Premium Support Provides Solution To Medicare Funding Problems

The last post explained the problem with future funding of Social Security & provided a solution based on Susan Lee's column in the WSJ dated November 23, 2004 entitled All You Need To Know About Social Security.  Had the points from Dr. Lee's column been followed, when written fourteen years ago, Social Security would be a solvent program today & Americans would have a much improved mindset regarding limited government, personal responsibility, & free enterprise – the founding libertarian principles of America.  Although time is running out before the demographics described in the column just cannot work we still have enough time to avoid the obvious predictable financial shortfalls, suffering, & distress that will be realized by unsuspecting people who are counting on Social Security in the not too distant future.  I hope everyone who read the preceding post & understood it can help make the solution described therein a reality.

 

In a similar vein this post covers Medicare problems & solutions.

 

In brief, the problem is that Medicare Part A is facing a funding shortfall that will require a 12% reduction in hospital benefits by 2029 & the cost of Parts B & D, which are 81% funded by general revenue from the Treasury, are growing too fast to be sustained.  The solution is to implement a premium support system, unindexed to inflation, that will wean people off the Medicare program before it overwhelms our ability to pay for it.

 

The Boards of Trustees for Medicare issued their most recent annual report to the Congress on July 13, 2017 regarding the financial operation & actuarial status of both the Hospital Insurance program (Medicare Part A) & the Supplementary Medical Insurance program (Medicare Part B & Prescription Drug Coverage – Part D).

 

The technical information & graphs in this post regarding the Medicare problems are principally based on the aforementioned report entitled 2017 Annual Report of The Boards Of Trustees Of the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trusts Funds – click on link to read the entire report – the 52nd annual. 

 

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On July 30, 1965 LBJ signed HR 6675 in Independence, Missouri & former President Harry Truman was issued the first Medicare card.  The Medicare budget was $10 billion & 19 million individuals were enrolled.  Medicare coverage took effect in 1966.  By 2016 the program had grown to cover 56.8 million Medicare beneficiaries & total expenditures were $679 billion.

 

The Tax Cuts & Jobs Act of 2017 did not directly affect Medicare; however, in previous legislation there are mandatory spending cuts to Medicare that can occur as a result of deficits - but these cuts were waived by Congress as part of a temporary spending bill to prevent a government shut down in December.

 

Medicare has two separate trust funds, the Hospital Insurance Trust Fund (HI) & the Supplementary Medical Insurance Trust Fund (SMI).

 

The Medicare Part A HI trust fund is financed by the payroll tax on covered earnings, 1.45% of worker's wages paid by both the employee & employer, plus an additional 0.9% tax on the earnings of high income workers, defined as $200,000 per year for individuals & $250,000 for married couples, plus a portion of the Federal income taxes that some Social Security recipients pay on their benefits, as well as interest paid from the general fund on the U.S. Treasury securities held in the HI trust fund.  The aforementioned income thresholds that make people responsible for the additional 0.9% HI tax are not indexed for inflation & it is estimated that 79% of workers will be subject to this tax by the end of the long-range projection period covered by the report.  The taxation of Social Security benefits also is not indexed for inflation so more people come under it every year. 

 

Medicare Part A (HI) helps pay for hospital, home health services following hospital stays, skilled nursing facility, & hospice care.  The HI trust fund is projected to be depleted by 2029 @ which time it will be able to pay only 88% of the hospital & related expenses it is responsible for under the Medicare program.  See graph below.

 

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The Medicare Part B portion of the SMI trust fund helps pay for physician, outpatient hospital, home health, & the like for the aged & disabled who have voluntarily enrolled.  The Medicare Part D portion of the SMI trust fund provides subsidized access to drug insurance coverage on a voluntary basis for all beneficiaries & premium & cost sharing subsidies for low income enrollees.

 

Eighty-one percent of the Medicare SMI trust fund that cover Medicare Parts B & D is financed by transfers from the general fund of the Treasury meaning that the government pays over four-fifths of the physician & prescription drug costs of the 47.8 million people aged 65 & older & the 9.0 million disabled covered by Medicare.  Premiums, including late filing penalty fees & Part D income-related monthly adjustment amounts charged to high income earners make up the rest of the costs.  See graphic below that shows the Medicare Parts B & D expenditures & premiums on both an historic & projected basis as a percentage of GDP based on current law.

 

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Based on current law total Medicare expenditures (Parts A, B, & D) represented 3.6% of GDP in 2016, are projected to climb to 5.6% by 2041, & then level off asymptotically just below 6.0% of GDP for the remainder of the projection period covered by the subject report.  See graphics below.

 

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Like Social Security, the Medicare problem, with 10,000 baby boomers reaching age 65 every day, is that its costs are increasing significantly faster than that of the U.S. economy thereby making the Medicare program financially unsustainable.

 

The above statistics & graphs are based on current law which include a significant one-time reduction for most physicians starting in 2025 followed by a slow rate of reimbursement growth that is notably lower than projected physician cost increases – i.e., it is not going to work when projected costs exceed projected reimbursements.  Accordingly, the Trustee's report also included a section under a hypothetical modification to current law that mostly dealt with maintaining physicians' reimbursement schedules – see dotted line on graphic below that portrays a more accurate condition than the current law condition described above, which is bad enough.

 

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I have advocated a premium support system as the solution for Medicare's financial problems since @ least 2012 – premium support will gradually phase-in thereby weaning people off Medicare while providing the freedom to choose whatever healthcare level of coverage each person prefers.

 

The premium support system would not affect anyone age 55 or older or those currently on disability.  Anyone age 54 or younger would switch to the premium support system when they turned 65 meaning the government would provide a demogrant for beneficiaries to purchase private insurance.  The original amount of the demogrant would be sufficient for people age 65 the first year of the premium support program to buy the equivalent Medicare coverage in the open market.

 

The premium support dynamic is clearly illustrated by looking @ the bottom curve on the following graphic that shows four cost trajectories illustrating the Medicare burden.  The bottom curve is the only one that bends down – it is for premium support with a growth rate based on the Consumer Price Index (CPI).  The cost curve bends down even faster if the premium support demogrant is frozen with no increase due to inflation.  People age 54 & younger would follow a sliding scale with people in their 50s receiving appreciably more purchasing power from the demogrant than those just entering the workforce who would not rely on the government @ all when they turn 65.

 

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Ever since the early 1990s many companies, such as IBM, ConocoPhillips, Delta Airlines, & Coca Cola, set ceilings on how much money they would ever pay for retiree healthcare costs – this follows the principle of unindexed to inflation premium support that needs to be applied to Medicare as well.  Younger employees & future retirees can see that their private sector employers or federal government will be providing less & less healthcare benefits each year as inflation keeps increasing their share but not their employers' or the government's.

 

But not only large companies are trending in this direction to solve their healthcare cost problems – in 2017 sixteen percent of small businesses (3 to 49 employees) that did not provide specific healthcare insurance policies did give their employees some money toward purchasing their own plan themselves & in 2012 Michigan stopped offering retiree healthcare to new employees but instead, in a form of premium support, contributed an additional 2% of salaries to new employee 401(k) plans with the idea that this money could be used for healthcare needs in retirement.  Michigan's retiree healthcare liabilities dropped about $20 billion since the program started.

 

Medicare is well liked by seniors & what's not to like – good coverage (if you have supplementary Medigap coverage also) @ a subsidized rate where beneficiaries pay a fraction of the real cost – except that it is not financially sustainable.  The above description of Medicare's funding problems presents a clear account of what lies ahead for unsuspecting seniors if a solution like the premium support system is not implemented.  How unkind is it for our elected representatives to let the current Medicare condition continue until benefits start to be curtailed?  It is the elderly & people over age 55 who are dependent on the Medicare programs who will be hurt the most when spending cuts occur.  Just what will these people do then?