Medicare Fund Shortfall: Statement of the Problem

JUNE 12, 1995 VOLUME 2, NUMBER 49

Medicare is projected to be bankrupt by the year 2002. That is the startling news from the Trustees of the Medicare Hospital Insurance fund.

Part A of Medicare (the portion that covers hospital insurance) currently costs about $150 billion per year. Approximately 10% of that cost is recovered from premiums charged to participants, with the rest coming from the tax of 2.9% on wages.

Projections for the next two decades, based on current levels of benefits and contributions, show that Medicare Part A will begin to expend more than it receives next year. The accelerating shortfall will have consumed the current $136 billion surplus by 2002.

Administration and Congressional figures have spent the six weeks since release of the projections trying to fix blame on one another and avoid authorship of the hard choices which must be made. Finally (though quietly), Congressional Republicans have begun openly discussing what measures are under consideration.

Republicans have arbitrarily determined that they must reduce the projected increase over the next two decades by $258 billion. This would permit Medicare to remain solvent until about 2013, when major changes would again be required as a result of the “baby boomers” turning 65.

This arbitrary target has produced tremendous glee on the part of Democrats, who characterize it as a “cut” in benefits and note the coincidental similarity to the size of a projected Republican tax cut. Unfortunately, discussion of specific proposals has not begun on either side.

What is Not Being Discussed

Two ideas not heard from either Democrats or Republicans:

  • “Single Payor” health care plans (like Canada’s) would reduce administrative costs (and insurance profits) dramatically–enough, according to some analysts, to permit government payment of all long-term care costs.
  • Direct regulation of medical costs could include doctor’s salaries, a critical component of medical inflation.

Republican Proposals for Reducing Shortfall

Republicans have begun discussing some specifics for Medicare change. Though no one is suggesting that they are in favor of any change in the hugely popular program, proposals are in circulation. Among Republican trial balloons:

  • “Incentive Based Medicare” would make 34 individual (and mostly small) changes to the existing program. Included are encouraging HMO participation, elimination of waste and overpayments to providers and extension of changes already made but scheduled to expire. One interesting new idea is to reward beneficiaries for challenging overcharges. Another idea, perhaps less likely to be popular, is to increase Part B premiums for recipients with incomes over $70,000 and require copayments for home health, skilled nursing and laboratory services benefits.
  • “Defined Medicare Contribution” is a proposal for the partial privatization of Medicare. Under this suggestion, each beneficiary would receive a voucher for the actual cost of Medicare coverage. Participants could then elect to use their voucher on traditional Medicare programs or private plans. Republicans expect the marketplace to provide HMO, indemnity, preferred provider and medical savings account plans; efficient plans would be favored since participants could pocket the difference between the voucher and the actual cost of each plan. Increases in the vouchers’ value would be capped at 7% for 1996 and 5% thereafter, regardless of the actual increase in medical costs.
  • “Private Plan Savings and Look-Back Sequester” is a fancy way of saying encourage more private market-based Medicare alternative plans. The entire available description of the crucial first half of this approach indicates that “proposals would be adopted to ensure the financial solvency and reduce the irresponsible growth in general revenue payments in the near term.”

Congressman Kolbe’s Idea

Southern Arizona’s Representative Jim Kolbe has an idea for review of proposed Medicare changes. Kolbe has convened a gathering of 40 southern Arizonans from various backgrounds to come up with suggestions for reform. The group had its first meeting Saturday, June 10, and heard an hour-and-a-half presentation by Kolbe, interspersed with questions about how to proceed.

The gist of Kolbe’s presentation:

  • Medicare will be bankrupt within seven years unless major changes are made.
  • Medicare must be preserved, as it is the main source of medical care for some 35 million participants.
  • Republican proposals are not “cuts” in Medicare, any more than President Clinton’s 1993 reductions in projected increases were “cuts.”
  • Democrats predominate on the Medicare Board of Trustees, yet have failed to make specific proposals for reform.

Kolbe’s group has been charged with responsibility for reviewing proposals for reform, generating new proposals and providing information to the community about the need for change. Deadline for completion of the project is July 5, 1995. If you have suggestions, questions or comments about what the Congressional response to the Medicare crisis should be, Kolbe’s Tucson office is located at 1661 N. Swan Road, Suite 112, Tucson, Arizona 85712. Kolbe’s staff can be reached by telephone at 881-3588.

Republican Strategists Propose

Republican spin doctors predict questions and suggest some answers:

Q: Aren’t you just going after Medicare to pay for tax cuts to the rich?

A: First 75 percent of the family tax relief in the budget goes directly to middle income families. Second, capital gains tax relief will benefit middle income families who own farms and small businesses, and will create jobs by generating savings and investment. Finally, even if we do no tax cuts, the Medicare trust fund goes broke in 2002. If we do nothing to rein in Medicare spending growth, we will have to triple current Medicare payroll taxes.

Q: The Trustees have pointed to Medicare’s coming bankruptcy for years now. Why the sudden urgency?

A: Republicans have always been concerned about keeping the promises we’ve made to seniors. This is the first report we’ve received as a majority party in Congress, where we are in a position to address the crisis. Democrats for too long made promises they couldn’t pay for. The new Republican majority is left to pay the bills and clean up after the big-spenders.

Q: Are you going to … a)raise the retirement age? b)raise premiums? c)raise deductibles? etc.

We are still working on the solutions to Medicare’s financial crisis. The problem is so big that it requires a restructuring of the program. We’re going to give seniors choices that give them more control over their health care dollars and more incentives to weed out fraud and abuse. Fee-for-service medicine will be an option.

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