Absent Strong Action, Medicare Goes the Way of Greece

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Greece owes $320 billion to its creditors and cannot repay the loans. Like Greece, Medicare is also accumulating an unaffordable mountain of debt. And both Greece and Medicare are more likely to default on their debts than to adopt the highly unpopular reforms needed to pay them off.

Wednesday's news from the Medicare Trustees may not seem that dire.

The headline is comforting, but misleading. Medicare's Hospital Insurance (HI) trust fund-also known as Part A-will run short of money, but not until 2030. Starting that year, Part A benefits can be paid out only to the extent that money comes into the trust fund, mostly from payroll taxes. That's the same date predicted by the Trustees last year, so Medicare's financial situation does not seem to be worsening.

But the HI depletion date tells only part of the story. Medicare also pays for physician and outpatient services under Part B and prescription drugs under Part D. Because Part B and Part D automatically receive additional funding from general revenues, they remain solvent indefinitely. But that does not mean we don't have to worry about the rising costs of those benefits.

In fact, we are seeing a shift of Medicare services out of the hospital and into outpatient settings that are often more convenient for the patient and more cost-effective for the program. Part A services accounted for 50 percent of Medicare spending in 2008. By 2014, that share had fallen to 44 percent. That shift of spending makes Part A's financial outlook better because the money is being spent in other parts of the program that do not have insolvency dates.

We can see this more clearly by examining the funds flowing into and out of the program. The Trustees predict that Medicare will run a small surplus until 2021, followed by red ink as far as the eye can see.

Fiscal experts often point to Medicare's unfunded liability. That's the shortfall between Medicare's projected spending and revenues dedicated to the program. According to the Trustees, the unfunded liability over the next 75 years is $28 trillion.

That's a lot of money. But it understates the fiscal burden of Medicare on the economy.

By focusing on the unfunded liability, we make the implicit assumption that dedicated revenues-the premiums, payroll taxes, and other levies collected specifically to fund Medicare-can be collected without complaint from an increasingly burdened public. The baby boom generation, which was blessed by a remarkable period of economic growth unrivaled in the history of mankind, is retiring. Succeeding generations face a bleaker future.

One fact is clear. There will be fewer workers to pay for the retirement benefits of an ever-growing senior population. According to the Census Bureau, there were 5.4 workers per retiree in 1970. By 2000, that number dropped to 4.7. By 2030, we will be at 2.7. Even with a growing economy, that decline in the worker/retiree ratio leaves us with an increasing cost to be borne by our grandchildren.

There is an alternative: default.

Many people seem to believe that the public debt accumulated by governments must eventually be paid by future generations. In the depths of the Depression, Freeman Tilden wittily pointed out that "posterity erases its external debts by repudiation...[and its] internal debts...by inflation..." Greece is preparing to do just that by negotiating yet another bailout at better terms-in other words, slowly repudiating its debt. If it eventually drops out of the Eurozone, devaluation is inevitable.

Unless we take strong action, Medicare might go the way of Greece. The Obama administration has enthusiastically announced all sorts of initiatives that are intended to slow the growth of Medicare spending within the current fee-for-service framework that has promoted inefficiency and excessive use of health services. However, the initiatives-which include accountable care organizations, bundled payments, and value-based purchasing-have barely gotten off the ground. Without more fundamental reforms, including premium support, we are unlikely to create a system that produces better care at a price that future generations are willing to afford.


Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute (AEI).

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