(Archived document, may contain errors)

May4,1995

THE HIGH COST OF NOT REFORMING MEDICARE

By Stuart M. Butler Vice President and Director of Domestic Policy Studies

An intense debate has begun on the future of Medicare. The majority leadership in Congress has made the case that structural reforms of Medicare are necessary to deal with the impendirig financial collapse of the program and to improve the quality and efficiency of medical services for the el- derly. House Speaker Newt Gingrich (R-GA), who has been discussing the outlines of a reformed Medicare program, has said in recent days that savings from any reforms of the program should be used to stabilize the finances of Medicare to assure its ability to deliver benefits. Critics of this view contend "reforming" Medicare and achieving "savings" in future outlays in re- ality is merely a smokescreen for cutting benefits. Most of these critics, including the White House, have not proposed any significant reforms in the Medicare program. But the Report of the Board of Trustees of Medicare, released last month, indicates that the program is in such bad financial shape that the only way to continue Medicare without reforms would be through huge future tax increases. Significantly, of the seven Medicare trustees, five are senior officials of the Clinton Administration -three of whom are Cabinet secretaries.

There are only two choices available to Congress: CHOICE #11: Do not change the way in which Medicare is run by the government, and pay for fu- ture benefits by raising new revenues through higher payroll and other taxes or by divdrting money from other programs. This means Medicare survives only by draining money away from the rest of the budget or by raising taxes. CHOICE #2: Change the way Medicare is run so that benefits are delivered more efficiently, avoid- ing future tax increases or a diversion of money from other programs. Making the program more efficient would improve the quality of benefits and the choices available to retirees while reduc- ing the double-digit rate of outlay increases. This would slow the depletion of the trust fund and stabilize the program.

The 1995 Trustees Report explains that if Medicare is not reformed, the cash flow of the HI trust fund (Part A), which finances hospital benefits for the elderly, will go into the red in fiscal year 1997 and the fund will run out of money and become insolvent in the year 2002. 2 The Report then provides some sobering information on how payroll taxes (which finance the HI program) would have to rise to keep the program afloat. Specifically: X "To bring the HI program into actuarial balance even for the first 25 years, 993 a new 1.3 per- cent payroll tax would have to be added on top of the current 2.9 percent Medicare payroll tax. Based on the Trustees' estimates for revenues under the current tax rate, this would raise payroll taxes-and hence raise the cost of employing Americans-by an estimated $263 bil- lion over five years and $388 billion over seven years. For a worker earning $45,000 per year, it would mean an additional payroll tax of $585 per year. X To achieve long-term actuarial balance of the HI trust fund without reforming the program- that is, to put it on a pennanently sound footing-taxes could be raised now or raised by a higher amount in the future. If the HI trust fund were to be made permanently sound by rais- ing payroll taxes immediately, an additional payroll tax of 3.52 percent would need to be levied on top of today's 2.9 percent rate. That would raise taxes by $711 billion over five years and $1.050 trillion over seven years. The payroll taxes of a worker earning $45,000 would increase by $1,584 per year. X If tax increases were delayed until the cash flow of the HI trust fund of an unreformed Medi- care system actually went into the red (FY 1997), a 3.65 percent increase would then be required to stabilize the fund permanently. If action were delayed until the fund actually ran out of money seven years from now, the payroll tax hike would have to be 3.91 percent. In this latter case, the payroll tax hike for the $45,000 per year worker would be $1,760 per year.

TAXES NEEDED TO MAKE MEDICARE (HI) SOLVENT WITHOUT REFORM (Billions of Dollars)

These calculations, moreover, apply only to the hospital insurance program paid for out of payroll taxes. Retirees also are entitled to enroll in Part B of Medicare, a voluntary program which covers much of the cost of physician and other services. Part B is approximately 75 percent subsidized by the taxpayer (eligibility for the subsidy is not means tested) and only 25 percent paid for by benefici- aries. Understandably, almost all eligible Americans enroll in Part B, also known as Supplementary Medical Insurance, or SM. The trustees point out that, like HI costs, SMI expenditures have been growing sharply. "Growth rates have been so rapid that outlays of the program have increased 53 percent in aggregate and 40 percent per enrollee in the last five years. For the same period, the progr !r!v, rew 19 percent faster than the economy despite recent efforts to control the cost of the program.' With the trustees' "in- termediate" estimates of future program growth, the annual taxpayer subsidy will grow from an esti- mated $38 billion in this fiscal year to an estimated $89 billion in five years and $147 billion in FY 2004.5 The Trustees' Report shows that whether lawmakers and advocates for the elderly like it or not, Medicare cannot be separated from the budget. The reason for this is quite simple. Without reform, the HI trust fund will run out, will require heavy new taxes or subsidies, and the taxpayer cost of the SMI program will spiral rapidly upward. The result: the rest of the federal budget must be restruc- tured to keep Medicare afloat, through a combination of taxes and money diverted from other pro- grains. The only alternative to this bleak scenario is to reform the program so that outlays are brought un- der control and Medicare does not have to "crowd out' 'other programs or impose heavy new taxes on working Americans. Bringing costs under control does not mean cutting medical care for the el- derly, however, as critics of reform charge. What it means is bringing the obsolete Medicare pro- gram up to date by incorporating innovations that are routine in the private sector and the Federal Employee Health Benefits Program (which covers Members of Congress and federal workers, many of whom are retired). These innovations would improve efficiency-and typically give wider bene- fit choices than under Medicare today-and so allow services to be delivered at less cost. The trustees, including three Clinton Cabinet secretaries, urge Congress to take "prompt, effec- tive, and decisive action" to control the escalating costs of the Medicare program.6 Critics of Medi- care reforms who argue that change should not be "budget driven," including some senior Clinton Administration officials not among the Trustees, ignore the simple fact that an unstable and unre- formed Medicare program increasingly is driving the budget deficit.