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Diagnosis: Poor Financial Health

The future of Medicare has become darker and bleaker since the Bush administration took office, writes Karen Davenport.

The Medicare Trustees released their annual assessment of the financial health of the Medicare program yesterday. The report, which examines the short- and long-range stability of the Hospital Insurance (Part A) and Supplemental Medical Insurance (Parts B and D) Trust Funds, did not hold any big surprises. But it does highlight the continuing need to make meaningful changes in the Medicare program.

An Alarming Diagnosis

According to the Trustees, the Part A Trust Fund will be depleted in 2019—slightly earlier than last year’s projection. The Trustees note that decreased payroll tax revenues—a measure of the nation’s troubled economy—are contributing to the somewhat earlier insolvency point within that calendar year, in comparison to last year’s estimate.

The longer history is even more alarming. Through a combination of mismanagement of the broader economy, and accelerated spending on behalf of private health plans, Medicare’s financial picture has turned darker and bleaker during the Bush administration’s tenure. When the Bush administration took office in 2001, the Trustees predicted that the Part A Trust Fund would remain solvent until 2029. Since then, the Trust Fund has lost 17 years of solvency.

The Trustees also issued a “funding warning” for the third time in three years—a warning they are required by law to make when 45 percent of Medicare spending will be supported by general revenues within the next seven years. And although the insolvency date for Part A has only changed slightly, a year has elapsed since the last estimate, which means that we have less time to improve Medicare’s financial health.

The Wrong Prescription

Instead of taking a serious look at Medicare’s financial health and proposing a reasonable course of treatment, the Bush administration has chosen to ignore the symptoms and causes of Medicare’s financial challenges.

The Bush administration has, for example, insisted on perpetuating massive overpayments to private insurers that contract with Medicare—companies that are paid, on average, 13 percent more per enrollee than the traditional program would pay to meet their health care needs. According to the Congressional Budget Office, eliminating these overpayments would save $150 billion over 10 years, and the Medicare actuaries have confirmed that this single step would add two years of solvency to the Federal Hospital Insurance trust fund.

But Medicare does not exist in a vacuum, and it is subject to the same spiraling health care cost increases as other payers. Yet the administration has put forward a set of health care proposals that would unravel our health care system without controlling costs.

These plans, which include changes to the tax treatment of employer-provided health insurance in concert with a new individual deduction for health coverage, would merely escalate the erosion of our current employer-based health care system. Even more Americans would be left uninsured or underinsured, and costs would increase for existing coverage options, including the Medicare program.

A Better Approach

The Trustees report once again highlights the need to make important changes to the Medicare program. But these changes must be about improving value within the Medicare program and strengthening our health care system as a whole, not about slashing Medicare provider payments or pushing more costs onto Medicare enrollees.

In addition to cutting the Medicare subsidy to private insurers, we need to make the long-term investments that will realize long-run savings within and beyond the Medicare program. Improvements like new funding for comparative effectiveness research will enable us to use the resources we have more effectively. And increased investments in prevention—both within the Medicare program and across generations—will reduce chronic disease and disability among the Medicare enrollees of the future.

But most importantly, we must deal with growing health care costs and the rising number of Americans without health insurance by systematically reforming our health care system. On its own, Medicare will continue to be at the mercy of larger health care cost trends. Until we reform our health care system by providing affordable coverage for all Americans and making investments in value-based health care, the annual Medicare Trustees report will continue to reflect the diagnosis of poor financial health.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.

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