When it comes to the nation's most important entitlement programs -- the programs expected to be there for seniors when they get older after paying into the system for decades -- there are none more important than Social Security and Medicare.
Social Security is the program designed to provide a financial backstop for low-income retirees and the disabled, and survivors of qualifying workers when they pass away. As of the end of Nov. 2014, some 59 million beneficiaries received benefits from the Social Security Administration.
Medicare is the healthcare program designed to help pay for the rising costs of treating our elderly and disabled. It comes in two parts: Part A, which is also known as hospital insurance, covers inpatient hospital care, skilled nursing care, and hospice care, while Part B, which is known as medical insurance, pertains to doctor visits, home health equipment, durable health equipment, and other healthcare provider services. As of 2013, approximately 52 million people were enrolled in the Medicare program, with over 43 million of those enrollees qualifying due to their age (which happens to be 65 and up). The remaining enrollees either qualify because they have end-stage renal disease, or have been eligible for Social Security benefits for at least 24 months and are under the age of 65.
However, according to one presidential candidate, one of these entitlements needs to be "phased out."
Might it be time to kiss Medicare bye-bye?
In what could prove to be an interesting stance to take with election season around the corner, Republican presidential candidate Jeb Bush, in an Americans for Prosperity event in New Hampshire, had the following to say about the current Medicare program:
"We need to make sure we fulfill the commitment to people that have already received the benefits, that are receiving the benefits. But, we need to figure out a way to phase out this program [Medicare] for others and move to a new system that allows them to have something, because they're not going to have anything."
Based on Jeb's analysis, the Medicare system is on an unsustainable path -- and figures from the Urban Institute and Center on Budget and Policy Priorities, or CBPP, would seem to concur.
A recent analysis from the CBPP suggests that while the outlook for Medicare is largely unchanged from the previous year, the hospital insurance segment remains on track for trust fund insolvency by 2030. The Hospital Insurance trust fund's shortfall is expected to average 0.68% of taxable payroll over a 75-year period. It should be noted, however, that this was an improvement from the prior year's expected shortfall, meaning things do not seem as dire as they did last year.
In 2013 the Urban Institute released a report detailing the lifetime Social Security and Medicare benefits of an individual versus the amount of taxes paid into the system. By 2015, a 65-year-old male earning an average wage ($44,800 in 2013 dollars) will have paid just $70,000 in lifetime Medicare taxes, but is expected to net $197,000 in lifetime Medicare benefits. For females turning 65 in 2015 and earning the same wage, they, too, will have contributed $70,000 in taxes toward Medicare, but will receive an estimated $230,000 in lifetime benefits. Keep in mind that life expectancies for women are about five years longer than those for men per the Centers for Disease Control and Prevention. This revenue versus benefit gap is a problem -- a problem that Jeb wants to tackle head on.
Jeb's plan somewhat mirrors that of previous vice presidential candidate Paul Ryan, which involved issuing vouchers to seniors that would act as partial subsidies for their medical care, and allowing private insurers to compete against one another in a transparent marketplace. The idea would be to not transform the current Medicare system for those already enrolled, but to modify the system for pre-retirees. In effect, Bush believes in making the rich pay more into the system, and in boosting the retirement age beyond age 65 in order to reduce the cash outflow the federal government is expected to see in the coming years.
What's really behind Medicare's woes
Why is the current Medicare program headed for a potential train wreck?
One of the more obvious reasons is that we're living longer than ever. Life expectancies have risen by approximately nine years over the past five decades to 78.8 years per the CDC. Living longer is great -- don't get me wrong! However, living longer also means the Medicare trust funds are on the line to pay for medical care over a longer period of time. If life expectancies continue to rise without the eligibility age being adjusted, it's quite possible the revenue being brought in will be handily outpaced by the benefits being paid out by the Trust.
The other major problem is that healthcare cost controls have been only hit-and-miss. In recent years medical cost inflation has been tamer than at any time in the past five decades. The culprit for this was the Great Recession, which put downside pressure on premiums and other medical costs. But recessionary pressures only last so long.
A new trend is emerging which threatens to really inflate healthcare costs in the coming years: the push to personalized medicine. Drug, device, and diagnostic makers have focused on specific genes to target within the patient population to give select people better chances of beating or suppressing disease. Although these products can improve a patient's chances of survival, they also come with extraordinary costs. Couple these rising costs with the fact that insurers take very few stands against five- and six-digit annual price tags from the pharmaceutical and device industry, and you have a recipe for rapidly rising costs well into the next decade and beyond.
Is there a simple solution?
Without beating around the bush -- or making any more terrible puns -- Jeb's plan is radical relative to the middle of the road approach that most presidential hopefuls have taken in 2016 and years past. Medicare is an especially important topic to seniors and pre-retirees, and completely reshaping a program that's been in place for 50 years could certainly rile a few people up. Even if the program remains untouched for current enrollees, the fact that their children and grandchildren may not be able to participate despite paying into the system may be a difficult objection to overcome.
So is there a quick fix to Medicare's problems?
If drug and device costs are the problem the government could always consider intervening with cost controls like those in a number of European countries. Cost controls would practically eliminate the sky-high inflation expected from the personalization of medicine, but it would also drive down the incentive for drug and device makers to develop new products. The United States is the most profitable market in the world for healthcare companies, and it essentially helps to subsidize medical care for other parts of the world. Placing price caps on products would probably control inflation, but it could have dire R&D consequences and perhaps cost jobs in the United States.
Raising the retirement age makes sense on paper, but it's not perfect, either. Estimates from the Congressional Budget Office in 2012 suggested that raising the minimum age of eligibility for Medicare to 67 from 65 would save $113 billion by 2023. But by the following year the CBO had readjusted its estimate to just $19 billion in total savings between 2016 and 2023. This works out to a "whopping" 0.01% of total U.S. GDP over this time span.
Why the big reduction in cost savings from the CBO? For starters, raising the eligible age doesn't affect the millions of sick people below the age of 65 already covered by Medicare, and it has little effect on healthy 65 and 66 year-olds who'd no longer have access to the program. The small snippet of unhealthy 65 and 66 year-olds is where the savings would come into play. Now here's the kicker: because of Obamacare, some low-income seniors aged 65 and 66 may qualify for Medicaid coverage through Obamacare even if they didn't qualify under a raised retirement age through Medicare. Thus, it's not that Medicare is saving money so much as the money is being shifted to another federal program.
The reality is that fixing Medicare isn't going to be easy. It remains to be seen if Jeb's plan can gain any traction, but if a 2012 survey from The Commonwealth Fund is any indication, it probably won't -- at least among senior citizens. In its national survey, just 8% of seniors on Medicare ranked their insurance coverage as "fair" or "poor" compared to 20% of current workers who purchased insurance through commercial plans.
Seniors love their entitled healthcare, and who can blame them after paying into the system their entire lives. But the numbers ultimately don't add up over the long run, and an eventual fix will be needed to ensure the survival of Medicare, or some form of Medicare in the future.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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