In 2016, Medicare spending accounted for 15% of the entire federal budget at about $650 billion. Major reforms are absolutely crucial to ensure solvency for the next generation.

Some options include: Medicare cost sharing and restricting Medigap coverage.

Historical Perspective:
In 1965, President Johnson launched the Medicare program to provide health care coverage for American seniors.

The program has two major components that, together, provide for basic health needs. Medicare Part A covers care at medical facilities such as hospitals or inpatient clinics. It also, sometimes, covers the costs of nursing homes, hospice care, and home health care, with limits.

Medicare Part B, on the other hand, covers routine medical care, such as lab tests and doctor visits. It also covers medical devices such as oxygen tanks and wheelchairs.

By grouping together older citizens into a single insurance plan, Medicare seeks to guarantee treatment for their more frequent and higher-risk medical needs. However, while seniors today receive universal access to care through the program, the declining quality and exploding cost of Medicare threatens whether the program will even exist for much longer.

Nearly 10,000 retirees per day become eligible for Medicare benefits due to the growing size of the baby boom generation. This trend is set to continue over the next two decades, which means that the program will rise from covering 52 million beneficiaries today to over 81 million beneficiaries in 2030. The problem is that there simply isn’t enough money to cover every senior who was guaranteed the Medicare benefit. If we don’t fix the system now then millions of seniors will lose health care when they need it most.

The Medicare Picture

Unlike other entitlement programs that provide direct aid programs to people like welfare and social security, Medicare is a government-sponsored health insurance plan. That means it requires all the complexity of a private insurance policy. The Center for Medicare Services administers the program and is responsible for pricing all medical services, setting cost sharing requirements like copays and deductibles, incorporating doctors and hospitals into the network, and many other health care activities. Because there are numerous moving parts there are no silver bullets to reduce Medicare’s costs.

The Medicare program is the largest driver of federal healthcare spending and debt over the long term. Combined with the other government health services, it will be the largest portion of the budget by 2038. In 2015, Medicare payments exceeded $630 billion, and the program is expected to nearly double in just 10 years, reaching over a trillion dollars by 2023.

medicare picture
However, the annual cost of the program pales in comparison to its future obligations. These unfunded liabilities are promises made to current and future beneficiaries and amount to $37 trillion.

Worse, the payroll taxes and premium dollars used to fund Medicare won’t be sufficient to reimburse older American’s health services. Doing nothing would demand tax hikes on current workers, take more money from senior’s pockets, and borrow so much that interest on the national debt will eclipse paying for services that Americans actually need.

A Unique Problem

Historically, health care spending has risen faster than economic growth making it quite expensive year after year. The Congressional Budget Office projects growth over the next decade to be almost 6 percent annually, which is far faster than the United States’ average annual economic growth rate of 2.7%.

This scenario reduces the hope that faster economic growth can offset the higher levels of federal spending needed to keep up with health costs.

The nature of the Medicare problem lies in its inability to finance its promises efficiently. The Medicare program is divided into four distinct parts with their own specific set of medical services and financing. Part A is funded by a trust fund that collects payroll taxes from current workers (similar to Social Security). Parts B and D are funded by their own trust fund that receives revenue from general taxation. Part C provides supplemental coverage for services that Medicare doesn’t provide and is paid for by seniors’ private premium contributions.

Both trust funds face unique problems:

Part A With a weak economy and declining ratio of the workers to retirees, the trust fund has been spending more than it has taken in since 2008. This means that surplus reserves in the trust fund need to cover the difference to pay out Part A benefits. The trust fund can to do this until 2026 when benefits will only be able to match payroll taxes, which means deep cuts for all beneficiaries

Parts B and D– This fund is financed adequately because it derives income from general revenues and premiums. However, since health care costs are expected to grow between 6 – 9 percent each year, more money from general taxation will be required. By taking a larger share of government funds from the rest of the budget, Medicare will crowd out other areas of federal spending. This will mean higher borrowing costs or higher taxes to accommodate the growth.