On Tuesday, March 25, 2008, the Medicare Board of Trustees released its annual report examining the fiscal status of Medicare.[1] As expected, the Trustees issued a "Medicare funding warning" based on the proportion of general revenues financing the Medicare program (see our February 21 Weekly Alert). The Trustees project that Medicare's Part A trust fund will exhaust its reserves in 2019, the same year the Trustees predicted last year, albeit slightly earlier in the year. With this information, the Trustees recommend action to address Medicare's fiscal challenges.

A cursory glance at newspaper headlines the morning after the report was issued yielded the following: "Government Benefit Programs in Trouble" (Associated Press), "Medicare Depleted By 2019, Annual Report Says" (Chicago Sun-Times) "Outlook Remains Bleak For 2 Programs" (New York Times). These headlines suggest that the media seized on the negative implications of the Trustees' report. However, as with most complex problems, headlines do not tell the entire story, and neither does one Report. To be sure, Medicare faces fiscal challenges, but Medicare's challenges mirror those in the rest of the health care sector.  Wasteful laws that favor private companies over beneficiaries further undermine Medicare's financial well-being.

What We Forget

When we examine the costs of Medicare, we often forget to examine its value. For over 40 years, Medicare has provided quality health insurance and access to healthcare for older people and, since 1972, for people with disabilities as well. Medicare has kept many beneficiaries out of poverty and has absolved their children from having to pay their medical bills. In 1950, the average life expectancy at age 65 was 13.9 years. By 2004, that number had increased to 18.7 years.[2] Those five additional years translate to more time spent with families—grandparents becoming great-grandparents.

Health Care Costs

Given these benefits, it is in the interest of every citizen and our society as a whole to consider how we can sustain Medicare for tomorrow. Most experts in health policy, including the former Comptroller General and the director of the Congressional Budget Office (CBO), agree that the majority of the financial troubles facing Medicare are neither endemic to Medicare nor due to the coming 'wave' of the Baby Boom generation. Rather, the financial troubles facing Medicare are a symptom of the rate at which cost growth in the entire health care sector outpaces the growth of the economy as a whole.

Savings Can Be Found

While escalating costs facing the nation's entire health care system will require the most attention, Congress should also look to other significant ways to save money for Medicare without hurting beneficiaries. Unfortunately, many of the options that have been proposed are dwarfed by the most egregious and wasteful spending measure in the Medicare program: lavish  overpayments to the private insurance companies that offer private plans under the subsection of Medicare known as "Medicare Advantage" (MA).

According to the Medicare Payment Advisory Commission (MedPAC), in 2008, these companies are expected to be paid 113% of the cost of providing the same beneficiaries with coverage under the traditional Medicare program,[3] or more than $16 billion per year.  If Congress were to set the payment rate for private Medicare plans equal to payments for traditional Medicare, the CBO estimates that the Medicare program would achieve a savings of $149.1 billion over the time period 2009-2017.[4]

It is often difficult to comprehend these savings. Consider that in his proposed legislation to address last year's 'Medicare funding warning,' President Bush proposed to further stratify Medicare beneficiaries by adding an income-related premium to Part D. That plan would achieve a savings of only $9.3 billion over the same nine-year time period, 2009-2017.[5]  This is less than one year of the savings that would be achieved simply by making private plans compete on an equal footing with traditional Medicare.

Beneficiaries Are Paying

Eliminating the enormous overpayments to Medicare Advantage plans will create dramatic savings in the Medicare program. Nonetheless, policymakers will likely continue to look to beneficiaries to find additional savings. They forget how poor most beneficiaries are, and how high their out-of-pocket healthcare costs are, even with Medicare.  For example, 59% of people age 65 and over have an annual income of less than $25,000.[6] The Chief Medicare Actuary acknowledges the significant limits on what additional burdens most beneficiaries can bare:

Under reasonable assumptions as to future growth rates in SMI [Part B] expenditures and beneficiary incomes, the average out-of-pocket SMI costs would eventually represent an unaffordable share of income for many or most beneficiaries who do not have subsidized coverage of such costs…

In essence, asking Medicare beneficiaries to pay more would add an unaffordable burden for most beneficiaries. Beneficiaries with Part B currently pay a premium of $96.40 per month (more for those with higher incomes). Additionally, beneficiaries must pay 20% of the costs of most care they receive under Part B, as well as an annual Part B deductible of $135. If a beneficiary requires a hospital stay, s/he must pay a hospital (Part A) deductible of $1,024. To help defray these costs, many beneficiaries purchase a Medigap policy, which pays many of these costs and allows beneficiaries to better regulate their medical expenditures, but these policies can cost hundreds of dollars per month.  Others join private Medicare plans, only to discover that they can't get the coverage they need or use the healthcare providers they choose when they get sick.

Reset Our Priorities

How can Part A of Medicare be unsustainable while Parts B and D are adequately financed? The newspaper headlines about Medicare point to a coming "bankruptcy," in reference to the Part A Hospital Insurance (HI) Trust Fund. The HI/Part A Trust Fund aggregates past surpluses for use in the future. This Fund is only used to pay for Part A expenses (hospital stays, skilled nursing facility stays, some hospice stays). Medicare Parts B and D are financed through a separate, Supplementary Medical Insurance (SMI) Trust Fund., which pays for Part B physician and outpatient services and for Part D medications. In their report, the Trustees note that "the SMI trust fund is adequately financed because beneficiary premiums and general revenue contributions, for both Part B and Part D, are established annually to cover the expected costs for the upcoming year."[7]

If There's the Will There's the Way

Medicare Part A is "unsustainable" only if Congress, the President and the American people do not have the political will to take the action needed to strengthen it. If there's the will, here are some ways to shore up Medicare:

• Repeal the law that limits Medicare's general revenue spending to 45% of all program costs. No other program of such value to the citizenry—education, housing, defense, veterans' programs—is limited in this way.  Medicare should not be either.

• Stop the lavish overpayments to private Medicare plans.  Pay them no more than is paid to provide coverage to people in the traditional Medicare program.

• Restructure Medicare so that Part A draws on annually adjusted revenues, just as Parts B and D do. 

The American people value Medicare. It has improved the lives of millions of Americans across generations. Policy makers should use this knowledge to summon the will to take the actions necessary to sustain Medicare for future generations