Let's at the outset establish something about entitlements: Medicare, Medicaid and Social Security are not the same program, don't have the same financing, don't have the same problems and don't have the same solutions. That's important, because it's easy to start talking about one and slip into talking about another. The complexities of individual state-supported Medicaid won't be covered today at all, and for the purposes of today's discussion, let's just get Social Security off the table, just like Congress ought to do.
Social Security is not responsible for the deficit. It has its own funding mechanism, and while there is an issue in a few years, there are easy solutions to adjust revenue to match or nearly match expenditure (link is to ssa.gov.)
By the way, if you're wondering why the green income line is so spikey (it looks like an EKG), it's seasonally dependent.
• Tax income reaches a peak in the second calendar quarter when many self-employed people pay their taxes with their income tax returns. After the second quarter, tax income falls as earnings of more and more people reach the taxable maximum for Social Security.You can see from the graph that there are some recent quarters where outgo is more than income and the green line falls below the blue. In fact, Social Security is projected have enough funds for full benefits until
• Interest on special-issue securities is paid on June 30 and December 31. While relatively small amounts of interest are paid in every month when securities are redeemed, interest income is always largest in the second and fourth quarters.
We need a fix for 25 years from now, and it'll be cheaper and easier to fix it now. As it happens, Dylan Matthews had a nice post last year showing what can be done to fix the problem:
Currently, wages over a certain yearly total ($106,800 this year) are exempted from Social Security payroll taxes. Medicare's payroll tax has no such cap...So from now on, whenever you hear Social Security is on the table, our answer should be fine, so long as we are talking about keeping the benefits and raising the cap. Are we resistant to changes in Social Security? Do we refuse to consider any changes whatsoever? Of course not. See above.
While all proposals put a dent in the shortfall, completely eliminating the cap without increasing benefits actually creates a long-term surplus, and eliminating the cap while increasing benefits comes close. The nature of Social Security as a social insurance, rather than welfare, program suggests that the latter proposal may be more palatable, as it retains the connection between what wage-earners pay into Social Security and what they get out of it.
Well, that was easy. Now we can talk about health costs.
One note about language before we get started:
"...when we're talking about cuts in things like health care and elderly support programs," [former Treasury Department official Eugene] Steuerle says, "we're basically talking about cuts in a rate of growth."And there we have a problem, not so easily solved: the current rate of growth is not sustainable. In fact, it's getting out of control because baby boomers are aging (story from 12/30/2010):
Health care, in other words, is always growing. If it's going to grow by $100 billion next year but is trimmed to grow only by $80 billion, that's still called "a cut."
"So the language can be very misleading," Steuerle says. A rate of sustainable growth is the real goal of any sensible Medicare reform proposal, he says.
Starting on Saturday, Baby Boomers begin turning 65 and qualifying for Medicare — one every eight seconds. A record 2.8 million will qualify in 2011, rising to 4.2 million a year by 2030, projections show.That is going to significantly add to Medicare costs over the next several decades. As boomers age, they/we will flood the system, and that's not fully addressed by our current health reform law:
In all, the government expects 76 million Boomers will age on to Medicare. Even factoring in deaths over that period, the program will grow from 47 million today to 80 million in 2030.
The federal health law, which will expand coverage to 30 million currently uninsured Americans, will have little effect on the nation's rising health spending in the next decade, a government report said today.The new health care law will keep the growth of costs under control (a good thing!) while insuring more people—a lot more people—in various ways, including through the expansion of Community Health Centers (there was $2 billion appropriated for federally qualified health centers in the 2009 stimulus package and another $28 million provided by HHS just last week.) Insuring more people and getting them access to health care is a good thing, even if it is not single payer (which I support, which is not what passed Congress, and which is a debate I will not rehash here.) But regardless of how efficient the new health care law proves to be, adding many more people to the system from the aging boomer population will cost more. This is from a recent article in the New England Journal of Medicine (my bolded):
The report by the Medicare Office of the Actuary estimated that health spending will grow by an average of 5.8 percent a year through 2020, compared to 5.7 percent without the health overhaul. With that growth, the nation is expected to spend $4.6 trillion on health care in 2020, nearly double the $2.6 trillion spent last year.
Health law critics said the report confirmed their concerns. "Most of us understood the health reform law was about expanding coverage not cutting costs," said Joseph Antos, a health policy expert at the conservative-leaning American Enterprise Institute.
But White House Deputy Chief of Staff Nancy-Ann DeParle said the report showed Americans were getting a good deal. "The bottom line from the report is clear: more Americans will get coverage and save money and health expenditure growth will remain virtually the same," she said on the White House blog.
On paper, the ACA significantly reduces the fiscal burden associated with Medicare: the Centers for Medicare and Medicaid Services estimates that it will slow per-beneficiary spending growth to about the rate of GDP growth, largely by reducing payments to providers and health plans. The ACA also establishes pilot mechanisms for transforming fee-for-service Medicare into a bundled-payment system with broader integration of care, which could promote cost containment by enabling providers to better capture practice efficiencies. Nevertheless, Medicare spending would still consume a growing share of the GDP because of increasing numbers of beneficiaries. Thus, even if the ACA achieves its ambitious goals, Medicare would still need extra resources to solve this demographic problem. Although some additional resources could come from reducing waste in the system, no industrialized country has ever achieved sustained growth rates of health care spending below that of the GDP, so it seems unlikely that Medicare's growth could be reduced below the projected ACA trajectory.ACA, the health care act, does hold down costs by curtailing payments to providers and organizations and promoting efficiencies like electronic medical records (see Health Care Reform and Cost Controlby Peter Orszag and Ezekial Emanuel) but since they are not yet implemented, that's still on paper.
So, what about Medicare and Medicaid, now?
Medicare and Medicaid spending rose 10% in the second quarter from a year earlier to a combined annual rate of almost $992 billion, according to new data from the Bureau of Economic Analysis (BEA). The two programs are on track to rise $90 billion in 2011 and crack the $1 trillion milestone for the first time.As people age, they use more services. As people lose their jobs and lose health insurance, they use more government services.
The jump in health care spending is the biggest since the Medicare prescription drug benefit was added five years ago and ends a brief lull in the spending increases that occurred during the economic downturn.
The debt limit and spending package approved by Congress and Obama don't restrict costs of Medicare, Medicaid and other entitlement programs. The rapidly escalating costs of the health care programs will challenge lawmakers seeking to rein in federal spending in the future, especially in 2014, when coverage expands to people who are uninsured now.
The latest spending surge in federal health care is driven by more people getting more treatment, not by price increases. Health care inflation is at its lowest level in more than a decade — a 1.7% annual rate — but the aging population and the weak economy are sending more patients to government-financed care.Now, another part of the equation is that average payouts for Medicare are three times what the average person pays in. When you pay a Medicare tax, you're paying for your parent's Medicare and your kids will pay for yours. And, ultimately, that's not sustainable.
There's a reason system current system is unsustainable, says Eugene Steuerle, a former Treasury Department official and senior fellow at Washington's Urban Institute. He boils it down to two simple numbers.We know that by a different name: "deficit".
"An average couple retiring today has paid just a little over $100,000 in Medicare taxes" over the course of their working lives, Steuerle tells Guy Raz, host of weekends on All Things Considered.
And what do they receive?
"About $300,000 in benefits" — even after adjusting for inflation...
The result is a Medicare system that only pays for one third of itself. The shortfall is made up — in part — from other sources of revenue.
"It's also borrowing from China and Germany and a lot of other countries," Steuerle says.
From the New England Journal of Medicine comes a graph illustrating how Medicare is paid for, and note the growing part that is made up of general revenues (click the graph for a bigger, more readable version):
The public financing of Medicare has particular implications for the economy. Specifically, raising taxes to pay for public insurance exerts a structural drag on the economy even if the revenue is spent on care; the same is not true of unsubsidized, privately purchased care or insurance. The net size and timing of the economic consequences depend on how the taxes are raised and how the revenue is spent. Deficit spending on health care also carries an economic cost: taxes are required to pay back any borrowed money (with interest), and rising debt-to-GDP ratios may have calamitous effects on the country's future ability to borrow. Moreover, increased spending on health care is not necessarily good for the economy even if it increases health care employment: spending on low-value health care diverts resources from other uses that could do more to boost the GDP and create jobs.The program changes that would reduce costs include some contained in the Affordable Health Care Act when fully implemented, as well as some included in these excellent suggestions by economist Austin Frakt. Certainly providers have to do their share in controlling costs. Health care costs themselves are unsustainable, and Medicare is just part of that big picture. And for more on what can be done about health care costs, I highly recommend Medicare, Our Deficit and Honesty by Dr. Chris Lillis and [my friend] Dr. Christopher Hughes, published at Doctors for America.:
Dr. Robert Levine wrote this piece a few years ago, and estimates that about a trillion dollars is wasted every year in our health care system between unnecessary care, administrative waste and fraud (not all in the Medicare system, but a substantial portion). Find it hard to believe? Then you have not read enough. Physicians are part of the problem in ordering and performing unnecessary tests, procedures and surgeries, as outlined here by Dr. Rita Redberg.
Of course, one way to control costs is simply not to cover people so they don't get health care.
The Medicare actuaries acknowledged that they were off on one of their estimates last year. At that time, they predicted that national spending in 2009 would grow by 5.8 percent, instead of the 4 percent growth that the report said actually occurred. Keehan said one of the factors helping push that prediction off the mark was that fewer people than expected joined COBRA plans after losing their jobs and that resulted in fewer people with health coverage and less spending.I certainly don't advocate saving money by not covering people. The idea is to get folks the care they need, not deny it to save money. Then again, I don't work for an insurance company. In any case, the actuaries figure that as people become more aware of their options, including the ones mentioned above, costs will eventually go up.
The office also predicted last year about 375,000 people would sign up for new Pre-existing Condition Insurance Plans by 2013. But since the plans began a year ago under the health law, only about 20,000 people have signed up.
For now, just note that because of that projected shortfall in Medicare hospital insurance, and the need to supplement with general revenue to make up the difference, Medicare will be on the table for discussion even when Social Security is not.
Here's what the federal trustees conclude:
Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided.
The financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected can adequately prepare.
And don't forget, it's not all about cuts, it's also about funding. We might start by cutting our military costs (wars are expensive) and applying those funds for needed programs at home. We might even tax the wealthy and corporations at a fair rate. But even if we do, there will be lots of demands on that money, and in any case, health care costs (and slowing their rate of growth) are still going to have to be managed in a way that does the most good for the most people.
In reviewing both Social Security and Medicare financing, the Center on Budget and Policy Priorities comes to the same conclusion: "Social Security’s funding shortfall is relatively small and manageable", but "Medicare’s financial problems are much more challenging."
The bottom line is that there will have to be adjustments made to Medicare (and easier, but necessary, adjustments made to Social Security.) That's simply not debatable. Therefore, the political question isn't why Medicare and Social Security are on the table, it's whom do we trust to do it in a way that preserves the programs and protects the elderly?