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December 22, 1998

OP-ED

"MEDICARE’S FINANCIAL CRISIS"

By: CONGRESSMAN BILL THOMAS, R-CA
Co-Chair, National Bipartisan Commission on the Future of Medicare

Medicare’s financial crisis may have moved off the front pages, but it has not gone away. Last year Congress faced the fact that the Medicare "trust fund" that pays for hospital care was going to run out of money in 2002. By reducing what Medicare pays hospitals and making bookkeeping changes, Congress extended the life of the fund for another 6 years.

These measures were only a temporary and limited fix. Medicare’s looming financial problems go far beyond the year 2008 and get much worse. They involve not only hospital care but outpatient and doctors’ services as well.

To develop long-range and comprehensive solutions, Congress established the National Bipartisan Commission on the Future of Medicare. I am co-chairman of this 17-member Commission. We were instructed to recommend ways to put Medicare on solid and secure financial footing. The Commission is closely examining the major issues: the costs, benefits, eligibility, financing, administration, and basic structure of Medicare. The Commission will make its recommendations to the Congress and the President next March.

Polls show that most Americans may not be aware of the crisis in Medicare financing. An important part of the Commission’s role is to inform Americans that the crisis is real, even if it is not front-page news.

From the very beginning, Medicare has been financed on a pay-as-you-go basis. Benefits are funded by the taxes of working people as they are paid. The Medicare trust fund that pays hospital bills is not really a trust fund. It is actually an accounting device to reflect the government’s receipt and expenditure of payroll taxes. Over a few years a slight surplus was built up in the fund. But even in its fattest years, the accumulated surplus was enough to pay only a little more than one year of Medicare’s bills for hospital care.

Medicare payments for hospital care are projected to be greater than the payroll taxes collected for that purpose for the foreseeable future. The slight reserve that had accumulated will be used up, and in 2008 the trust fund will be broke. Medicare cannot, as a matter of law, spend any money for hospital care except what it receives from taxes collected on each worker’s paycheck. On its current course, Medicare will fall behind in paying for hospital care, hospitals will be put in financial jeopardy, and our senior citizens will not get the hospital care they expect.

And the problem gets worse every year. If Medicare is not successfully reformed, it is projected that the shortfall for hospital care in 2010 will be $40 billion. In 2030 it will be $914 billion. It may be hard to believe, so it is worth emphasizing: these figures are the deficit in each year and are based on the more optimistic of the two estimates the Commission is using. The accumulated deficit, of course, is the enormous sum of these annual deficits. On Medicare’s current course, the accumulated deficit, just for hospital care, would be more than $7 trillion in the year 2030.

And this is for hospital care only. Medicare pays doctors’ bill out of current income tax revenues (75 percent) and beneficiaries’ premiums (25 percent). The cost of paying for doctors’ care under Medicare is increasing at an even faster rate than spending for hospital care.

Medicare spending for all kinds of care now represents 2.7% of the country’s Gross Domestic Product. On its current course, it will be between 6.3 and 8.5% in 2030—consuming approximately three times as much of national wealth as it does now. This is particularly daunting because the ratio of workers to beneficiaries will drop from 4-to-1 to 2-to-1 during this period.

Medicare was created more than 30 years ago. Since then the health care world and the demographics of our people have changed dramatically. In order to survive in this new environment, Medicare’s structure must be modernized.

If Medicare is not fundamentally and successfully reformed, the country will confront four choices: limiting promised benefits; reducing spending on other government programs; raising taxes; or returning to deficit spending. Let’s look at what each of these options would mean.

As it is, Medicare now covers only about half of seniors’ health care needs. It does not cover prescription drugs (except for drugs given to hospitalized patients and in some other circumstances) or nursing home care (except for limited post-hospitalization periods). While cuts in payments to doctors and hospitals do not appear on the surface to be a cut in benefits, they can be. If the cuts are too deep, they would reduce the ability of elderly patients to get the care they need.

The second option is to reduce federal spending in other areas and transfer the money to Medicare to cover the increases in Medicare expenditures. But the budget cuts in defense, justice, health and safety, the environment and the other activities of government would have to be truly draconian to cover these increased costs.

Or there is the option of raising taxes. It should be understood what this course would mean. We estimate that to fully fund hospital care, the payroll tax rate working people pay to support hospital care for Medicare beneficiaries by the year 2030 would be between two and three times what it is now. On top of this, to fully fund doctors’ care on the present basis, income tax rates would have to be increased dramatically.

If none of these actions is taken, the country would by default return to massive budget deficits and new borrowing. This would raise the government’s interest costs dramatically, curtail other governmental activities, and dampen the general economy (which would in turn make all the problems worse, require more borrowing, and start a new vicious downward cycle).

Clearly, we cannot allow these to be the only choices. We must make the changes necessary to avoid them. The Commission will develop suggestions for modernizing and saving Medicare. These will give beneficiaries more control and more choice, and make Medicare more efficient. This has the greatest likelihood of putting the program on a secure financial footing. Only if we are successful, will we avoid the unpalatable choices we have discussed. We can do no less.

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