Medicare Devours the Federal Government

by John R. Graham,

Every year, the Medicare Trustees issue a report on the program’s financial status. Reaction to the last few years’ reports has been complacency. Because Medicare’s fiscal problems do not appear to be getting worse, people have the misconception that Medicare’s finances are improving. Nothing could be further from the truth.

Indeed, the Trustees themselves insist that: “Notwithstanding recent favorable developments, current-law projections indicate that Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.”

In 2014, Medicare’s taxes and premiums added up to $342 billion dollars, just 11 percent of federal tax and fee revenue of a little over $3 trillion. However, its spending of $600 billion comprised 17 percent of $3.5 trillion of federal spending. This is just short of defense and security-related spending, which amounted to $615 billion.

Medicare’s finances are unnecessarily confusing because of the artificial distinction between the Hospital Insurance Trust Fund (Part A) and the Supplemental Medical Insurance Trust Fund (Part B, for physician payment, and Part D, for outpatient prescription drugs).

The Hospital Insurance Trust Fund is the most deceptive. This is financed by payroll taxes. For many years, the federal government’s revenue from the payroll tax was more than required to pay hospitals’ claims. The government spent the surplus on other parts of the federal government. When it took a million dollars out of the drawer labelled “Medicare” and transferred it into the one labelled “Navy,” it inserted a one-million dollar Treasury note into the Medicare drawer. Absurdly, the pile of notes resulting from these transfers is called the Medicare Trust Fund.

Suppose Mr. & Mrs. Smith put aside some of their household income for a college fund for their four kids. Then they decide to spend it on a vacation. So, they replace the money with a note stating “the Smith family will pay its kids’ college tuition.” Nobody would consider that an asset. The money is gone.

Remarkably, even with no real money in the Trust Fund, it is going bust. According to the Trustees, “the HI trust fund has not met the Trustees’ formal test of short range financial adequacy since 2003.” By 2030, the Hospital Insurance Trust Fund will be depleted – run down to zero. Since 2008, the payroll taxes have not covered Medicare’s hospital claims, and the chickens are coming home to roost.

Earlier this year, Congress passed a long-term increase, hiking doctors’ pay for ten years and adding $141 billion to the deficit. But this so-called fix is still unrealistic because it merely kicks the can down the road a decade. According to the Trustees, the bonuses “…… are scheduled to expire in 2025, resulting in a significant one-time payment reduction for most physicians.”

By 2025 at the latest (and perhaps as early as 2018, by my reckoning), organized medicine will once again declare the payment system broken and demand more, deficit-financed, pay hikes.

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