Next president to inherit Medicare morass

Image: John McCain
Republican presidential candidate Sen. John McCain speaks to business owners as he campaigns in Santa Ana, Calif. on Tuesday.Mario Anzuoni / Reuters

The Medicare and Social Security trustees report is an annual Washington ritual, coming out at the same time as the daffodils bloom and the robins build their inside-the-Beltway nests.

For that reason — sheer familiarity — the always-dire findings of these annual reports may have lost some of their impact.

Medicare, the program that pays for medical care for 37 million Americans aged 65 and older and 7.2 million disabled Americans, is going to be insolvent in 11 or 12 years

But as one of my editors warned me years ago, "Never use the word 'still' in a headline." So the headline "Medicare still headed for insolvency" doesn't pass muster. Yet it is factually correct.

The only difference in the trustees’ reports from year to year is the slight adjustment — plus or minus one or two years  — to the date at which the trustees predict that Medicare will no longer collect enough revenue to keep paying out all the benefits that have been promised.

Medicare in worse shape
Medicare is in worse straits than Social Security.

“Medicare's financial difficulties come sooner — and are much more severe — than those confronting Social Security,” the trustees said in their 2008 report issued Tuesday. “While both programs face demographic challenges, rapidly growing health care costs also affect Medicare.”

The trustees said that in 2019, Medicare’s Hospital Insurance program will have only enough revenues to pay 78 percent of its costs. The shortfall keeps getting worse after that, unless benefits are cut or taxes are raised.

That gloomy forecast doesn’t mean Medicare will stop providing benefits in the years ahead, but it does mean that the people over age 65 will get fewer benefits than those now enrolled in the program.

In practical terms, it might mean that future retirees (who are today’s workers) would be forced to have shorter hospital stays, wait longer to see specialists, or possibly forego future high-tech treatment for their disease.

Who pays for Medicare
Today’s workers pay for most of Medicare's outlays in the form of a 1.45 percent payroll tax on all their earnings. Employers likewise pay a 1.45 percent tax on the salaries they pay to their employees.

The numbers are big: Medicare collected $191 billion in dedicated payroll taxes last year; in addition, the program got $180 billion from general income tax revenues.

It sent out $425 billion in benefits, with the average benefit per person amounting to $10,460.

Unlike the Social Security tax which only is imposed on the first $102,000 (an amount that goes up every year), the Medicare tax is imposed on all of a worker's earned income.

Does the next president have proposals to fix the Medicare problem?

There’s agreement among all three major contenders, Sen. John McCain, Hillary Clinton, and Barack Obama, that doctors and hospitals ought to focus on better treatment of chronic diseases. All three contenders complain that the current Medicare reimbursement system rewards sheer quantity of services delivered and does not adequately measure quality and efficacy of treatment.

In their position papers on reforming health insurance both Obama and Clinton use nearly the same phrase: “align incentives for excellence,” says Obama’s position paper; “align Medicare payments with performance,” says Clinton’s.

Both essentially promise that they will find ways for Medicare to pay for more effective treatment, without paying more money.

Both candidates also promise that as president they would save money by “investment in electronic health information technology systems,” as Obama puts it.

Clinton and Obama have also said they would raise the current income tax rates on upper-income people to help pay for offering insurance to younger and middle-aged Americans who now have none.  But their health insurance rhetoric has not focused on the dour forecast for today’s workers who hope someday to be enrolled in Medicare.

In contrast, McCain has used grim rhetoric to depict Medicare’s future. Medicare’s costs, he pointed out in a speech in Iowa last year, “are growing astronomically faster than its financing, and leaving its structural flaws unaddressed will hasten its bankruptcy.”

Unlike most Republicans, has been harshly critical of the pharmaceutical industry.

In one of his sharpest clashes with then-rival Mitt Romney, McCain accused the pharmaceutical companies of “overcharging of millions of dollars of Medicaid costs to their patients" during a January debate.

"How could that happen?," he railed. "How could pharmaceutical companies be able to cover up the cost to the point where nobody knows?"

"Why shouldn't we be able to reimport drugs from Canada? It's because of the power of the pharmaceutical companies," he said.

Are they the 'big bad guys'?
Romney protested that McCain should not portray the pharmaceutical firms as “the big bad guys.”

“Well, they are,” McCain growled.

No, insisted Romney “actually they're trying to create products to make us well and make us better, and they're doing the work of the free market.”

Both Clinton and Obama have pledged to change the Medicare Part D pharmaceutical program by allowing the plan to force drug companies to supply pharmaceuticals at discounted prices.

Unlike most of his GOP colleagues, McCain voted in 2003 against President Bush’s Medicare Part D proposal to provide pharmaceuticals to older people. McCain explained last October in a speech in Iowa, “I strongly opposed adding another unfunded entitlement to the fiscal train wreck that is Medicare by providing all seniors with a costly drug benefit, even those, like me, who can more than afford to pay for their medicine.”

Should higher-income people pay more?
All three contenders had a chance last year to cast a high-profile vote on controlling the growth of Medicare spending.

Sen. John Ensign, R- Nev. offered a proposal to impose a degree of means-testing. That means that higher-income people would have to pay a higher premium for their prescription drugs under Medicare than middle-income people.

Currently, low-income people have most or all of their Medicare Part D drug premiums paid by the taxpayers, but higher-income seniors pay the same drug premiums as middle-income people do. Ensign would force the wealthy to pay more.

Ever since Medicare was created in 1965, mean-testing has been anathema to most Democrats, who contend that it would erode support for universal medical insurance for the elderly and ultimately lead to its demise.

Clinton and Obama agreed with the traditional Democratic argument: they both voted “no” on the Ensign proposal, as did all other Democratic senators. McCain did not show up for the vote.

Ensign’s idea is one of the 26 specific options to cut Medicare spending that were detailed in a February 2007 report by the non-partisan Congressional Budget Office. The most far-reaching of these ideas is for Congress to do to Medicare what Congress did back in 1983 to Social Security: raise the eligibility age for collecting benefits.

For people born in 1960 or later the eligibility age for full Social Security benefits is 67, not 65 as it was for today’s retirees.

The CBO said Medicare spending could be cut by about ten percent if the eligibility age were increased to 70. It’s a radical cost-cutting idea and one that none of the contenders has endorsed.