Experts Sound Medicare Alarm

Observers say the program will be in more trouble than Social Security

WASHINGTON (By Bennett Roth, Houston Chronicle) February 6, 2004 - While President Bush and much of Congress debate changing Social Security, experts say Medicare is heading for a fiscal crisis of its own, with spending for the health insurance program surpassing Social Security's in the next 20 years.

Yet Medicare has drawn relatively little attention from Washington leaders. The health care insurance program for the elderly, the disabled and others got no mention in the president's State of the Union address last week, when he pressed for reform of Social Security, the retirement and disability benefit program.

As the prices of medical care and medication rise, Medicare spending is projected to increase 150 percent, to $766 billion a year, according to the Congressional Budget Office. Social Security is estimated to grow 80 percent to $888 billion a year during the same period.

By 2024, Medicare costs are expected to top those of Social Security, and by 2078 Medicare expenditures are projected to be double those of the retirement system, according to the federal government's Centers for Medicare and Medicaid Services.

"There is a major crisis in one direction, and the president is marching the country in the other direction," said Henry Aaron, a liberal health care expert at the Brookings Institution who has lobbied for tax increases and benefit changes to keep Medicare solvent.

Mark McClellan, Bush's administrator for Medicare and Medicaid, said the long-term finances of Medicare "were something to be concerned about."

The government partly addressed the rising cost of health care in the recently approved Medicare legislation, he said. By expanding coverage for preventive care and drugs, McClellan said, Medicare is helping people avoid more expensive treatment later.

Spotlighting chronic care

The chairman of the House Ways and Means Committee, Rep. Bill Thomas, R-Calif., has suggested that as part of the upcoming debate on Social Security, lawmakers should examine ways to address the cost of long-term and acute health care, which he said is driving up Medicare and Medicaid spending.

"Medicare, as people have said, is going to be a greater crisis problem than Social Security," he said last month on NBC's Meet the Press. He said that without dealing with chronic care needs, "you will never address the financing of seniors and a comfortable living as they retire."

Medicare trustees John Palmer and Thomas Saving, a professor at Texas A&M University, warned last year that the health care system was in financial peril because of advancements in medical treatments.

"The conundrum of Medicare financing is even more perplexing because Americans are taking advantage of continuing medical advances in diagnostic and treatment capabilities and living longer and more productive lives," they wrote. "But the result of these (very happy) trends, unfortunately, is a rate of growth of medical costs that will continue to far outstrip that of the economy."

Social Security is expected to remain financially healthy until 2018. In contrast, the largest component of Medicare, the hospitalization program, which is funded by a 2.9 percent payroll tax, already is in trouble.

Reserve may soon be gone

Last year, payments exceeded revenues, forcing the fund to dip into its reserve. It will have to dip deeper in coming years to pay full benefits.

The reserve is expected to be gone by 2019, and the program would no longer be able to pay full benefits. Over 75 years, the hospitalization fund is projected to have an $8.2 trillion funding shortfall, more than double the $3.7 trillion deficit estimated for Social Security during the same period.

Compounding the problem, the nonhospital portion of Medicare, which is subsidized by general government revenues and premiums paid by patients, is expected to place a greater strain on the federal budget, particularly after the prescription drug benefits sought by Bush kick in next year.

In 15 years, Medicare is expected to gobble up almost a quarter of federal income tax revenue, compared with 7.5 percent today.

Warnings about growth

The director of the Congressional Budget Office, Douglas Holtz-Eakin, warned last week that the growth of Medicare and Medicaid, the federal health insurance program for low-income people, was "simply unsustainable."

Despite these warnings, the White House and Congress do not appear eager to tackle the finances of a program that, since its creation in 1965, has been the major source of health insurance for older people.

"A good Medicare solution is more difficult than the war on terrorism, education, Social Security and homeland security combined," said Rep. Kevin Brady, R-The Woodlands, who sits on the Ways and Means Committee, which oversees Medicare and Social Security.

`Big picture' problem

The reluctance to tackle Medicare stems from the complexity of the problem and the belief that any solution is linked to curbing overall health care costs, observers say.

"You can't fix it without taking a big-picture look at the entire health care system," said John Rother, legislative director for AARP, the influential seniors lobbying group that backed Bush's plan to add prescription drug benefits to Medicare. It opposes the president on Social Security.

Rother said the bitter partisan battle in Congress in 2003 that led to the narrow approval of prescription drug benefits has made lawmakers and interest groups wary of reopening the Medicare issue. Critics said the plan would benefit insurance and drug companies more than seniors paying for expensive drugs; supporters said it finally recognized that medications were an ever-bigger share of medical costs.

Brady echoed the administration's contention that the recently passed drug subsidy measure will eventually lower Medicare costs by preventing future illnesses. In the meantime, he said, Congress should first tackle Social Security and then move on to more Medicare fixes.

Adding costs

Realizing the Medicare savings may take a long time, experts say.

The prescription drug subsidy soon will create a major drain on the federal budget. In 10 years, that component is expected to make up about a fifth of Medicare spending, according to the Congressional Budget Office.

The recent Medicare legislation also added to the cost of the overall program by increasing payments to rural hospitals and private health plans.

With health care costs outpacing general inflation, federal officials have estimated that Medicare expenditures will rise from 2.6 percent of gross domestic product in 2003 to 3.4 percent of GDP in 2006 and 7.7 percent of GDP in 2035.

The new drug program is only one factor. Medicare payments for visits to doctors are expected to increase 6.6 percent annually for the next decade.

Premiums paid by seniors are rising along with the government's costs.

Medicare requires that premiums cover a quarter of total costs for nonhospital care. Last year Medicare raised premiums by 17 percent.

Another financial factor: The hospitalization fund dips into a surplus that has been invested in government bonds, essentially a paper transaction that means Medicare has loaned the federal money for general use.

To repay the bonds, the government will have to shift money from its general fund to Medicare.

Controversial options

The government's options for covering the shortfalls include raising the share that patients pay, boosting the Medicare payroll tax, borrowing from the general fund or, as has been done before, reducing payment rates to hospitals and other medical providers.

Medical providers are likely to balk at efforts to further scale back payments. Medicare and Medicaid payments make up more than half of many hospital budgets.

Robert Moffitt, a health care expert at the conservative Heritage Foundation, said lawmakers should consider even more controversial solutions such as scaling back benefits for wealthier people who have other health insurance.

Moffitt and fellow conservatives have been particularly critical of the high costs of the drug subsidy program for the elderly, which provoked more controversy last week when Medicare announced that Viagra would be covered.

But Moffitt doubted that there would be any move in the near future to deal with Medicare's finances.

"Congress is in a state of denial," he said.