for better news, like that Medicare will not have exhausted funds or that it won't cost the taxpayers more money, but I couldn't. As the bipartisan Committee for a Responsible Budget points out, the kernels of good news hardly mean that we're out of the woods when it comes to Medicare.

First, the HI Fund fails to meet the short-range test of financial adequacy (Trustees Report, p. 42), which is to say that it's insolvent. Second, the national health expenditures (NHE) are decreasing, and not necessarily for the right reasons. Although there is the distinct possibility that we are improving upon cost effectiveness in health care delivery, it's just as possible that the NHE dropped due to the recession (p. 3). As a matter of fact, I would contend that it's more likely due to the recession. Why? In spite of the Report's ambivalence on the effects of Obamacare (ibid), it nevertheless admits that "without fundamental change in the current delivery system, these [Obamacare-induced] adjustments would probably not be viable indefinitely (p. 43)." Once the funds are scheduled to exhaust in 2030, Medicare will only be able to provide for 85 percent of payable benefits as a percentage of cost (p. 30). What that means is that as of 2030, you will be paying the same amount, but only acquiring 85 percent of what you were previously. Second, although one can cheer over the surplus being created, the deficits will kick in again in 2021 and remain throughout the remainder of the budget projection (p. 21). Third, although SMI funds are considered solvent for the foreseeable future, they will remain solvent at the expense of economic growth. Right now, SMI-related costs are only equivalent to 1.9 percent of the GDP. That is expected to rise to 4.5 percent of the GDP over the next 75 years (p. 42). When looking at overall Medicare costs as a percentage of GDP, it's hardly flattering:

The CBO brought this up in its recent long-term budget outlook and how Medicare will further drive up costs (p. 40, Figure 2-2). The inability to contain costs, even with the supposedly wonderful Obamacare, is troublesome. This problem won't get easier to solve because the workers to beneficiary ratio is decreasing (Medicare Trustees Report, p. 67). Even the people managing Medicare were calling for legislative action to make fiscal improvements upon Medicare (p. 25, 30, 44). I'm not going to even touch policy alternatives to reform Medicare because it's well beyond the scope of this blog entry. I will, however, provide some from the Kaiser Family Foundation and the Congressional Budget Office on policy alternatives for your reading pleasure. What I will say is this: in spite of what certain individuals think on the Left, we should be more worried about Medicare solvency if we actually care about the dampening effects that debt has on economic growth.

8/6/2014 Addendum: For further reading, here is an analysis by research fellow Charles Blahous.