Last week, Donald Trump and the Republicans unveiled the framework of their fiscal 2018 budget proposal and, needless to say, a number of Americans weren't too happy.
The $3.6 trillion budget aims to boost spending for defense, while at the same time making big cuts to the State Department, the Environmental Protection Agency, and Medicaid. Over the next decade, Medicaid will be cut by more than $600 billion. This begins with the American Health Care Act (also known as Trumpcare), which will end Medicaid expansion by the beginning of 2020 and reduce Medicaid payouts to states by parsing them out on a per-capita basis, if voted into law.
Proposed cuts to the Supplemental Nutrition Assistance Program, which is sometimes referred to as the food stamp program, also drew intense scrutiny.
You probably missed this terrifying long-term forecast in Trump's budget
However, a quick run-through of Trump's budgetary projections led to a long-term figure sticking out like a sore thumb -- and it had nothing to do with the concerns focused on by a majority of Americans.
As noted in table S-3 (page 27 of the White House budget), which provides a budget baseline, the projections for Medicare spending over the next 10 years should worry consumers. Following $588 billion in Medicare spending in 2016, the Trump budget predicts a surge to $1.195 trillion in annual expenditures by 2027, an increase of slightly more than 100%. In fact, when examined as a whole, mandatory programs (Social Security, Medicare, and Medicaid) are expected to see annual costs rise from $2.43 trillion in 2016 to $4.46 trillion in 2027, although no program is expected to witness a larger percentage increase than Medicare.
Here's why Medicare expenses are expected to surge over the next decade
What's the cause of this surge in Medicare spending?
To begin with, baby boomers began leaving the workforce earlier this decade, and they'll continue to do so throughout the remainder of this decade and nearly all of the next 10 years. As soon as these boomers hit age 65, they'll become eligible for Medicare benefits. Since Medicare tends to cover approximately 80% of seniors' medical expenses, this rapid increase in the eligible base of members is liable to increase costs to the federal government.
Another issue is prescription drug costs. Even though prescription drugs are commonly dealt with by Part D, which would be the concern of contracted private insurance companies, prescription therapies administered at the doctor's office can qualify under Part B, and therefore be the responsibility of the consumer and the federal government. A good example are IV-based cancer immunotherapies. They can be administered in an outpatient setting, but their annual costs can regularly top $100,000 or $150,000. Considering the pricing power drug companies have in pricing their medicines (especially specialty medicines like cancer drugs), this has played a key role in pushing Medicare expenses higher.
A final factor is steady inflation in general surgical procedures and care, which is represented by Medicare Part A. Expenses from Part A have generally outpaced average wage growth.
Can anything be done to slow Medicare's rising costs?
Considering that nothing can stop baby boomers from aging, the big question that has to be tackled is whether there's something that can be done now to slow inflation tied to Medicare or at least secure the program for future generations.
The simplest solution of all is to increase the payroll taxes that consumers pay, which would generate more money for the program and ensure that future generations of seniors are taken care of. Payroll taxes for Medicare are 2.9% of earned income, with most employers and employees splitting this tax down the middle (1.45% each). For those who may not recall, the Medicare Board of Trustees predicts that Medicare's Hospital Insurance Trust (which covers Part A) will have exhausted its asset reserves by 2028. Should this happen, reimbursements to physicians and hospitals that accept Medicare could drop by a double-digit percentage. Of course, getting consumers to open up their wallets for mandatory retirement programs is easier said than done.
Another intriguing idea would be to allow the federal government to negotiate drug prices with pharmaceutical companies. Currently, it is barred from negotiating on behalf of Medicare, which leads to significant pricing power for drug companies and smaller list price discounts for the program. President Trump has suggested that he would "lower drug prices" during his tenure in the Oval Office, and has previously opined that allowing Medicare to negotiate with drug companies could be a viable solution. However, Republicans in Congress usually prefer free-market pricing, so the likelihood of this happening is pretty slim.
Indexing Medicare benefits to life expectancies is another option to combat rising expenses. Medicare's eligibility age is fixed at 65 (for a majority of members), but life expectancies have generally trended higher over the long run. Indexing for this added life expectancy and increasing the eligibility age could reduce some of the responsibility of the federal government. The downside? The rich tended to live longer than lower-income folks, so indexing Medicare would probably help the rich and hurt the poor.
A final idea would involve something of an Obamacare-esque approach: providing premium support to seniors. Instead of being responsible for approximately 80% of seniors' medical expenses, the federal government would provide a subsidy that allows seniors to shop for their own Medicare coverage. The subsidy would likely shift some of the responsibility of medical care costs to seniors.
As you can see, there are ideas aplenty to fix Medicare and slow program cost inflation. Once again, the issue remains finding a plan that will garner bipartisan support. Given how divided Congress currently is, a fix for Medicare's rapidly rising program costs shouldn't be expected anytime soon.
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