Posts Tagged ‘Medicare’

Understanding Medicare Math

Monday, May 30th, 2011

Medicare

I am often amazed by the amount of disinformation that is spread by politicians, activist organizations and members of the media. Today we’re going to look at the fuzzy math behind the Medicare debate. But before we get to Medicare, there are a couple other concepts we need to understand.

The Federal Budget
We have recently discussed how raising taxes will not fix our federal budget problems. It’s important to know how our money is spent, and the impact the entitlement programs have on the budget. Let’s split the budget info four categories:

  1. Mandatory Spending: The ONLY spending that is truly mandatory is servicing the debt.
  2. Entitlement Programs: social security, Medicare and Medicaid.
  3. National Defense
  4. Everything Else: This is often referred to a “non-military discretionary spending” but I don’t like that phrase. In my opinion, entitlements should also be considered “discretionary spending”.

Keep in mind the recent disagreements between the two parties in passing a budget, and the discussions of what can be cut from “discretionary spending”. They’re arguing over pennies. The reality is this — if we reduce “Everything Else” (the “non-military discretionary spending”) to $0, we would still be running a deficit of more than a $1 trillion this year. Reducing spending on an assortment of “discretionary” programs cannot fix the problem. And entitlements will only continue to grow  — both in a literal sense, and as a proportion of our federal budget. There is no path to fiscal responsibility that does not include reforming military spending and entitlement programs. (Here’s a good read on Politifact about the budget.)

ObamaCare Math
Now before we dive into Medicare, we also have to look at the math behind ObamaCare because it’s directly related to the recent discussions on the solvency of Medicare. According to its supporters, ObamaCare has been estimated to cost $1 trillion over the first ten years. To pay for ObamaCare, Congress plans to reduce payments to Medicare by $500 billion, and increase taxes by $500 billion, over these same ten years. I have said all along that this math is bad. That ObamaCare will cost more than $1 trillion. That Congress will not achieve $500 billion in cuts to Medicare. And that we would not likely see $500 billion generated in new tax revenues. But for today, that’s beside the point. Let’s assume that all of these numbers are golden. That we can and will pay for the first ten years of ObamaCare as explained through these cuts in Medicare and increased taxes.

So what does this have to do with Medicare math? Everything.

Medicare Solvency
As of today, the federal government receives more in Medicare tax revenues than it pays out in Medicare coverage. But as we move forward, this will no longer be true. We will continue to have a smaller percentage of people paying into the system with their Medicare taxes, and an increasing number of people receiving Medicare benefits. Expenses will soon surpass revenues.

People who oppose Medicare reform point out that the CBO says that ObamaCare extends the solvency of Medicare. That Medicare is not an impending problem and does not need to be fixed. But this is an inaccurate portrayal of what is going on, and what the CBO has said.

If you ONLY look at Medicare expenses and revenues generated from Medicare taxes, then we have indeed extended the solvency of Medicare with ObamaCare. It will take longer for Medicare to become insolvent — meaning that we’re paying out more in services than we’re bringing in in taxes. But that’s if you don’t use these savings and revenues on anything else. You can’t pay for ObamaCare AND use this money for Medicare. This is clarified by the CBO in this memo. Here’s the key part of the explanation:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs. Trust fund accounting shows the magnitude of the savings within the trust fund, and those savings indeed improve the solvency of that fund; however, that accounting ignores the burden that would be faced by the rest of the government later in redeeming the bonds held by the trust fund. Unified budget accounting shows that the majority of the HI trust fund savings would be used to pay for other spending under the PPACA and would not enhance the ability of the government to redeem the bonds credited to the trust fund to pay for future Medicare benefits. To describe the full amount of HI trust fund savings as both improving the government’s ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government’s fiscal position.

So you can either use this money to pay for Medicare OR you can use this money to pay for ObamaCare. But it cannot be used for both. So either we have not extended the solvency of Medicare, or a significant portion of ObamaCare is unfunded. Take your pick.

Medicare Reform
Medicare under its current form will soon become insolvent and must be reformed. Is the Paul Ryan plan a good plan for fixing Medicare? I don’t know yet. I’m still trying to fully understand it. What I can tell you is that Ryan is well intentioned. Tackling entitlements is risky politically, and may cost the Republicans in 2012. Ryan and the Republicans will continue to be demonized and demagogued (I’m not sure that’s actually a word but I like it) over Medicare.

The arguments that are being made to oppose Medicare reform are much like the arguments made by those opposing welfare reform in the ’90s. The GOP fought for welfare reform, and it was eventually signed into law by President Clinton. Today, welfare reform is viewed as highly successful. And it appears that President Clinton supports the idea of Medicare reform as well:

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UPDATE 6-5-2011: As I continue to research Medicare, I’ve found that I made a pretty glaring mistake in this article shown above. Though the mistake only further illustrates our need for Medicare reform. A significant portion (about half) of the revenues used to pay for Medicare already come from other sources. A quote from PolitiFact: “Medicare, which provides health care to about 50 million elderly or disabled Americans, is financed through a combination of funding streams: a Medicare payroll tax; general revenue (mostly from federal income taxes); premiums paid by Medicare users; and a tax on Social Security benefits and state payments toward the prescription drug benefit.” I am unclear how anybody can claim that Medicare is “solvent” when half of the costs are paid for by revenues outside of premiums and the Medicare payroll tax. Read this post on PolitiFact.