Medicare's Next Patient: The Federal Budget Deficit

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When it comes to cutting budgets, fiscal conservatives often drag out easy villains like peanut subsidies and bridges to nowhere. But while those obvious targets are great for scoring political points, they represent a tiny fraction of the overall deficit. To really slash costs, the government will need to go after at least one of its big three expenses: Social Security, the military or Medicare. As the recent debt-ceiling negotiations demonstrated, it isn't hard to see which program is the most vulnerable.


With two wars rumbling along and threats dotting the horizon from North Korea to Somalia, chances are that the military's budget won't be dropping much any time soon. As for Social Security, former President George W. Bush's disastrous 2005 push for privatization has ensured that the third rail of American politics will remain mostly untouched, at least for the time being.

That leaves Medicare, one of America's most popular -- and expensive -- social programs. In 2010, the health-care subsidy for the elderly cost more than $524 billion, eating up 15.2% of total government spending. Even worse, its costs are projected to rise at a rate of 5.4% per year, surpassing $1 trillion in just over a decade. Politicians across the spectrum agree that the program needs to be reformed, but -- with the wrath of the powerful senior lobby threatening the future of any politician who touches it -- it's also clear that any changes are going to come at a huge cost.

How It All Started

Even before it was enacted, Medicare faced some determined enemies, most notably the American Medical Association. As part of a massive public relations push, the group hired a well-regarded B-list actor to produce an album linking the health-care program to communism.

The record, Ronald Reagan Speaks Out Against Socialized Medicine, not only outlined the argument against Medicare, but helped lay the groundwork for the future President's political career. On the album, Reagan envisioned a dire future following the passage of Medicare: "Behind it will come other government programs that will invade every area of freedom as we have known it in this country until one day ... we will wake to find that we have socialism.... We are going to spend our sunset years telling our children and our children's children what it once was like in America when men were free."

Reagan's diatribe notwithstanding, President Lyndon B. Johnson signed Medicare into law on July 30, 1965, while sitting beside the program's first two beneficiaries -- former President Harry S. Truman and his wife, Bess. At the time, the program had a promising future: With baby boomers just beginning to enter the job market, the country had over 106 million people of working age and only 18.4 million retirees taking money out. In other words, for every retiree receiving Medicare funds, there were more than five and a half workers putting money in.

A Victim of Its Own Success

Over the last 46 years, Medicare has made the lives of America's oldest citizens a lot easier. By underwriting much of the cost of aging, it helped raise the life expectancy of the average 65-year-old male from 76 years to almost 81. At the same time, it also provided incentives for researchers to develop medical procedures that treat chronic age-related health problems. Today, ailments that were once a death sentence -- including diabetes, heart attacks, cancer and strokes -- are now treatable.

Unfortunately, Medicare has also driven up the costs of health care. The program pays caregivers for every procedure that they perform, a policy that encourages doctors to administer unnecessary tests and procedures. More importantly, the demographic bump that once funded Medicare is now working against it: This year, the first of 72 million baby boomers will hit 65 and begin using the program. The U.S. currently has 40 million residents aged 65 or older and roughly 176 million employed workers between the ages of 18 and 64. In other words, the ratio of five and a half workers for every retiree has dropped to less than four and a half.

Within the next 10 years, another 36 million Baby Boomers are slated to join the ranks of Medicare recipients, almost doubling the number of recipients in the program. By comparison, America's stock of potential workers is growing at a much slower rate. Following the current trend, the ratio of people paying into Medicare versus those taking money out is on track to drop below 3 to 1.

Potential Solutions

U.S. Rep. Paul Ryan's (R-Wis.) controversial proposal was designed establish an annual Medicare subsidy of $15,000 per person, which recipients would use to pay for private health-care plans. According to Ryan, this would result in lowered costs, as various plans would compete to offer the most service for the lowest price. Ideally, this would lead to an environment in which a much lower Medicare expenditure would result in a comparable level of service.

Ryan's critics disagree. Noting how health-care costs have grown during the past few decades, they worry that Ryan's reduced Medicare benefit would leave many of the elderly unable to afford their health-care needs. Currently, Medicare pays for 80% of covered expenses, leaving participants to cover the remaining 20%. Under Ryan's plan, any gap between total health-care costs and the government's $15,000 would come out of pocket, potentially leaving many retirees struggling to survive.

The White House's solution, which was part of last year's Affordable Care Act, cuts Medicare payouts to private doctors, taxes benefits for wealthy recipients, and establishes blanket fees for certain conditions to minimize unnecessary procedures. Perhaps most importantly, it will also set up a board to determine the most cost-effective treatments.

A Victim of the Debt Ceiling?

Some of the White House's provisions already have been enacted, while others will be slowly integrated over the next seven years. For the time being, however, it still isn't clear how they will affect Medicare's bottom line -- or its services.

Recently, another event may have superseded the Ryan/White House debate. The recent battle over the debt ceiling resulted in the creation of a 12-member "super committee" that has been tasked with cutting the federal budget by $1.5 trillion. Allegedly, nothing -- from tax increases to slashes in entitlement spending -- is off the table in these negotiations.

Speculation has already begun about which parts of Medicare could be facing the scissors. On PBS NewsHour, Jason Kane surmised that Medicare's eligibility age could be increased, as could patients' co-pays and deductibles. Kane goes on to note that "Medigap" supplemental insurance could also be slashed, as well as benefits to wealthier participants.

Even if the super committee doesn't find $1.5 trillion that it can agree to cut, Medicare seems unlikely to escape unscathed. If the committee hasn't found the necessary cuts by Thanksgiving -- or, for that matter, if Congress fails to pass the cuts -- $1.2 trillion will automatically be clipped from the federal budget. Half will come from defense spending and the other half will come from entitlements. Given Medicare's outsized share of the budget and its dazzling array of critics, many of the entitlement cuts would likely come from its budget.

Ultimately, legislators are caught between a rock and a hard place...or, to put it more clearly, between financial insolvency and a furious electorate. This is because of yet another group that has a major say in Medicare: the voters. There is little doubt that the public widely prefers Medicare as it currently stands. A recent poll from The Washington Post and ABC found that 78% of respondents didn't want cuts to the program. Unfortunately, with costs rising and a flood of new enrollees waiting for their benefits to start, doing nothing seems to be the one option that's off the table.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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CHUCK

If the coverment didn't steal so much money out of the programs their wouid be a lot more and stop leaving Ilegals have it, their would be more then enough and before cutting anything for americans STOP all the AID going overseas It is our money that they give away.

September 01 2011 at 2:29 PM Report abuse rate up rate down Reply
Carolyn Anne Bateh

I get benefits from SSI and I have Medicare so I really would not like to see any cuts or changes in the services and cash flow i am getting from this. These governmental services are a key factor in many americans lives today. I really think there are other things the government could look into when it comes to making cuts.

August 25 2011 at 2:24 PM Report abuse rate up rate down Reply
shankerrr

Modify all government retirement - local, state, county and federal. Raise their retirement age, cut their medical, dental, vision, etc.. make theirs in line with SS/medicare eligability age (they can retire early but must accept less). When a government empoyee can retire at 50 years of age and make more than they did when they worked is unacceptable. We are the taxpayers and we need to have a say if our money is paying for their "entitlements".
Stop all wars and only assist if the US enters into a war support contract where we are paid to help (of course this does not include acts of war against us directly). In addition, change the tax system - make everone pay a flat tax from the top to the bottom.
One MORE thing anyone found guilty of abusing medicare/meidaid should be punished harshly - life in prison without parole and pay back funds gained by fraud.

August 18 2011 at 4:47 PM Report abuse +1 rate up rate down Reply
Carly EngageAmerica

Currently Social Security and Medicare use 8.5% of nonentitlement revenues (federal revenues dedicated to all other programs besides the two). By 2020, the deficits will grow to almost 25%. This means that within 9 years, in order to pay projected benefits to retirees and the disabled, the federal government will have to stop doing about one out of every five things it does today. If the government would like to prevent that from happening it will have to raise taxes by about 20%, significantly cut benefits or make beneficiaries pay for substantially more of their benefits.

By the time all of the baby boomers have reached their retirement years, projected Social Security and Medicare benefits will require almost one in every two nonentitlement tax dollars. By 2050 the government will have to stop doing 60% of the other things it does today if taxes are not raised (http://eng.am/poetWU). In order to prevent this, fundamental changes need to be made to the entitlement programs. For example, the eligibility age for Medicare, Medicaid, and Social Security should all be raised. The programs should be targeted so that only the neediest of Americans are the ones receiving benefits. States should be given block grants for Medicaid so they can then distribute to the neediest of areas. Very importantly, entitlements should be changed into budgeted programs, balanced against other needs.

August 18 2011 at 3:38 PM Report abuse rate up rate down Reply
Gumby

and greedy !

August 18 2011 at 2:01 PM Report abuse -1 rate up rate down Reply
Gumby

Medicare's next patient is not the federal government ... it is Republicans.. they are so sick!!

August 18 2011 at 2:00 PM Report abuse rate up rate down Reply
jm

It would not be that hard if the government would work together to have bidding or cost controls for Medicare and all government health costs. Then it should trickle down to the rest of the private insurance subscribers.

Health care should not be such a big deal. The way it is set up you can lose everything if you become ill. That is just wrong.

August 18 2011 at 11:19 AM Report abuse +2 rate up rate down Reply
jet202

You have to love the unbiased reporting. They hired a "B-list actor" his "diatribe notwithstanding". Great reporting. And oh yea, how accurate was he by the way? Maybe, just maybe if the govt. had stayed out of this our medical care might have gone the way some medical procedures, that are not covered by insurance (as an elective, some cancer or other patients may need both of the procedures but not on elective basis but because of other complications but they are minor compared to the overall numbers) have gone. Kind of a looking glass approach. Lets see lasik surgery is not covered and has improved in techinique, reliability and cost. Breast enhancement has gotten lots cheaper without insurance and govt getting in the way. Why, as that old "B" actor said, private sector having to compete will keep the costs down. And oh yea, if the govt would take the lid off the number of doctors that are allowed to graduate in this country that might help too.

August 18 2011 at 11:03 AM Report abuse rate up rate down Reply
rosenbill858

Our retirement savings, well into six figures, are going down fast--especially today Aug. 18. We do not wish to be kept alive longer only to die in poverty. I just turned 85, my wife is somewhat younger. Unless the researchers and medical practitioners find ways to alleviate the financial problems associated with ever more people living ever longer lives, stop all research aimed at increasing the lifespan. Give Department of Health and Human Services one year to come up with some suggestions on how to begin work on this problem, or shut it down. I can say if they, or anybody else, has any ideas on how to avoid the shutdown, they will cost money. Oh yes, I do have some ideas which have been printed in newspapers, but generally ignored.

August 18 2011 at 10:27 AM Report abuse rate up rate down Reply
savemycountry911

Now Obama wants to create thousands of new govt. jobs. Doesn't he know everone can't work for the govt? Somebody has to pay for the dead wood govt. workers.

August 17 2011 at 10:27 PM Report abuse +2 rate up rate down Reply