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Thursday, March 27, 2008
The Outlook for Medicare
The Medicare Trustees Report, released on Tuesday, paints a somewhat bleaker picture than the Social Security Trustees Report. Unlike Social Security which is projected to have a nontrivial cash flow problem in 2042, the Medicare report indicates that Medicare has two problems: 1) The exhaustion of the Medicare Part A trust fund and 2) explosive cost growth that presents a larger, longer-term problem for federal fiscal policy.
HI Trust Fund Exhaustion
The Hospital Insurance (HI) trust fund, which funds "hospital, home health, skilled nursing facility, and hospice care for the aged and disabled," receives revenues from payroll taxes. Currently, the rate of growth of HI expenditures (7.4 percent per year) is outpacing the rate of growth of HI's dedicated revenue stream (4.5 percent per year), and as a result, the trust fund will be tapped in the next few years and is projected to be exhausted in 2017.
The upshot of this revenue shortfall is that in 2019, revenues will be sufficient to cover only 78 percent of Medicare Part A's costs. In 2050, that coverage level falls to 40 percent, and by 2082, costs are projected be over three times the level of revenues.
Precipitous Cost Growth
The second issue of Medicare financing is the rapid growth in the cost the entire Medicare program, which includes Parts A, B (coverage of physician, outpatient hospital, home health, and other services), and D (prescription drug coverage). Medicare cost increases have historically kept pace with overall health care inflation - about 4.2 percentage points higher than inflation for all other goods and services.
At this rate of growth, Medicare expenditures are expected to be 10.8 percent of GDP in 2082. This is a substantial increase from current expenditures, which totaled 3.2 percent of GDP in 2007. And because of structure of the funding mechanism for Parts B and D - transfers from general revenues (the federal budget) and subscriber-paid premiums -, revenue growth for these parts will keep pace with expenditures. Economists predict that this explosion of revenue demands on the federal government may result in unsustainable national debt increases.
Posted by Craig Jennings
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