Medicare's in Good Health

Medicare's in Good Health

Will future workers accept higher taxes to buy their grannies insulin? Or will they say, 'Let her rot'? (I'm betting on the grannies here.)
By Jane Bryant Quinn

May 24 issue - The way the pessimists talk, you'd think that America couldn't afford the future. Exhibit A is medical care for baby boomers. As they age they'll supposedly break the bank. By 2050, we may have to pile the old and sick onto ice floes and float them off. Otherwise they'll devour our treasure (assuming we have any, after all the deficit spending).

advertisementAnyway, that's how you spin the story if you want Medicare chopped or dropped, as many conservatives do. They're backing a raft of proposals to make the elderly pay more of their future medical costs.

The optimists, on the other hand, give future Medicare funding a cheerier spin. No need for ice floes, they say. Our standard of living will boom over the next 45 years. GDP will grow, grow, grow. In 2050, today's Medicare program will indeed take a larger slice of the pie. But the pie is going to be so big that workers will be twice as prosperous as they are today, even if they're paying a higher Medicare tax.

Before I lay out the competing plans, let me mention some things you might not know:

Boomer retirements are not the driving force behind soaring medical costs. The aging of the population will add only .5 percent a year to costs between 2000 and 2030, says economist Uwe Reinhardt of Princeton University. The true culprits are technology, prescription drugs and our preference for consuming ever more medical care.

Medicare isn't doomed just because fewer workers will be supporting each beneficiary. By 2030, only 2.4 workers are likely to stand behind each Medicare beneficiary, down from 3.9 today. But new technologies will make those workers far more productive—raising their incomes and their ability to pay.

Medicare won't go broke. The only trust fund in Medicare covers Part A, which pays your hospital bills. The fund is still growing, thanks to the interest earned on the Treasury securities it holds (6.2 percent last year). It's supported largely by payroll taxes and, on paper, lasts until 2019. After that... well, I don't even want to think of the fate of the Congress that quits paying hospital bills for the elderly.

None of the rest of Medicare has a similar trust fund to worry about. Part B, which pays doctor bills, is 25 percent funded by monthly premiums that retirees pay. The rest comes from general tax revenues. Part C covers privately managed Medicare HMOs, which the government subsidizes lavishly. The new drug benefit, Part D, will also be funded by retiree premiums plus the general taxes everyone pays.

On paper, there's money available to pay full Medicare benefits to future retirees. But they're competing with many other wants, such as tax cuts, farm subsidies and wars. So what are the priorities? Will future workers accept a higher payroll tax so their grannies can get insulin and hip replacements? Or will they say, "Let Granny rot—I want a tax subsidy to buy my own private rocket"? (I'm betting on the grannies here.)

Even so, Medicare has to trim its sails. For the lefties, a favorite goal is to wring more efficiency out of doctors and hospitals. For example, some states (primarily in the sun belt) spend far more per capita on Medicare patients than do other states (Wisconsin, Minnesota, Oregon). If the sun belt were weaned from its wasteful ways, Medicare would stretch a lot further than it does now. The drug companies will be pushed to cut their costs as well, says Robert Reischauer of the Urban Institute. The lefties also say, "Cut the budget deficit." By 2030, the interest on today's deficit will cost more than Social Security and Medicare combined, Reinhardt says.

The righties tackle spending directly, by privatizing Medicare and shifting more of the medical costs to seniors themselves. (In these scenarios, the taxpayers save money but seniors don't.) Michael Cannon at the Cato Institute, a conservative think tank, likes Medicare personal accounts. Part of your Medicare contribution would go to an investment account to help you pay future medical bills. You'd get less from Medicare, so you'd have to cross your fingers that your personal savings would grow.

Cannon also backs "premium support," which is basically a voucher plan. The government would pay seniors a fixed amount toward health care every year that they'd use to purchase a private plan. If the voucher isn't large enough to buy comprehensive care, they'd have to settle for a high-deductible plan, paying the smaller bills themselves. Seniors would have to decide how much health care they could afford.

The irony is that private plans are more expensive and less efficient than traditional Medicare, which remains America's most popular program. In a study covering the years 1970 to 2000, Marilyn Moon of the American Institutes for Research found that Medicare did a better job of containing costs than private plans did. In fact, private HMOs can't even compete with Medicare unless they get large government subsidies. (The righties love government handouts, as long as the hands are theirs.)

Whatever we do about Medicare, we know this for sure: health-care costs won't go away. Who will look Granny in the eye and say she'll have to pay or do without? Especially as she approaches the voting booth.

Reporting Associate: Temma Ehrenfeld