MEDICARE'S SOLVENCY:
HELPED OR HARMED BY THE MEDICARE ACT OF 2003?


On March 24, 2004 the Trustees of the Medicare program released their annual report on the state of the Medicare Trust Fund. The Trustees report that the Trust Fund is now expected to be exhausted in 2019, seven years earlier than previously projected. These projections, even if accurate, do not tell the tale for the entire Medicare Program. And the projection of a serious shortfall should not come as a surprise. These two points have not been made clear in many of the press reports about the Trustees' report.

The Medicare Trust Fund referred to in the Trustees' report funds Medicare Part A, that portion of Medicare which pays for hospital, nursing home, short-term home health, and hospice care. Physician services and most out-patient services are covered under Part B, which is funded by premiums from beneficiaries and general revenues, separate from the Trust Fund. The prescription drug benefit, planned for 2006, will also be funded outside the Trust Fund. So the Trustee's latest projection needs to be seen in the context of what the Fund does and does not finance.

Nonetheless, the projection is of obvious concern. We certainly cannot accept the loss of funding for the critically important services covered under Medicare Part A. But the deterioration of the Trust Fund should not come as a surprise, even if the actual dollar amount or date of demise is subject to debate. Just as with lunch, there is also no free health care. The aging population is growing, people are living longer with chronic conditions, and the cost of medical care is ever-increasing. Yet the Medicare Trust Fund, financed by payroll taxes from employers and employees, has relied on the same contribution formula for almost 20 years.

The matching payroll tax shares which finance the Trust Fund, 1.45% from employers and employees, have not been increased since 1985, despite the fact that the Trustees have alerted the public repeatedly that the Trust Fund is in jeopardy. While the projected year of the Fund's demise has changed from one projection to the next, the alarm has been ringing for years. Clearly, if the Medicare Fund is to remain solvent, the revenue formula must be increased from the formula set in 1985.

Unfortunately, the Medicare Modernization and Prescription Drug Act of 2003 will only exacerbate Medicare's precarious funding and encourage a call for drastic measures just when the largest group of elders in our history needs coverage. The new law mandates extraordinary payments to managed care companies, inflating Medicare's costs by approximately $46 billion over the next ten years. These inflated costs will not go to benefits for Medicare's intended beneficiaries, older people and people with disabilities, but rather to managed care, which already costs more than the traditional Medicare program.

Further, and unknown to most people, the 2003 law also establishes a new, arbitrary formula for defining when Medicare is insolvent. This formula, unlike any applied to other services funded by general revenues such as defense and education, would consider Medicare insolvent when it is predicted that more than 45% of total Medicare funding comes from general revenues. The extraordinary payments to managed care, the unrestricted drug costs to be paid under Medicare Part D, and the aging of our population make it all but inevitable that this definition will be met. Then Medicare will be declared insolvent and drastic actions will be required.

Now is the time to pay attention and to take corrective measures. We must properly fund the Part A Trust Fund, rescind windfalls to the managed care industry, and repeal the newly enacted Medicare insolvency definition. To do otherwise will ensure that Medicare will disappear for tomorrow's seniors.

For a detailed discussion of trust fund solvency issues, please see the following analysis: "Understanding The Social Security and Medicare Projections," and "Misleading Claims about New Social Security and Medicare Projections," prepared by the Center on Budget and Policy Priorities. Go to www.cbpp.org to view these items.


Copyright, Center for Medicare Advocacy, Inc.