Recently, WWNK took a hard look at Social Security, and discovered that it is not nearly in as rough a condition as the fear mongers in politics would have us believe. Today we turn our attention to Medicare, another federal program that's received a lot of scrutiny because of an impending funding "crisis" that is supposedly of even greater consequence than Social Security's. What's the reality?

In order to have any useful discussion of U.S. health care delivery systems, we need to divide the issue into two components.

First, there is the fiscal crisis itself. Is Medicare a train wreck waiting to happen? If so, what can be done to avert disaster?

Second, what about health care in general? A growing segment of the population will need it, at the same time that it is becoming less and less affordable for many people. Is it possible to restructure the system to make it more efficient?

The clamor about Medicare's looming insolvency has recently been drowned out by the Social Security debate, simply because "fixing" Social Security is at the top of the Bush Administration's wish list. If critics are correct, though, this would seem like an instance of badly skewed priorities. Whereas the 75-year shortfall predicted for Social Security is $3.7 trillion, the Medicare deficit over the same period is projected to come in at a staggering $27.8 trillion, according to the latest report from the General Accounting Office (GAO).

Like Social Security, Medicare revenues are derived from the FICA withholding shown on your paycheck stub. The money is deposited into a trust fund administered by the Health Care Financing Administration (HCFA). The program's surplus has allowed the government to withdraw funds and leave IOUs in the form of Treasuries behind. Unlike Social Security, however, the "tipping point" for Medicare--where present expenses exceed present income--occurred last year. From here on out, the gap will only continue to widen, with exhaustion of reserves (those IOUs) expected around 2019.

[Note: Lest our alert readers feel tempted to remind us, we are aware that Medicare is not monolithic. It consists of two separate funds, HI (Fund A, Hospital Insurance) and SMI, Supplemental Medical Insurance, which is subdivided into Fund B (physician expenses) and Fund D (the new prescription drug benefits), and the fiscal health of these is not uniform. However, to break the various funds down during our analysis would just further complicate a subject that's already difficult enough to understand.]

Despite the looks of it, however, Medicare is not going "broke." But once its reserves are gone, the shortfall between income and expenses must be made up out of general tax revenues, i.e. other programs must be sacrificed. Or taxes must be raised. Or benefits must be cut.

The gap is expected to widen sharply during the 75-year projection window legally mandated for Medicare. Hence the missing $27.8 trillion which, based upon the Medicare Trustees' latest report, will steadily accumulate. The caveat being, of course, that no economist can reliably predict next year, much less what will happen over seven and a half decades. Still, the Trustees are compelled to try, and like their Social Security counterparts, they crunch the numbers under three different economic scenarios-- optimistic, pessimistic, and intermediate.

Even under the conservative intermediate scenario, the future is hardly so bright that we have to wear shades. Medicare expenses now stand at 2.5% of GDP (remember, the trust is already in deficit spending as of last year). By 2080, that number will have risen to 14%.

The Congressional Budget Office estimates that government will consume a full 40% of GDP in 2080. Now, that's a shocking figure in and of itself-- and far, far above the current 19% or so, a level at which President Bush has vowed to hold the line on spending. Suffice it to say that projected 2080 expenses for Medicare dwarf everything else in sight. They amount to 35% of the entire federal budget, more than will be spent on all other U.S. government programs combined, including defense and Social Security. Perhaps more to the point, outgo will be more than twice income by 2019, and more than four times income by 2070.

We are looking, essentially, at an impossible chasm to fill, should we wait until it gets that deep. It's hard even to imagine it happening. But in the absence of some kind of "fix," the Trustees think it will. Nevertheless, there are dissenting voices; one of them belongs to Bruce Vladeck, who worked as administrator of the HCFA from 1993 to 1997.

In February 2003, Vladeck derided the intermediate scenario as "excessively pessimistic," and went on to say that "if long-term productivity and income growth in the American economy even approaches historical norms (let alone the performance of the 1990s), the increased costs of Medicare (and Social Security) will be simply drowned out by increased incomes and wealth." In other words, don't worry, we can afford it. Well, maybe. The optimists may yet be vindicated, but they are definitely in the minority.

Let us, then, go along with the Trustees' analysis and concerned legislators like Senator Pete Domenici (R-New Mexico), who in 1998 called Medicare "the most precarious program we have got." And with Fed Chairman Alan Greenspan, who last month pronounced the Medicare problem "several multiples more difficult than is Social Security."

Greenspan--in the typical wait-until-it's-too-late attitude that has characterized his chairmanship--then went on to advise against tinkering with Medicare until we see advances in medical information technology, which will purportedly save dollars through increased efficiency in the health care sector. "If we do it [try to fix Medicare] now or even next year," Greenspan said, "I'm fearful we would be restructuring an obsolete model and have to come back and undo it."

Let us also naovely trust the word of politicians like Jim Nussle (R-Iowa), House Budget Committee Chairman, who in 2001 proclaimed that "This Congress will protect 100 percent of the Social Security and HI trust funds. Period. No speculation. No supposition. No projections... We will protect 100 percent of Medicare and Social Security."

Jim Nussle's line in the sand was drawn before the prescription drug benefit was added, but what he appears to guarantee is both solvency and no benefit cuts. That is a tall order, but indicative of the current majority sentiment in Washington.

Not that we're dealing with the goodness of anyone's heart here. Politicians know how to count votes. Medicare is a very popular government program that will only get more popular as Americans age. When in doubt, promise the people the moon. That's what's being done by everyone who claims we can preserve the status quo without tax hikes, or benefit cuts, or (most likely) both. The only other alternative is a radical overhaul of the entire system. That's an option we'll also examine, but first, what are the possibilities if we stick with Medicare as we know it?

President Bush could roll back his tax cuts; but since he seems adamant about making them permanent, there's not much chance of a rollback. FICA taxes could go up, and/or the cap on withholding could be raised or abolished. No Republican administration is going to propose the former, but the latter, according to the President, is in play. In our opinion, anything can happen here. If Bush decides raising the cap is the best move, he would face strong opposition, but might be able to twist enough arms to ram it through.

Benefits for future claimants could be slashed. Political suicide. Though Congress will resist this for as long as possible, the truth is that its members may ultimately have no choice in the matter.

Monthly premiums that beneficiaries pay for the SMI portion (both Funds B and D) of Medicare will rise sharply from their present level of $66.60/month. This, while politically unpalatable, is a given. It's already built in. Beyond that, a premium could also be required in order to draw from HI Fund A, as well. The public outcry about this is apt to be fierce. Consumers have grown accustomed to, and have generally accepted, a lower level of service from the government than they would from a private insurer, but only because their premium rates are low, too. Should government and private sector rates begin to converge, there will be hell to pay.

That's about it in the way of conventional solutions. Is some combination of them enough? No one knows, including us. We're not going to pretend that we do. Still, there are some interesting alternative ideas out there that are worth considering. We'll do our best to summarize them next week, in Part II of our article.

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Posted 03-28-2005 3:56 PM by Doug Casey