In my previous diary, I described how Medicare works and the cost to seniors. This post will discuss funding, sustainability, and look at some reforms to improve the program for beneficiaries while lowering the overall cost of the program. While I was writing this, President Obama announced his plans for deficit reduction, including some Medicare reform. I hope this post provides some insight into why some reforms are needed.
This diary has a lot of numbers which make it somewhat difficult to read; however, without the numbers, it does not seem to me that one can understand the situation.
Funding for Part A, hospitalization insurance.
The Medicare portion of the FICA tax is the funding source for Part A. This is a 1.45% tax on taxable gross earned income, paid by both employers and employees. Unlike the SS portion of the FICA tax, there is no cap on the amount of income subject to the tax. However, it is only on earned income, and therefore, capital gains, dividends, interest, and other sources of investment income are not subject to the tax.
Part A has a trust fund called the HI (Hospital insurance) trust fund so in addition to current FICA tax receipts, there is interest income from bonds in the trust fund and a few other funding sources such as premiums from those who do not have enough quarters paid in and taxes on benefits. However, since 2008, expenditures have exceeded the tax revenue coming in and the interest income from these bonds. For example, at the end of 2009, there was $304.2 Billion in the HI fund. Income during 2010 (from FICA and interest) was $215B, and expenditures were $249.9B which meant that $32.3B more was paid out than came in through the FICA tax ($182B), interest income ($13.8B), premiums ($3.3B), taxes on benefits ($13.8B), and other ($2.9B). The assets at the end of 2010 were $271.9B. Note that this was before any baby boomers were added to the program. The trust fund will be exhausted in 2024, at which time only current income will be available for funding Part A. This income is projected to cover 90% of expenditures in 2024, declining to 76% in 2050 and increasing to 88% by 2085.
Funding for Parts B and D (Medical insurance and drug benefits)
Parts B and D are funded through the SMI trust fund which relies primarily on the general fund and premiums. Premiums for each of these programs cover only about ¼ of the necessary revenue and about ¾ comes from the general fund. In 2010, the expenditures for Parts B and D were $274.9 billion, with $58.4B coming from premiums, $204.6B from general revenues, $4B from transfers from states, and $3.1B from interest on bonds. The SMI fund was reduced from $76.6B at the end of 2009 to $72.1B at the end of 2010. Again this is before any baby boomers were added.
Projection of Future Expenditures
These are projection based on current policy and do not obviously reflect any changes which are being proposed by either the President or the Congress.
In 2011, Part A expenditures are projected to be $263B and is expected to increase to $399B in 2020. This is a 51% increase in the next 9 years. Part B expenditures are projected to be $228B this year and increase to $376B in 2020. This is a 65% increase in the next 9 years and will mean that $282 billion will come from the general fund. Part D expenditures are projected to be $67B this year and increase to $157B in 2020. This is a 134% increase in the next 9 years with $118B coming from the general fund. In other words, the subsidy for Parts B and D coming from the general fund in 2020 will be $400B, compared to a little less than $205B last year . As time goes by and more and more baby boomers are added, the amount spent will continue to rise. In 2010, there were 47 million Medicare recipients; this is expected to rise to 80 million by 2030.
The Federal tax receipts in 2010 were $2,162 Billion of which $865 billion was for Social Security and social insurance, leaving $1,297 billion from other sources of revenue (income tax, corporate income tax, excise taxes, and other). It is from this $1297 billion that the $205 billion not covered by premiums for Parts B and D come. Of course, the actual expenditures for 2010 as budgeted was $3,456 Billion with the difference being borrowed. It would seem obvious that this is not sustainable.
Possible Reforms
The memo of the Democratic members of the House Ways and Means Committee lists 24 or so proposals to cut Medicare expenditures with the pros and cons of each. Some, such as raising the eligibility age, are not something I would support, but other options have much to recommend them. Since I wrote this this morning, President Obama has made his proposals, some of which are discussed below and some of which are different, but are included in the memo mentioned above.
One of the most cost effective and generally well regarded proposals is to establish a Part D rebate for dual eligible recipients. This would save $120 billion over 10 years.
Prior to the establishment of Medicare Part D in 2006, dual eligibles received their drugs through state Medicaid programs. Drug manufacturers were required to provide rebates on these drugs, which resulted in substantially discounted rates. Effective 2006, the Medicare Modernization Act of 2003 shifted drug coverage for these beneficiaries to the Medicare Part D program, but the rebate policy did not follow the people. This policy option would restore rebates for dual eligible beneficiaries and apply it to low-income subsidy recipients as well
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Another proposal that the President has supported is increasing the surcharge that high income recipients pay on their premiums for Parts B and D by 10% and freezing the income thresholds for 2 more years than the ACA did (i.e. until 2021). This would produce savings of $13.7 Billion over 10 years.
These two proposals would produce more than half of the $248 Billion in “cuts” over 10 years that President Obama is proposing and I believe both are in his proposals today.
Other proposals include recovering erroneous payments to insurers for Medicare Advantage ($2.6 B), cutting reimbursement for medical education by lowering payments to students and hospitals ($15 B), eliminating or phasing down reimbursement to hospitals for bad debt ($15-30 B), eliminating or cutting back on the extra 25% that rural hospitals are paid (up to $62.2 B), recouping the 2011 overpayments to Skilled Nursing Homes due to a change in rules ($4.5 B), and accelerating home health care rebasing under the ACA ($3 B).
None of these proposals even touch the elephant in the room which is end of life care. Here are two articles concerning hospice care as it relates to healthcare cost and quality of life.
Reuters
New Yorker