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Mediscare: Our Government-Administered Insurance Looks into the Abyss

Thursday, March 18, 2010

Just how bad is Medicare’s future? Ask its Trustees.

This week, we are likely to find out the fate of Obamacare. But no matter the outcome, a fact will remain largely unchanged: the financial condition of Medicare is unsustainable.

Each year, the Social Security and Medicare Board of Trustees report on the current and projected financial status of the two programs. The most recent report outlined the worrisome state of Social Security. It also showed that Medicare's financial status is much worse, in particular Medicare’s Hospital Insurance (HI) Trust Fund. HI helps pay for hospital, home health, skilled nursing facilities, and hospice care for the aged and disabled, and is, in the words of the trustees, “not adequately financed.”

For instance, based on data from the Social Security Administration, the accompanying chart shows why the HI Trust Fund is quickly running out of cash.

This chart shows long-term projections of Medicare revenues (the bottom three sections) along with projected transfers into Medicare from the federal government (teal section) and the projected HI deficits (orange section); when summed, these components comprise total long-term Medicare expenditures.

deRugy 3.17.2010

Medicare is funded by two general trust funds: the Supplementary Medical Insurance Trust Fund (SMI), which pays for physician and outpatient services as well as for the Prescription Drug Benefit, and the HI. When SMI expenditures exceed Medicare’s revenue from monthly premiums, the U.S. Treasury covers the deficit out of our tax dollars (labeled “General Revenue Transfers” above). However, when HI expenditures exceed payroll tax revenues, current law makes no provision to finance this deficit.

Since 2008, Medicare’s Hospital Insurance Trust Fund has been paying out more in hospital benefits and other expenditures than it receives in taxes and other dedicated revenues.

Since 2008, HI has been paying out more in hospital benefits and other expenditures than it receives in taxes and other dedicated revenues (premiums, state transfers, and taxes on benefits). This trend continues in 2009. For now, the difference is made up through transfers from the U.S. Treasury, and by redeeming trust fund assets accumulated over the years.

In 2017, however, HI reserves will be exhausted.

Under current law, revenue from taxes would remain at roughly 1.5 percent of GDP, while general fund revenue contributions are projected to increase from 1.5 percent of GDP in 2009 to 4.7 percent in 2083, and beneficiary premiums would rise from 0.5 to 1.6 percent of GDP.

What does this mean? The chart shows revenue sources dedicated to Medicare will become enormously insufficient and will need an increasing share of general revenue transfers. As the General Accounting Office has warned for a long time, this mortgages the future and crowds out other national needs.

Unless Congress adopts a law to fund the HI deficit (which in the current financial environment won’t be easy), beneficiaries of HI services could see its provision interrupted. Medicare spending is clearly out of control and must be slashed. Legislators must, however, cut deliberately and not due to an arbitrary lack of funding from a legislative loophole.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: de Rugy has been inspecting government healthcare and entitlement spending for months. Her most recent forays into this field include “What Unsustainable Looks Like,” “The High Cost of No Price” for healthcare, and “Why Reform Will Cost Taxpayers More, Much More.” The American Enterprise Institute’s Andrew Biggs explains how the “Senate Obamacare Bill Depends on Enron Accounting for ‘Savings,’” while Joseph Antos and Thomas Miller offer “A Better Prescription” for healthcare reform.

Image by Darren Wamboldt/Bergman Group.

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