Medicare’s Problems Are Much Worse Than You Think

Last week, Larry Kotlikoff and I set the record straight in the Wall Street Journal. What follows is a version of that editorial.

The latest report of the Medicare trustees report is out and even before the public saw it, the White House spin masters had already crafted a carefully orchestrated story.

Medicare’s finances have improved, we are told. The trust fund will last longer. The unfunded liability is lower. One of the reasons is ObamaCare. The core of the new health reform law doesn’t kick in until next year, but already it’s improving things for seniors. The president’s new budget carries much the same message. But is any of this really true?

Here is the rest of the story. The Trustees report is based on assumptions that even the Medicare actuaries are calling “clearly unrealistic.” Ditto for the president’s budget. Even with these unrealistic assumptions, the future looks bleak. The unfunded liability in Medicare, the Trustees tell us, is $34 trillion over the next 75 years. Looking indefinitely into the future, the unfunded liability is $43 trillion ― almost three times the size of the economy. Based on more plausible assumptions, such as the ones reflected in the “alternative” scenario produced by the Congressional Budget Office, the long term shortfall is over $100 trillion.

To take one example of rosy optimism in the latest administration report, the Trustees assume that next January 1, there will be a 25% decrease in the fees Medicare pays doctors. Beginning next year, every doctor in America who participates in Medicare will take a 25% pay cut. The reason has nothing to do with ObamaCare. In the Balanced Budget Act of 1997 Congress declared that Medicare physician fees would grow no faster than the economy as a whole. But Congress has on 14 occasions postponed the cuts and not allowed them to take place.

A second problem actually does stem from ObamaCare. In order to pay for the expansion of health insurance for the young, the health reform law calls for steep cuts in spending on the elderly. Whereas Medicare spending per person in real terms has been growing at about the rate of growth of real GDP per person plus 2 percentage points, the ObamaCare law calls for a growth rate of GDP plus 0.04 percent. Over the next ten years that slower growth rate produces about $716 billion in savings. But it doesn’t stop there. The health reform law mandates slower growth forever!

How is this possible? There are a number of demonstration projects that were supposed to find more efficient ways of delivering care. But three separate CBO reports have found that these programs are not working. As a result, Medicare will have to resort to a fall back mechanism: more cuts in provider fees.

Were these cuts actually to be implemented, the problems of Medicare would be basically solved. If Medicare grows no faster than the economy as a whole, we can keep on doing what we have been doing without the need for any fundamental change. Yet two graphs produced by the Medicare actuaries report show how draconian the suppression of provider fees will be. Medicare fees fall below Medicaid next year and then fall further and further behind Medicaid and the private sector as the years pass by.

From a financial point of view, senior patients will become less desirable than welfare mothers. On the hospital side, the actuaries office is predicting that one in seven hospitals will completely leave the Medicare system by the end of this decade.

This is not a newly discovered problem. At the time the Affordable Care Act was passed, Medicare’s Chief Actuary, Rick Foster, said the cuts envisioned would damage access to care. Harvard health economist Joe Newhouse predicted that seniors may have to seek health care at the same places frequented by Medicaid patients today ― at community health centers and the emergency rooms of safety net hospitals.

Of course if Congress caves to political pressure and restores the cuts in provider fees (as it has done consistently for the past 16 years) the unfunded liability in Medicare will be much greater ― on the order of twice what the Trustees are now showing. Meanwhile, it’s not as though other areas of government can’t be easily cut to accommodate health care. We’ve made promises we can’t keep in Social Security, disability insurance and elsewhere.

All told, the fiscal gap separating the present value of all future projected federal expenditures ― Social Security, Medicare, Medicaid, ObamaCare, defense, gassing up Air Force One, servicing existing debt, you name it ― and all future federal taxes and other receipts is a staggering $222 trillion.

Anyone in Washington who thinks there is no need to rush into a grand bargain on the budget any time soon should think about that number. Then think again. And again and again…

Comments (48)

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  1. Bruce says:

    Not surprised.

  2. JD says:

    “Anyone in Washington who thinks there is no need to rush into a grand bargain on the budget any time soon should think about that number. Then think again. And again and again…”

    A lot of them don’t think the size of the number has any significance.

    • Richard says:

      The size of the number is much less important given our role in the world and the interest rates that we face, as well as the seeming ability to raise revenues and limit spending.

      Change any of these, and the importance of the size of the number grows dramatically, and quickly.

      You’re right; any lagged response to a change in these could be devastating. But when are any politicians truly proactive?

  3. Buster says:

    It’s hard to fathom that, over time, policymakers have discovered that — to appeal to voters — they can provide an array of services and pass the bill on to current voters’ grandchildren. The framers of the Constitution took steps to avoid many potential problems but amassing national debt to procure votes was one thing they did not apparently foresee.

    • Richard says:

      Hamilton, by taking on the state debt after the Revolutionary War, was passing the bill onto future generations (though the benefits of doing so for future generations far outstripped the costs of doing so for future generations).

      And Jefferson and Jackson, by eliminating the Bank of the U.S., were pushing problems onto future generations (the frequency of financial distress, both regionally and nationally).

      The unwillingness of politicians to address the slavery issue also was placing the burden on future generations to solve this (and suffer through this).

      Politicians have always been willing to place burdens onto future generations, though much more so as time has increased (and we’ve moved away from the ideal of fighting for our freedom, which is now taken for granted). How we have done it (through legislative inaction in the past, to more legislative activism in the present) has changed, as you astutely point out.

      The debt is a policy instrument now solely because of our place in the world financial order. Without that power, the tool goes back in the shed.

      • Tim says:

        Once our power fizzles, the state of our politics will be forced to change.

      • JD says:

        You are right to point out that this is a new phenomenon, people have been doing this forever. Although, I do think that the debt is different than the examples that you mentioned. Hamilton didn’t think that the nation would survive without his actions, that surely can’t be claimed about the debt. Similarly with slavery. Jefferson and Jackson believed they were doing the right thing to save the future, they weren’t trying to kick the can down the road.

        • Richard says:

          In my treatise, I did say that how we have done it has changed (I know, it’s long :) ).

          My examples were both showing how actions undertaken could have negative consequences in the future that were unanticipated or should have been anticipated (I’d put Jefferson and Jackson here; though they did it because they believed in it, I think they should have known the buzzsaw they were walking through).

          Really, even the examples I listed are, admittedly, dependent on what you think the path would have been without them. We’re arguing counterfactuals (a more enlightened version of arguing semantics!).

  4. Tim says:

    There certainly are appropriations questions to be asked and investigated further. Not sure mine and future generations will want to pay the burden.

  5. Tom says:

    “projected federal expenditures…and all future federal taxes and other receipts is a staggering $222 trillion.”

    - This is a serious problem. This is a weakness that can be exploited.

    • Sam says:

      I agree. Being in debt to this extent surely weakens our credibility, and is a strategic defense problem. Especially when the country that owns most of our debt is China.

  6. Big Al says:

    Even though the assumptions of the CBO’s 2010 Alternative Scenario have changed, with respect to revenues, spending, legislative changes and economic recovery, projections are still chilling. Bottom line, to address the shortfalls, government has to place more of the cost burden on the public, whether it is in the form of higher taxes or reducing the support to providers, insurers, and patients.

    History has shown [14 occasions] that both Congress and Administrations recognize the need to keep provider’s reimbursements for social programs equitable. This article is a hot poker to put pressure on Congress to continue the reprieve or repeal the 1997 legislation. I’m assuming that the Doc Fix will continue after 1 January, which means Dr. Goodman needs to help brace us for the tax increases needed to offset the fix.

  7. Doctor Tom says:

    As Charlie Rangel so elequently stated a few years ago when the debate was on privatizing SSI (paraphrased): “We don’t need to deal with SSSI now there is no crisis.”

  8. Uwe Reinhardt says:

    John:

    I think that as a down payment on a grand bargain and as a gesture of good moral conduct the Republican House should put in place full financing of the Medicare Modernization Act they helped push through Congress in 2003, bestowing on the elderly a huge new entitlements, from here to eternity, without a penny of financing, also from here to eternity. Or they should have the guts to pass a bill abolishing Part D of Medicare.

    Would that not be a wonderful start?

    Uwe

    • Richard says:

      The practical divide between political parties is diminishing, except for rhetoric spewed based on which party holds the Presidency.

    • Al says:

      Uwe. as you know most Republicans are little more than lite Democrats. They should never have passed Part D and both parties should abolish it. For the most part Part D is a waste of time, money and effort. Those below a certain income were more frequently than not provided with brand name products at zero or $15 per month by the pharmaceutical companies. When Part D was passed there were adequate generics to take care of the vast majority patients making this plan even less beneficial than thought. I don’t know what Bush, the Republicans, the Democrats or some libertarians/conservatives were thinking. Maybe the politicians just wanted to get reelected and didn’t care about future generations.

    • Wanda J. Jones says:

      Uwe, as a Medicare member as well as a healthcare person, I agree that Part D was much over-drawn. I take 7 meds, one of which costs several hundred dollars a month. I believe that if I did not have Part D, the price would modulate to the level that would induce me to buy it.

      WJJ

    • Linda Gorman says:

      Regarding Part D, it seemed bizarre to me that Medicare didn’t offer the same coverage that most private plans did, and that only covering inpatient drugs led to massive inefficiency.

      Could have passed legislation to make Medicare mimic the private sector plans. But governments do a lousy job of designing health coverage programs, so we got Part D. And then we got ObamaCare, which made Part D worse.

      • Al says:

        I don’t know that private plan coverage of medications is all that great either. I think we are overinsured.

  9. hoads says:

    “From a financial point of view, senior patients will become less desirable than welfare mothers. On the hospital side, the actuaries office is predicting that one in seven hospitals will completely leave the Medicare system by the end of this decade.”

    This is precisely the goal of Obamacare–redistributing healthcare from old to young by imposing de facto rationing at the bedside. Obamacare is constructed to limit access to expensive and/or lifesaving healthcare consumed by the elderly by limiting reimbursements of such to physicians, hospitals and other providers.

    Meanwhile, the majority healthy (both young and old) will be lavished with “preventive” healthcare that will be cheap, plentiful and broadcasted while the minority sick, disabled, dying will be quietly denied medical care when they need it the most by an amalgam of reduced provider fees, biased research that provides “evidence” to withhold/limit/substitute expensive medical care and oppressive regulation that will incentivize providers/suppliers to withhold/limit medical care to undesirables.

    • Big Al says:

      With all due respect to your sentiments on the ACA, as i mentioned in my comment above, it still is reduced to a balancing act. You decrease public costs, private costs go up. You decrease private costs, public costs go up. The ACA is an attempt to decrease public costs, therefore private costs must go up [via increased taxation and mandated participation]. You eliminate the ACA and private costs go down but public costs go back up, and in turn … the deficit. Once you admit to being on a teeter totter, strategies unfold more easily.

      • hoads says:

        Totally disagree. Healthcare does not have to be a zero sum endeavor as you describe. Obamacare doubles down on everything that has distorted healthcare–price controls, burdensome regulation, unfunded government mandates, etc. What you describe as “private costs” are no such thing. Medicare/Medicaid (and third party payors) inextricably engulfs any semblance of free market exchange (i.e. “private costs”) in medical care. There is no inverse relationship between public and private healthcare costs as you imply.

        Only those healthcare entities completely untethered from government control have demonstrated reduced pricing and efficiencies. as one example, the government has been paying over $100 for walkers that can be had at Walmart for $30. It has also reimbursed pharmacies multiples above for prescription drugs that are offered for $4 at many pharmacies.

        Meanwhile, we continue to be gouged by health insurance companies with the blessings of Obamacare.

        • Big Al says:

          “What you describe as “private costs” are no such thing … There is no inverse relationship between public and private healthcare costs as you imply.”

          Correct me if I am wrong, but on the ‘good’ assumption that a ‘free market’ health care system is not impending and that health care costs [providers and insurers] do not go down, that only leaves the two payers … public [government/taxes] and private [businesses/ patients]. Examples:

          1) The ACA reduces public costs of reimbursements to hospitals for indigent care by requiring everyone secure private insurance … which costs you and I more in premiums.

          2) If the ACA Medicare Advantage reimbursements were retained, you and I would benefit from continued low deductibles and more exotic care … whereas the government would not realize the $716 billion in savings.

          3) Someone wants to eliminate the ACA to reduce their costs or increase their income … the CBO says it will cost the government $109 billion if they do.

          4) If the government reduces its costs by letting the Doc Fix expire … the difference has to be made up in the private sector [Insurer/Doctor/Patient]

          My analogy may be simplistic but I do see inverse effects. In the words of Newton … “and to every action there is always an equal and opposite or contrary, reaction”

  10. Glenn Smith says:

    I read the WSJ item but was disappointed that there were no details leading up to the punch line of $200 trillion. Now the number seems more precise but with no back up.

  11. Politics Debunked says:

    re: “The Trustees report is based on assumptions that even the Medicare actuaries are calling “clearly unrealistic.”

    And those are simply the medical assumptions. The Medicare report uses many of the same assumptions for things like GDP and labor force participation and population, etc, that the Social Security report done by the same entity does. It turns out that if you look at them closely many of the assumptions are serious flawed (e.g. expecting labor force participation to be higher than the BLS expects, implying when using alternate (low, high) assumptions that it can predict GDP more accurately out to 2090 or so than it is even measured (given GDP/GDI statistical discrepancy)).

    This page critique’s last year’s report,

    http://www.politicsdebunked.com/article-list/ssaestimates

    it hasn’t been updated for this one which however has the same kind of flaws, merely some numbers have changed rather than the underlying problems. Unfortunately it was done by an entrepreneur outside the beltway critiquing their “business plan”, who has been too busy to try to find ways to effectively spread the word (unfortunately it only came out a few weeks ahead of this years report).

    • Uwe Reinhardt says:

      Frankly, I find it vaguely amusing to see us nitpick over the myriad particular assumptions going into the Trustees report, all the while offering with a serous countenance projections that go to infinity.

      When you step back from the problem, does anybody realize how ridiculous that is?

      Nothing we do today can influence in the slightest bit what the folks living 10 years before infinity will or will not do.

      Indeed, every generation of contemporaries will have to decide for itself how to split up the GDP pie among the young, the working people baking the GDP and the old. If people running the country in 2050 don’t like the outcome from “current law 2013″ — assuming no one has changed in in the meantime — they can change the law to beget the distribution that meets their moral standards. But chances are that in 2023 the law will be changed anyhow. In 2027, too.

      So let future generations take care of their problems and we’ll take care of ours, which we have in Medicare and Social Security, so far.

      I’d worry more about whether we are investing today enough and smartly enough to extract the full productive potential from our human capital. Doing that would really be of help to future generations.

      Is my view.

      • Richard says:

        Of course people in the future will do their own things. But aren’t inter-generational considerations at least somewhat important (seeing as how we leave bequests for future heirs we may not see, there’s limited evidence we do care about the future), beyond how we invest in ourselves?

        While we take care of our own problems, shouldn’t we realize that we should at least have a “long-term” in mind when adopting policies? That it’s not simply about me and my peers, but my heirs and their heirs?

        Aren’t we all glad that our forefathers fought for us, at least partially, in attempting (or succeeding) in adopting long-living documents that they knew would help guide us long into the future (Constitution, for instance)?

        So, while nitpicking the assumptions can be a bit ridiculous (though the “infinity” aspect must be utilized by a careful cost-benefit planner, if that’s what is expected; though you can create bounds by limiting the practical lifespan of the program), sometimes it’s a bit useful on the margin.

        And we all see how current institutions have been built; on the foundations of the old. Dismantling the systems can be both time-consuming and not politically expedient. It’s actually very possible that the institution we are nitpicking will provide a baseline for future ones. And that by shaping what we approve and how we look at them today can shape what foundation the future will build on.

        I do appreciate your comments though.

        • Uwe Reinhardt says:

          I don’t think we disagree on your points. For example, I feel that the way the MMA 03 was financed — giving our parents free drugs now but letting our children pay for it — violates the most fundamental precepts of inter-generational ethics.

          We should similarly worry on whether we pass on to our children at least as much asset value as we were given by our parents.

          But we really don’t need Trustee projections 75 years into the future or even to infinity to guide us on those moral choices. To pretend that could even imagine what health care will be like in 2060 or what fraction of payroll will go to Medicare is just nuts.

          Some decisions are not clear cut. For example, we don’t agree on the science of climate changes. We don’t agree whether the two recent wars we initiated yield benefits commensurate with the trillions they cost, etc. But even here long run projections are not of much help.

          • Richard says:

            Thank you for your response.

            I agree that the projections, at best, can provide bounds on what we think will happen, but we can’t even begin to label these as proper confidence intervals.

            I’ve never been a fan of forecast projections (even small distances into the future and we start to see drastic differences), and, in some attempts, I see professionals use our knowledge to skew perception one way or the other (do you show bounds, the estimate, one bound, …).

            And you’re last paragraph is one that should underlay quite a bit of long-term projections. Sometimes it’s acceptable, and even proper, to not agree on the direction.

      • Al says:

        Uwe, I agree with your last paragraph and that should be our emphasis. You also state that we should let “further generations to take care of their problems” which is fine and dandy, but our policies and wants are placing those further generations in debt solely to feed our own inflated needs. Why at present do you seem to have so little concern for future generations when on earlier blogs you appropriately demonstrated deep concern for the young?

        • Uwe Reinhardt says:

          I agree entirely with you, Al. I wrote with disgust as early as the 1980s about our debt addition and recall giving our students hell in 2003, after the MMA 03 passed, for being so passive about the financial burden we shoved down their path.

          But again, I don’t need long run forecasts to come to that conclusion.

          The big deficit bulge following the financial crisis is, of course, a one-time thing. Revenues plummeted and spending rose i=on automatic stabilizers, for the most part.

          But, yes, we do need a grand bargain on our fiscal policy, and we don’t need those silly Trustee reports to grow up.

          • Al says:

            Uwe, you are an enigma to me. At times you make so much sense and at other times (to me) you seem to forget about incentives and economics. Then again I note all my hero’s tend to disappoint me whether they look in the short or long term. I focus on my kids and the next generation or so thereafter and I feel we have taken their futures away.

            • Uwe Reinhardt says:

              Al:

              While would not claim that our fiscal policy since 1981 (Clinton excepted) has been responsible and has shifted a financial burden to our young, I think arguing that we have taken their future away is a bit hysterical.

              Yes, they inherit debt from us. But they inherit no assets from us for which they did not pay a dime?

              Think about that, Al, starting with the huge amount of human capital they got from us, most of it for free.

              So, when I look at the balance sheet we pass on to our kids, with assets they did not pay for and debt for which they got no benefits, on a net basis I feel alright vis a vis the little critters, and so should you.

              Have a carrot juice and relax, Al. Our kids will be ok.

              • Al says:

                “Have a carrot juice and relax”__Uwe R.

                Your idea about the carrot juice is a good one, but my question to you is should I be insured for the costs of that carrot juice and should that carrot juice be a civil right? That is where we seem to differ. I say carrot juice need not be a right nor does it require a mandate for it to be insured by others. At different times you seem to argue the opposite.

                While we both agree that we have a special responsibility to children (though we use different juicers) you seem to want to abandon them once they become half baked. At that point you want them to pay for their parents hedonistic lifestyles that mimic the lifestyle of the President and First Lady now in office. I’ll skip the show and read a book. That will be a far better choice than making our children into indentured servants.

                PS: I noted your comments on Clinton and how you praised his abilities as a master of saving money and reducing the debt. I hope your students didn’t get A’s for such superficiality as you know better than I that such praise is unwarranted though he deserves some credit for his bit of fiscal conservatism amongst a bunch of big spenders in his party. Just don’t forget that the bill for entitlements climbed and his actions with regard to lending in the housing market (among other things) have left us in a mess today.

  12. Paul Nelson says:

    AND, to think that we are going to insure another 30 million citizens next year. Even if they cost only $3000 per citizen, it will be close to $100 Billion in healthcare next year. As a result, the healthcare industry will again validate Parkinson’s Law. In contemporary language, “The level of work in complex institutions will always expand to use the resources available.” Remember also that the $100 billion will come directly from the Federal budget. Is there anyone who does not believe that this is totally mindless?

    • Uwe Reinhardt says:

      So, Paul, would letting these people just hang there uninsured be your preferred solution?

      • Al says:

        Uwe, you don’t believe that health insurance is the same as health care, do you?

        • Uwe Reinhardt says:

          I would imagine you are not insured, Al, given how unimportant you think it is.

          • Al says:

            Uwe, you are being funny. I am risk averse so among other things I carry insurance policies for my home, my car and my health. I don’t however carry insurance to change the light bulbs nor change my oil. Why would I want to pay so much more to prepay medical care instead of insuring unexpected or very high costs? It makes no sense. Can you explain this to me?

  13. Wanda J. Jones says:

    We seem to be in a policy limbo as regards Medicare and other benefit programs. A lot of dire predictions, a few correctives, almost no action. It is ironic to me that our government, which is so ready to buy the notion that medicare should do “value purchasing”–or paying providers by outcomes, is not so subject to evaluation of its own actions or inactions. how about a yearbook of legislative members and their performance scores, from E–did nothing–to F–did the wrong thing more than once–to D–is muddling through something he does not understand, to C–aware but lazy, to B:–struggling and working with colleagues, to A–has a plan and is advocating it as hard has he can.

    If we were to score Congress today in healthcare, what do you think? Give them an F? With all the talk about holding healthcare enterprises accountable, I’d just like to see Congress itself held accountable for work it is supposed to do. Why do we not question the net present value of this form of government? At least, let those vote on remedies and concepts who can demonstrate knowledge of the subject.

    Wanda J. Jones, President
    New Century Healthcare Institute
    San Francisco

    • Uwe Reinhardt says:

      The wonder is that this Congress most Americans think deserve an F gets reelected for the most part year after year — some members for decades.

      What does that say about the citizens?

  14. John Goodman says:

    The Social Security and Medicare Trustees used to project out for 75 years (and they still do). But then someone noticed a problem. Take someone who retires in the 76th year. A 75 year projection counts all of his payroll taxes, but ignores all of the benefits he expects in return for those payroll taxes.
    So any cutoff year underestimates the size of the problem generated by pay-as-you-go finance. That’s why the infinite horizon is the preferred perspective. Although things look bad from any perspective.

    To say that each generation can decide on its own how to divide up the pie is like saying that the WWII generation decided how to divide up Europe among the fascists, the communists and the democracies. They did more than just “divide things up.” they killed millions of people in the process.

    • Uwe Reinhardt says:

      Now, John, you know that your WWII analogy is just plain silly. I won’t grace it with a reply.

  15. John Goodman says:

    Sorry, my last comment got cut off.

    We are setting the stage for intergenerational warfare and one hopes it won’t be a shooting war.

    We are making promises to millions of people, but we have been unwilling to pay for those promises. This creates implicit obligations for people (many not yet born) who have never agreed to participate in a government sponsored chain letter and who, very understandably, might want to opt out.

    • Uwe Reinhardt says:

      John:

      I would be the last to defend the cumulative public debt with which we have financed our government outlays — starting with Reagan, under whom the public debt tripled, and when Bush Sr. left, it had been quadrupled. It stood at $10 trillion when Bush Jr. left. And then came a huge recession in which revenues plunges to 14% of GDP.

      But to project current tax rates and spending rates into infinity and tell us that the gap sums to a pv of $200 trillion and then to relate that gap to our current GDP is just silly. It trivializes the issue, because we can all just shrug and say that whatever we do with our GDP, we can’t do much about the problem.

      We could now enact a different set of taxes and promises and make tons of assumptions about now to infinity and thus get the projected shortfall down to zero. Would that guarantee us that in 2030 another Ronald Reagan might not come discovering the political beauty of lowering taxes without cutting spending?

      I would rather follow a policy and ask, legislation by legislation, how it could be financed responsibly.

      Building a new airport can responsibly be debt financed. Giving the elderly free drugs not. And so on.

      That leaves the question how our wars should be financed. In your view, how should the Iraq invasion and occupation and Afghanistan’s have been financed? Was debt financing ok with you? Or should we have levied a war tax to finance these wars?

      I would find exploring such questions far more interesting and yielding than silly projections to infinity.

  16. Mark Kellen says:

    Everyone who comments on spending and taxes has ignored what governments have historically done when faced with fiscal dilemmas; print, print print. Our government is devaluing our currency, has since 1913′ and will take it to toilet paper over time. I would not worry about tax increases, as any overt increases will likely be trivial compared to covert inflation taxes.

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  18. Andrew says:

    And again. And again. And again…

    http://www.tubechop.com/watch/1316047