Medicare?s Life Expectancy in Doubt

Thursday, June 30, 2016 | Larry Sobal

 

Medicare will turn 51 years old next month. Like many middle-aged patients, Medicare is due for a good physical, including a frank discussion about its ailments and the prospects of making it to old age. The most recent news about Medicare’s health status is not good. Last week, the Obama administration, in its annual Medicare Trustees Report, announced that the hospital care portion of the Medicare program will be solvent for only twelve more years (until 2028), two years less than was estimated last year.

Medicare’s birth in 1965 was a milestone for America—it was a program designed to help seniors and disabled persons with the cost of health care. It has matured greatly during its lifetime. Today, Medicare covers over 55 million people (46 million aged 65 and older and 9 million with disabilities). Almost 32 percent of these beneficiaries have chosen to enroll in Part C private health plans that contract with Medicare to provide Part A and Part B health services. Total expenditures in 2015 were $647.6 billion and total income was $644.4 billion.

Before we get to the diagnosis of our ailing patient, it helps to understand its anatomy. The Medicare program has two separate trust funds, the Hospital Insurance Trust Fund (HI) and the Supplementary Medical Insurance Trust Fund (SMI). HI, otherwise known as Medicare Part A, helps pay for hospital, home health services following hospital stays, skilled nursing facility, and hospice care for the aged and disabled. SMI consists of Medicare Part B and Part D. Part B helps pay for physician, outpatient hospital, home health, and other services for the aged and disabled who have voluntarily enrolled. Part D provides subsidized access to drug insurance coverage on a voluntary basis for all beneficiaries and premium and cost-sharing subsidies for low-income enrollees.

Medicare also has a Part C, which serves as an alternative to traditional Part A and Part B coverage. Under this option, beneficiaries can choose to enroll in and receive care from private Medicare Advantage and certain other health insurance plans. Medicare Advantage and Program of All-Inclusive Care for the Elderly (PACE) plans receive prospective, capitated payments for such beneficiaries from the HI and SMI Part B trust fund accounts. The other plans are paid from the accounts on the basis of their costs.

As with any patient, it's difficult to make accurate predictions of Medicare's future health status. Projections of Medicare costs are highly uncertain, especially when looking out more than several decades. One reason for uncertainty is that scientific advances will make possible new interventions, procedures and therapies. Some conditions that are untreatable today will be handled routinely in the future. Spurred by economic incentives, the institutions through which care is delivered will evolve, possibly becoming more efficient. While most health care technological advances to date have tended to increase expenditures, the health care landscape is shifting. No one really knows whether future developments will increase or decrease costs.

Without significant modifications, Medicare’s financial requirements will increasingly strangle the U.S. economy to the point of consuming a substantial percent of our federal budget.

With that initial assessment in mind, a thorough examination finds some chronic issues.

First, the payroll tax revenues supporting the HI trust fund are inadequate to fund the HI portion of Medicare benefits. HI expenditures have exceeded income annually since 2008; however, the Trustees project slight surpluses in 2016 through 2020, with a return to deficits thereafter, until the trust fund becomes depleted in 2028.

Second, SMI cost increases are placing increasing financial pressures on both beneficiaries and the federal budget. The SMI trust fund will remain solvent because its financing is reset each year to meet future costs. Projected increases in SMI expenditures, however, will require increases in beneficiary premiums and general revenue contributions.

Third, increases in total Medicare spending threaten the program’s sustainability. Overall Medicare spending—including both HI and SMI—is projected to consume an ever-growing share of the nation’s economy. Total Medicare costs are projected to grow from 3.6 percent of GDP in 2015, to 9.1 percent of GDP in 2090.

Hopefully, I am not violating any HIPAA regulations here, but I must tell you that the prognosis for Medicare in its current form is terminal. Without significant modifications, Medicare’s financial requirements will increasingly strangle the U.S. economy to the point of consuming a substantial percent of our federal budget.

Ultimately, Medicare’s survival will depend upon whether we are willing to begin drastic and painful treatment. It’s not too late, but Medicare can’t survive if we wait much longer.

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Larry Sobal is Executive Vice President of Business Development at MedAxiom. He has a 35-year background as a senior executive in medical group leadership, hospital leadership and insurance. As part of his current role, Larry consults, writes and presents on topics relevant to transforming physician practices and health systems.

 

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