The Largest Problem, Known Solutions

While we wait for the February 25 summit that will bring together President Barack Obama, Republicans, and Democrats to discuss the future of health reform, a review of largest problem the government and the country has might be in order.

That’s Medicare.

The Centers for Medicare and Medicaid Services estimates that by 2012, public spending on health care will account for more than half of all U.S. health care spending, compared with 47% in 2008. The CMS projects that private spending in 2010 will grow only 2.8% as a result of both declining private health insurance enrollment because of sustained high rates of unemployment and the end of federal subsidies for COBRA coverage (15 months from Feb. 28, 2010).

In addition, the most recent report from the Medicare trustees indicates that Medicare's hospital insurance (HI) trust fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up from trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81% in 2017 to about 50% in 2035. Adding to the HI trust fund's financial instability is the current economic recession --with fewer people working, less is being paid into the trust funds for Social Security and Medicare.

In addition, the Medicare supplementary medical insurance (SMI) trust fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time. In December 2008, 45.2 million individuals were covered by Medicare and the program's total expenditures in 2008 reached $468 billion.

In other words, Medicare costs are destined to overwhelm the entire economy.

So far, the reaction of the public and legislators has been to defend every Medicare benefit to the death—citizens scream that the government better not touch their Medicare benefits, and legislators pass resolution after resolution to maintain current benefits.

That won’t work. As with every other cost crisis, there are only two solutions –decreases in expenditures or increases in revenues. Or as the Medicare trustees noted, the health insurance trust fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134% increase in the payroll tax (from the current rate of 2.9%, shared equally by employers and employees, to 6.78%); or an immediate 53% reduction in program outlays; or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon.

Don’t expect these rational solutions any time soon.