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Seeing Past a Red Herring in the Medicare Debate

Thursday, February 15, 2007

President Bush is not “cutting” Medicare spending—all the media hype notwithstanding. His plans would, however, eliminate trillions of dollars worth of fiscal liabilities.

Newsweek recently published a story titled “Potentially Devastating.” At first, I thought it was another nervous article on climate change, but then I saw the subtitle: “The president of the American Hospital Association discusses how Bush’s proposed budget cuts could hurt the nation’s medical facilities.”

The interview with AHA president Rich Umbdenstock, as it turns out, discusses the cuts in Medicare and Medicaid purportedly proposed by the President. Eve Conant writes: “cuts to Medicare spending would equal about $66 billion over five years and Medicaid would see a similar decline in funds by about $25 billion over the same period.” 

But the President has not been suddenly seized by fiscal conservatism fever and did not, in fact, propose any spending cuts. Under the President’s proposal (see the chart at the bottom), federal spending on Medicare and Medicaid is set to increase by $84 billion from 2006 to 2008. That spending increase is certainly not a cut—even when including inflation, it represents a generous increase in entitlement spending.

Controlling the size of entitlement programs is the major challenge for fiscal conservatives and for anyone committed to fiscal sustainability.

Newsweek confused cutting the rate of spending growth with cutting spending itself. The President’s proposals reveal an interesting picture: instead of growing at a 6.5% rate, the President would have Medicare grow at a 5.6% rate. Medicaid was set to grow at 7.3%; the President has proposed a 7.1% rate of growth. Assuming health care expenses grow at the rate the government projects, the President proposes shifting some of the growth in expenses from the government to seniors, who will pay slightly higher premiums under his plans. If anything, the proposals seem rather timid attempts to get a grip on runaway federal spending. One wouldn’t tell it from the media coverage, however: lobbying groups of almost every kind are up in arms.

In the Newsweek piece, AHA President Umbdenstock claims Bush is proposing outright spending cuts and hurting the most vulnerable people in society, saying: “Given the needs of the poor and the elderly, these cuts go in a direction that's simply inappropriate. These cuts are significant, to say the least.”

There are, of course, proposed changes that some find unpleasant. As was noted in the Washington Post, one of Bush’s most controversial ideas is to charge wealthier seniors, single seniors making more than $80,000 or senior couples making more than $160,000, higher Medicare premiums: monthly premiums would be $106 to $162.10 for Medicare Part B coverage for physician services, up from the standard premium of $93.50.

Payments to hospitals, nursing homes, home health agencies and other providers, would be $61 billion lower than anticipated, but remarkably, still higher overall—an indication of just how much the Federal Government spends on health services.

In the Medicaid program, Bush proposes to trim spending growth by about $5 billion per year, “through measures such as altering how the program pays for drugs and eliminating funding for graduate medical education in teaching hospitals.” The move has upset teaching hospitals.

It’s useful to place this spending restraint in perspective: entitlements face a looming $43 trillion shortage over the next 60 years, and unless entitlement spending is curbed, those programs are headed straight for bankruptcy. What’s fascinating is that if the President’s modest Medicare plans were realized, $8 trillion dollars would already be shaved off of Medicare’s future liability. It’s a hopeful reminder that moderate fiscal restraint can, over time, accomplish a great deal of good.

Controlling the size of entitlement programs is the major challenge for fiscal conservatives and for anyone committed to fiscal sustainability. It should also be the major focus of people who worship these programs—but it’s not. Witness Barack Obama’s call for universal government healthcare, and John Edwards’s proposal for universal healthcare costing $90 to $120 billion more per year.

Any politician who promises more entitlement spending at this time—or worse, new entitlement programs—is aggravating, not remedying, the looming fiscal meltdown of American entitlement programs and attempting to score political points at the expense of America’s fiscal future.

Umbdenstock, of the American Hospital Association, concludes by warning that “any more cuts are impossible to support.” This implies that there have already been a lot of cuts, but the numbers tell a different story: from 2005 to 2007, spending on Medicare and Medicaid has grown from $485 billion to $600 billion, a 23% increase. It’s enough to make you wonder what Newsweek and others would say about real cuts.

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