Why Medicare Is Broken
Politics aside, can anyone explain how a federal program only 43 years old came to be insolvent? When Congress enacted the Medicare Act in 1965, the program was estimated to have an annual cost of under $10 billion for quite some time. Indeed, contributions from Part A payroll taxes and premiums for Part B were designed to create a surplus that would be held in trust for use in the future when revenues might not cover costs. In 2007, Medicare required an infusion of $178 billion of general revenues just to pay its current bills. How can we have gotten so far off track?
"The Facts About Medicare," an article that appeared in the July/August 2008 issue of Contingencies, the journal of the American Academy of Actuaries, attempts to answer this question. Six factors are blamed for what might be the greatest forecasting error in history. First, the Medicare population grew much faster than expected because of a marked increase in life expectancies (which means the program worked!). Second, new benefits and new covered populations have been continuously added since the inception of the program, the most recent being Part D prescription drug benefits. Third, medical costs have grown faster than wages during the same period, both because of price inflation and the addition of new medical technologies (we can do much more today than we were able to do in 1965). Fourth, the percentage of the program's cost shouldered by consumers has steadily fallen since inception.
The government (i.e., taxpayers) currently pays a much higher percentage and is expected to do so for many years to come. Fifth, the working population paying payroll taxes has grown at a much slower rate than the number of Medicare beneficiaries. At the start of Medicare, there were 5 workers for every eligible person. Now there are only 3.5 workers and that is expected to drop to 2.4 by 2030. Lastly, the entire health care system and our expectations about it have dramatically changed in the past 43 years. Simply put, Medicare has distorted the medical marketplace in unimagined ways, perhaps irreversibly.
So what can be done to correct this imbalance? The group of actuaries responsible for this article suggest that we can start by being honest with the way the books are kept. No solution is possible without objectively determining how much the program costs, who actually pays for it, and whether we as a society can realistically fund the present value of the future benefits that have been promised. This will require some difficult cost-benefit decisions as well as a debate about inter-generational equity.
A sustainable long-term funding mechanism for Medicare is desperately needed. The longer the delay in finding one, the more painful the remedy will be.
Congrats on the recent launch of your blog - I really like the "voice" it uses. Take care!