Medicare is America’s health insurance program for people age 65 and older, and for some younger disabled citizens. Medicare spending has steadily increased and continues to grow as a percentage of the federal budget. In 1990, Medicare equaled 8 percent of all federal spending; by 2000, it was 12 percent; 15 percent in 2010; and is projected to be 18 percent by 2021, and 19.5 percent by 2025. This trend cannot continue.
The trend is being driven by our aging population and rising health care costs. People are living longer and the huge baby boomer generation is retiring. The population of people 65 years old and over in the U.S. will increase 80-85 percent over the next 20-25 years. The massive number of Baby Boomers retiring is making our colossal national debt problem much worse, as we lose the income taxes and payroll taxes they have paid for years, and spending for their Medicare and Social Security benefits begin to mount.
Medicare spending is projected to increase from $600 Billion in 2014 to $1 trillion by 2022. It’s important that we come up with some solutions to begin reducing Medicare spending as a percentage of the federal budget. The best way to do this is to make gradual changes to the program over time. If we don’t, Medicare as we know it won’t be around for future generations.
Medicare consists of four separate programs: Part A, Hospital Insurance, or HI; Part B, Supplementary Medical Insurance, or SMI; Part C, Medicare Advantage, or MA; and Part D, outpatient prescription drug benefit (for more information on Medicare see blog from August 2).
Over the past few years, lawmakers have offered a number of proposals to reduce Medicare costs, but none have been embraced. Below, I will outline some of the most talked about solutions, and how they can reduce Medicare spending.
One option is to raise the retirement age to 67 to be in alignment with the Social Security program, which is in the process of raising retirement its age from 65 to 67. This was done in gradual steps over many years, by slowly increasing the retirement age depending upon a person’s year of birth. This process will be complete in 2029, when people born in 1962 turn 67. The non-partisan Congressional Budget Office (CBO) reports that if the retirement age for Medicare was slowly raised to 67 between 2017 and 2029, it would reduce Medicare spending by over $113 billion the first ten years, and reduce Medicare spending from 19.5% to 19.1% of the federal budget by 2025.
A second option is to raise the Medicare payroll tax by one percent. Currently, Medicare Part A is mostly funded by a 2.9 percent payroll tax, half paid by workers and half by employers; and higher-earning individuals pay an additional .9 percent if their income exceeds $200,000 (married couples filing jointly earning over $250,000). This proposal would split the one percent increase between employees and employers, so that each would pay 1.95 percent instead of the current 1.45 percent; and higher-earning individuals would pay 2.85 percent instead of 2.35 percent.
These payroll tax revenues are credited to the HI Trust Fund, which pays all benefits and associated administrative costs for Medicare Part A. At the end of 2014, this trust fund amounted to $197 billion. Over the years there have been several times when the fund was projected to be insolvent, but Congress has made periodic adjustments to the payroll tax to keep the trust fund in the black, and with large enough surpluses to pay future claims many years in the future.
It is projected that the HI Trust Fund will be depleted in 2030 unless changes are made to payroll taxes. If changes aren’t made and the fund runs out of money, on-going payroll taxes will be sufficient to pay only 86 percent of HI costs. Over time, the revenues from payroll taxes will continue to decline, and the trust will only be able to pay 80 percent of costs by 2050.
If payroll taxes were raised one percent, the CBO estimates that over ten years it would raise an additional $800 billion for the Medicare trust fund, keeping it solvent for many more years and remove the worry of reduced benefits in the Part A program after 2030. This option would also reduce Medicare spending from 19.5% to 17.9% of the federal budget by 2025.
A third alternative is to increase premiums for Parts B and D. At this time, premiums paid by Medicare recipients amount to about 25 percent of the cost of these two programs, and the federal government pays the rest. The CBO estimates that if amounts paid by participants were raised 2 percent of costs each year, over five years, to 35 percent for both programs, the savings to the federal government would be $274 billion over ten years. This option would reduce Medicare spending from 19.5% to 18.6% of the federal budget by 2025.
A fourth option is to increase out of pocket costs to enrollees. Advocates of this idea maintain that some seniors who purchase supplemental (MediGap) policies have little or no incentive to avoid expensive and possibly unnecessary treatments. This is especially true if a recipient’s supplemental policy has “first-dollar” coverage for all deductibles, co-pays, and co-insurance, and zero out-of-pocket expenses. The CBO reports that 60 percent of people with MediGap policies have first-dollar coverage, and cites a study from a Medicare that it spends 33 percent more per recipient who has MediGap coverage than those who don’t.
By increasing deductibles and co-pays, and limiting coverage to less than 100 percent (but with a maximum exposure cap), participants would most likely be more prudent in their health care decision making. The CBO estimates that these kinds of steps could save Medicare up $114 billion over ten years, and reduce Medicare spending from 19.5% to 19.2% of the federal budget by 2025.
There are several other options for reducing Medicare spending, but the four above are among the ones most written and talked about. Of course, all four of these options have critics, and they have valid some reasons to oppose them. I’m not endorsing any of these alternatives at this time, but it’s evident we have to make some adjustments to the program if we want to keep benefits at current levels, and without adding to an already enormous national debt.
Combining all four options would save $1.3 trillion over ten years, and decrease Medicare spending from 19.5% to 16.3% of the federal budget. This is a significant amount of savings, and a step in the right direction towards reducing Medicare spending as a percentage of the federal budget. Even then, a level of 16.3 percent may not be sustainable in the long run. I’m not sure what a sustainable number is yet, as I am still in the process of studying the federal budget. I hope to finish this process in the next several weeks.
Whatever we do, it’s important that we don’t make substantial changes to the rules of the program for current retirees, or people near to retirement age. But we need to take action sooner than later. Doing so will also permit the consideration of a broader range of solutions, and provide more time to phase in changes so that people have adequate time to prepare.
I’d like to get your feedback on the four options listed above. Feel free to leave your thoughts in the “comments“ section below. If you’d like to keep your thoughts private, please reply with an email instead.
No blog next week – on vacation
Links to related blogs:
Medicare turns 50 – will it survive another 50 years? http://www.commonsensecentrist.com/medicare-turns-50-will-it-be-around-another-50-years/
Possible Solutions for Fixing Social Security: http://www.commonsensecentrist.com/possible-solutions-for-fixing-social-security/
A Fiscal Straightjacket: http://www.commonsensecentrist.com/a-fiscal-straightjacket/
Building a Strong Economy: http://www.commonsensecentrist.com/building-a-strong-economy/
Greece’s Troubles: http://www.commonsensecentrist.com/what-america-should-learn-from-greeces-troubles/
China’s emergence as largest economy: http://www.commonsensecentrist.com/a-coming-new-order-in-global-financial-systems/
China and U.S. national debt: http://www.commonsensecentrist.com/china-why-deficits-and-the-u-s-national-debt-matter/
Budget concerns: http://www.commonsensecentrist.com/the-federal-budget-were-getting-boxed-in/
Economic growth: http://www.commonsensecentrist.com/growing-the-economy-the-road-ahead/
Fiscal policy: http://www.commonsensecentrist.com/leadership-not-misleadership/
Deficit reduction: http://www.commonsensecentrist.com/passing-the-buck-really-big-bucks-2/