The Medicare Trustees have released the annual report on the
financial status of the Medicare program. The Washington Post's
front page headline on the report warns of a "Medicare Collapse."
The basic facts are simple and dramatic:
- Medicare has an unfunded liability of almost $38 trillion;
- Medicare's hospital insurance trust fund will become insolvent
- Congress has ignored funding warnings; and
- American households will inherit hundreds of thousands of
dollars worth of debt.
While some in Washington say that Medicare reform should wait
until Congress somehow fixes the broader health care system, the
truth is that Medicare itself is a major driver of health care
costs. Within three years, the first wave of the gigantic baby boom
generation will start to retire and impose a demand on medical
services unprecedented in the nation's history. The traditional
Medicare program is not capable of absorbing such a shock without
some fundamental changes.
What the Trustees Report Says
According to the 2009 Medicare Trustees Report, Medicare
expenditures were $468 billion in 2008. But going forward, Medicare
expenditures are projected to increase faster than workers' wages
and the economy as a whole. In 2008, Medicare's annual costs were
3.2 percent of gross domestic product (GDP). Over the next 75
years--the time frame for long-term actuarial projections--these
annual costs are projected to grow substantially, reaching 11.4
percent of GDP.
Trillions in Debt. The trustees estimate that Medicare's
long-term unfunded obligation--the benefits promised but unpaid
for--totals $37.8 trillion, or more than two-and-a-half times the
current size of the entire U.S. economy.
Medicare Part A--Medicare's Hospital Insurance (HI) Trust Fund,
or the part of Medicare that pays hospital bills--will again spend
more in benefits than it receives in revenues. The trustees project
that the HI fund will become insolvent by 2017, two years earlier
than projected in last year's report. The trustees consider the
earlier insolvency of the HI trust, which was largely a consequence
of the recent economic downturn and reductions in payroll tax
revenues, an "urgent concern" that will "require substantial
changes" even in the short term.
Medicare Part B (which pays doctors' bills and other outpatient
expenses) and Medicare Part D (which pays for prescription drugs),
grouped under the Supplementary Medical Insurance (SMI) Trust Fund,
will never become "insolvent." They will just impose greater
burdens on taxpayers as they automatically draw down funds from the
Treasury each year to pay three quarters of the medical bills
The SMI portion of Medicare will increasingly rely on larger and
larger amounts of general revenues to finance the open-ended demand
for medical benefits. In the short term, changes in Social Security
as a consequence of the economic downturn will indirectly impact
Medicare. The trustees expected that about 25 percent of Part B
enrollees will face unusually large premium increases in the next
two years largely due to a "hold harmless" provision in current law
that limits premium increases for approximately 75 percent of
seniors enrolled in Part B.
Clearly, Medicare's fiscal challenges are large, but those
challenges may, in fact, be larger than indicated by the trustees
report for a number of reasons:
- The economic stimulus included Medicare incentive payments to
promote the adoption of electronic medical records that could
accelerate the insolvency of the HI trust fund by six months;
- Trustees projections assume current law and therefore fail to
take into account the annual costs of Congress offsetting
reductions in physician payments; and
- The Medicare trustees assume the growth in health care costs
will slow sooner and faster than the Congressional Budget Office
and other analysts predict.
Ignoring Another Medicare Funding Warning. Under the
Medicare Modernization Act of 2003, Congress set a trigger to
address Medicare's large and growing unfunded obligation. If more
than 45 percent of Medicare expenditures were projected to come
from general revenues (as opposed to dedicated revenues such as
payroll taxes and beneficiary premiums) within a seven-year
actuarial period, the trustees would issue an "excess general
revenue Medicare funding" determination in their annual report. Two
consecutive "excess general revenue Medicare funding"
determinations generate a "Medicare funding warning," triggering
action by the President and Congress. The President is required to
address the funding warning in legislation within 15 days of the
next budget, and the proposal needs to receive expedited
consideration in Congress.
Given the projected growth in Medicare expenditures, for the
fourth consecutive year the trustees made an "excess general
revenue Medicare funding" determination, triggering the third
"Medicare funding warning" as a result of the program's excessive
reliance on general revenues as part of its overall financing.
While Congress initially enacted the Medicare "trigger" in 2003
to call attention to the substantial financial challenges facing
the Medicare program, the current Congress voted to ignore the
Despite repeated public commitments to reforming unsustainable
entitlement programs, President Obama's budget submission did not
include a proposal to address the funding warning issued last year.
Although Congress has chosen to ignore the Medicare trigger, the
requirement that the President submit reform legislation to
Congress each year following a Medicare funding warning--as
toothless as that requirement is--still stands.
Ignoring Medicare Reform. Most analysts expect the
forthcoming health reform proposal to cost taxpayers $1-1.5
trillion over 10 years. Yet the President's budget proposal, which
includes a $635 billion health care "reserve fund," is short on
In the meantime, representatives of the health care industry
have joined with the President and pledged to reduce the annual
growth in health care costs by 1.5 percentage points--cutting $2
trillion in costs over 10 years by adopting cost-savings measures
such as health information technology, care coordination, disease
management, and "evidence-based" medicine.
The Congressional Budget Office and other independent analysts
say that such measures are unlikely to deliver the level of savings
hoped for--or required to pay for--health care reform. Most of the
health care cost savings would occur in Medicare but are not
dedicated to reduce the program's obligations but rather siphoned
off to financing Obama's health care agenda.
Urgent Need for Reform
Medicare should remain as it is today for current beneficiaries.
But at a date certain, Medicare should be transformed into a
defined-contribution system in which the government contribution
for benefits is adjusted for age, income, or health status.
The elements of reform have been discussed for many years and
have been advanced by responsible analysts and public officials,
including the 1999 National Bipartisan Commission on the Future of
Medicare. There is no need to reinvent the wheel.
In implementing reform, the new government contribution should
be based on a real market calculation of the price of medical goods
and services but capped at a dollar amount each year, just as it is
today in the popular and successful Federal Employees Health
Benefits Program. While there are a variety of models for such a
system, a defined-contribution arrangement would control the
growing costs of Medicare, making those costs predictable and
sustainable for seniors and taxpayers alike.
D'Angelo is Policy Analyst and Robert E.
Moffit, Ph.D., is Director of the Center for Health Policy
Studies at The Heritage Foundation.