For years, Social Security has been the entitlement program that's been highlighted as being in dire straits. Expected to burn through its cash reserves by 2035, and providing income to more than 40 million retirees each month, seniors and pre-retirees consider a fix to Social Security to be of the utmost importance.
Medicare is actually the more immediate problem
However, lost in the scuffle to fix Social Security is the fact that Medicare, the program primarily designed to help pay for some of the cost of eligible medical expenses for seniors aged 65 and up, is on pace to run out of money even quicker.
Based on the latest trustees' report, Medicare's Hospital Insurance Trust Fund is slated to burn through its remaining cash reserves by 2030. This is, of course, an estimate based on current spending rates and projected spending growth rates. If medical expenses rise at an even quicker rate, the HI Trust could, in theory, run out of money by as early as 2022. Should the program burn through its cash safety valve, it would only be able to pay hospitals at a rate commensurate with what it's bringing in via payroll tax revenue.
As we saw last week, taxes paid versus benefits received appears to be Medicare's biggest downfall. As of 2010 (but based on 2012 dollars), the average man and woman were paying $61,000 in Medicare taxes over their lifetimes. Yet, men and women were receiving $180,000 and $207,000, respectively, worth of lifetime benefits (women have a longer life expectancy than men). This gap between taxes paid and benefits received is only expected to grow between now and 2030.
In other words, Medicare is on an unsustainable path unless lawmakers on Capitol Hill choose to do something about it.
Seven ways to fix Medicare
How can Medicare be fixed? There have actually been a number of proposals that have recently come to light. Whether they'd work, though, is a different story altogether.
1. Raise Medicare taxes
The easiest, and probably least liked, method of fixing Medicare would be to dramatically increase Medicare taxes.
Medicare is currently taken out as part of your payroll taxes along with Social Security at a rate of 2.9% of your modified adjusted gross income. Like Social Security, this tax is typically split down the middle between you and your employer, with each side paying 1.45%. If you're self-employed you're required to pay all 2.9%, and an additional 0.9% Medicare surtax currently exists for individuals with MAGI's in excess of $200,000 per year, and couples with MAGI's above $250,000.
One difference between Medicare and Social Security is that payroll tax on Social Security is not levied on income above $118,500. There is no earnings cap on the Medicare tax, so raising the earnings cap isn't an option here. If taxes are going to rise, they're likely going to rise for everyone. While increasing taxes could indeed stem a cash shortfall, it also could strain the pocketbooks of tens of millions of working Americans.
Democratic Party candidate Bernie Sanders has suggested creating a universal health plan for Americans of all ages, which would require a 2.2% healthcare premium tax on all individuals and a 6.2% tax on employers.
2. Institute means-testing
Another popular solution would be to institute means testing.
What's means testing? In short, it would entail using an income scale to determine whether or not someone actually "needs" Medicare or not. For instance, a low-income retiree with $40,000 in savings probably needs Medicare to help pay for qualified medical expenses, whereas a single retiree with $4 million in assets can likely afford to pay for medical care privately, without the use of Medicare. Removing well-to-do individuals and couples from the program could save it from unnecessary expenditures.
Another plan along these same lines would be to require well-to-do individuals and couples to pay a copay or deductible for eligible medical care. Currently, Part A (hospital insurance) rarely comes with a premium, while Part B (outpatient services) does. Means-testing could involve premiums, copays, and deductibles for all Medicare's components for wealthier Americans. However, it seems unlikely that this solution would stem the entirety of the cash shortfall.
3. Use the federal government's might to negotiate
A third solution that might work is to take a page out of Democratic Party front-runner Hillary Clinton's recent proposals and use the might of the federal government to negotiate better deals with drugmakers and potentially even hospitals and physicians. Estimates from actuarial firm Milliman pegged prescription drug price hikes at more than 13% in 2015, and the full power of the federal government could help reduce or eliminate many of these price hikes.
The issue here is twofold. First, Medicare Part D (drug plans) spending was "only" $78 billion in 2014, meaning even with staunch negotiations the program might only save between 2% and 5% of its total annual expenditures, by my estimate. That's not going to give the Medicare program much of an extension beyond 2030.
The other issue is simply innovation. If drug developers lose their pricing power in the U.S., they could take their research, and jobs, overseas. Since U.S. drugmakers are known to subsidize emerging and developing markets with medicines, prescription drug reforms may also reduce access to these medicines overseas.
4. Index Medicare to life expectancies
One of the bigger issues for both major entitlement programs is that the "retirement age" rarely changes. While this does give the working American a fixed number to look forward to, it also exposes Social Security and Medicare to growing life expectancies.
According to data from the Centers for Disease Control and Prevention, life expectancies in the U.S. are nearly up to 79 years, a full nine years higher than where we were when Medicare was signed into law back in 1965. If Medicare eligibility for seniors continues to be age 65, the number of eligible beneficiaries will likely keep growing, and there simply won't be enough workers paying into the program to keep the worker-to-beneficiary ratio from falling. Utilizing Census Bureau data to adjust the minimum eligibility age higher from time to time may solve this issue, as well as encourage people in their 60s to continue working and contributing payroll tax revenue.
The downside is that indexing entitlements by age tends to favor the rich since they, as a whole, live longer than the poor. This is because higher-income individuals have had easier access to medical care throughout their lives whereas lower-income individuals may be unable to receive medical care because of its high cost. Additionally, there are no guarantee a person's health will allow them to work into their golden years.
5. Institute hospital-at-home care
As reported by CNBC last year, and developed by Dr. Bruce Leff of Johns Hopkins, one radical idea looks to create something of a "hospital at home" that allows physicians and nurses to bring hospital-level care to your home. Leff describes a model that would allow older Americans with common and chronic conditions, such as a heart failure, to be treated in their homes with IVs, diagnostic testing, and physician and nurse visits. By Leff's own estimates, his model could reduce healthcare costs by nearly 20% (which based on Medicare's 2016 budget costs would equate to well over $100 billion in annual savings).
The problem is in convincing lawmakers that a model beyond the institutional hospital setting should be reimbursed. It may also be tougher for Medicare officials to police claims if they aren't made within the traditional settings of a hospital. Medicare fraud is a big problem, and it could become an even bigger problem if care is extended well beyond the walls of the traditional hospital.
6. Promote virtual visits and care
Leaning on technology and promoting virtual visits could be another source to save money and time. Allowing seniors to correspond with nurses and doctors over video, just like Skype, could allow for more frequent interactions, and thus a more personalized treatment plan for seniors suffering from chronic ailments. It's also a potential time-saver, which is something the patient, physician, and hospital should appreciate.
The biggest obstacle here is that Medicare currently does not provide any sort of reimbursement for virtual visits. It's possible this could change over time as technology continues a deeper push into the healthcare industry and as physicians' time becomes even scarcer with an aging population. Of course, the risk is that a virtual visit could result in misdiagnoses that may not happen had a patient been seen in person.
7. Provide premium support to promote value
The final radical idea would involve the federal government providing seniors with a subsidy that they could then use to shop for Part A and B coverage.
As it stands now, Part C coverage, which is better known as an alternative to original Medicare called Medicare Advantage, and Part D, allow consumers to shop around to find the best value for them. Part A and B have no options, making these take it or leave it styled plans. Giving consumers a subsidy (aka premium support) and then turning them loose to shop for themselves in a transparent exchange-like platform would be somewhat akin to mixing Obamacare's marketplace exchanges with employer-based private exchange marketplaces. The idea is that competition would help keep premium inflation down over time.
The concern here would be just how educated of a decision seniors could make with the information provided. We were supposed to see consumers making smart choices with Obamacare's transparent exchanges, but instead we've seen plenty of consumers who are simply auto-enrolling in prior-year plans without shopping around for the best deal.
Could one, or more, of these seven solutions fix Medicare, or do you have a better solution? Sound off in the comments below.
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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