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Opinion: Medicare, A Bulwark of Elderly Care Now and Tomorrow

Healthcare Basics: A series that details the fundamentals of Medicare and Medicaid, two costly programs that play a critical role in keeping millions of Americans healthy

Richard F. Keevey
Credit: Amanda Brown
Richard F. Keevey

Fifty-four years after Medicare and Medicaid were established, our nation is rapidly approaching a crossroads in how we provide and pay for these government programs that are critical to the health of millions of elderly, disabled and poor Americans. This is the third in a four-part series by Richard F. Keevey, the former budget director and comptroller for New Jersey, breaking down the complicated issues, explaining what the programs are and whom they serve, how they came to this juncture and where they are headed. Keevey will also suggest steps that could be taken now to forestall a crisis. Today’s focus: Medicare. Follow these links to read Part One and Part Two.

Overview

Nearly every American 65 or older relies on Medicare to meet most healthcare costs, including 1.6 million folks in New Jersey and 60 million nationwide. It is the second largest program in the federal budget (behind Social Security) and cost $711 billion in fiscal 2018.

Medicare is so large a portion of the healthcare market, it falls into the category economists call “quasi-monopsonist,” meaning its reimbursement rates and payment structure help define the market itself. Medicare plays a significant role in how pharmaceutical companies, hospitals, doctors and other health enterprises operate.

Total healthcare spending in the United States is almost 19 percent of national gross domestic product (GDP) and rising. The U.S. ranks first in health spending as a percentage of GDP (but only 51st in overall life expectancy). We spend $8,700 per capita, nearly three times what much of the rest of the world pays for healthcare.

Medicare encompasses approximately 25 percent of healthcare spending in the U.S.

As reported in the 2019 Medicare Trustees Report, the program’s fiscal future is in doubt as healthcare costs continue to increase. And now, the question of whether our country should have “Medicare for All” has entered the political arena. But first some background is necessary.

Despite initial struggles, Medicare has expanded, adding, for example, coverage for home-health services, and limits on out-of-pocket expenses. But, at other times some political leaders have attempted to reduce its scope. Former House Speaker Newt Gingrich tried to restructure Medicare into a defined-contribution voucher program, which would have increased costs to the client and limited coverage.

Other attempts at cost control — such as “capping” expenditures and the Medicare Catastrophic Coverage Act (MCCA) of 1988, whereby certain benefits were to be funded by an income-tax surcharge on beneficiaries — both failed.

More recently, there have been changes that enhance benefits for enrollees. Medicare Part D for pharmaceuticals was added, and Medicare Advantage was made available as a viable private-sector option.

Medicare’s administration is relatively simple, and very efficient. People enroll, receive a card which they present to the provider (doctor, lab, hospital, etc.), usually make a copayment and receive the service.

The provider sends the bill to the Centers for Medicare and Medicaid Services, a part of the federal department of Health and Human Services or its designee for payment. In some circumstances, additional action might be required, such as pre-approval for certain services.

Financial facts and problems

Below is a summary of how each component of Medicare is financed:

  • PART A (hospitalization): A payroll tax of 1.45 percent on total wages is paid by both employee and employer and an additional 0.9 percent is charged on joint incomes over $250,000. There is also a deductible of $1,316 for hospital stays beyond 60 days.

  • PART B (doctors and other providers): Monthly premiums range between $134 to $428, based on income, and are adjusted each year. If the recipient receives Social Security, the amount is deducted from the monthly check. The federal budget supports 42 percent of all costs for Part B, as well as Part D.

  • PART C (Medicare Advantage managed care): Is not funded separately but the revenue and tax monies are re-routed to private plans. Various plans have different options and cost structures. Interestingly, Part C enrollment has increased and it now covers 38 percent of all beneficiaries.

  • PART D (pharmaceuticals): Average monthly premiums start at $35 (again, based on income). As noted above, additional funding comes from the federal budget.

Most folks buy supplemental coverage (Medigap), as Part B typically pays only 80 percent of charges. There are 10 standard plans and they vary based on cost and coverage. These plans are purchased from the private sector but regulated by the federal government. On average, costs are $3,000 yearly.

The Medicare Trustee’s Report projects that Part A will become insolvent in 2026, when it will have insufficient funds to pay all claims. Available funds will only support 89 percent of hospital costs, a figure projected to drop to 78 percent in 2043.

Three fixes are evident: Reduce program reimbursements to providers, increase the 1.45 percent tax rate and/or dig deeper into the federal budget.

Insolvency does not loom in 2026 for Parts B and D as physician and outpatient costs and prescription drug benefits are funded by premiums (25 percent of costs), and tax revenue from the federal budget (75 percent). Revenue contributions are specifically set each year by Congress to assure no shortfalls.

But with costs projected to increase on average by 8.3 percent over the next five years, participants will face substantial increases in premiums and more support will be needed from federal taxpayers.

Observations and recommendations

The specter of insolvency for Part A distracts from the larger issues facing the Medicare program. With the number of beneficiaries and per-capita costs increasing, total Medicare spending will place increasing demands on the federal budget.

Enrollment is expected to grow from today’s 60 million to 87 million in 2040, and to roughly 2.5 million in New Jersey. The portion of tax revenue needed to support Medicare will increase from 18 percent of the federal budget today to 22 percent in 2020 and 28 percent in 2093.

The Medicare Trustee’s Report has a number of other wiz-bang numbers, but most alarming, the chief actuary has a concluding section that suggests if certain favorable assumptions do not materialize, those projections could be off by a third, with Medicare spending increasing to 8.8 percent of GDP instead of 6.6 percent.

Suffice it to say, Medicare is currently a dominant part of federal spending — and future costs will be significantly greater under any scenario.

It’s also fair to say that Medicare is here to stay. The elderly form a significant political constituency, one not to be tampered with. Once someone enrolls in Medicare, he or she remains a beneficiary for life — like with Social Security. But unlike Social Security, it not only provides financial support, but shapes the nature of medical services and clinical relationships for the balance of a lifetime.

So, what does all this mean for Medicare for All? I am not equipped to make any projections as to the cost of such endeavors, nor the viability of finding the money to support such expenditures. We can’t even find the revenues to pay for our current spending, except by borrowing and adding to the national debt.

My experience tells me Medicare for All is not feasible. It’s much too expensive and disruptive to folks who are happy with their existing coverage. But my morals tell me we need a way to provide healthcare at reasonable costs for everyone.

The Affordable Care Act (ACA) made a significant impact on reducing the number of uninsured. Today approximately 20 million have healthcare coverage under the ACA. That number could be higher since 18 states have refused to participate, and our current federal government seems to do all it can to discourage participation.

Also remember that ACA covers a lot of folks beyond those eligible for Medicaid. Individuals and families above the poverty line but who previously had no insurance are now covered and receive a federal subsidy to pay for a portion of the costs.

Even so, there are still an estimated 27 million uninsured in the United States and according to the Commonwealth Fund, a private foundation focused on healthcare research, an estimated 87 million are inadequately insured.

We need some smart people of goodwill to develop viable recommendations — to expand Medicaid without restrictions and to fund and extend cost-sharing subsidies. And in general, we also need to expand the ACA program so that everyone can receive needed health insurance. We have this mechanism in place — it need only be improved and properly explained.

At the same time, as the financial projections suggest, we also need to find ways to reduce healthcare costs and slow medical spending — the things that are driving growth in premiums across all insurance markets. Just as importantly, government needs to address rising prescription drug costs.

The rest of the developed world has done all of this already. Surely, we can too.

Richard F. Keevey is the former budget director and comptroller for New Jersey –appointed by two governors from each political party. He held two presidential appointments as the deputy undersecretary of defense and the CFO at HUD. Currently, he is distinguished executive in residence at the School of Planning and Policy, Rutgers University and a lecturer at the Woodrow Wilson School, Princeton University. He is an elected fellow of the National Academy of Public Administration in Washington.

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