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Medicare Faces Looming Money Worries

The current possibility of healthcare reform legislation has brought some attention to another serious healthcare challenge for our nation — how to shore up the Medicare health program’s troubling long-term financial picture.

“Medicare’s looming financial problems are a significant issue related in part to the aging of the U.S. population,” says UAB Director of the Lister Hill Center for Health Policy Michael A. Morrisey, PhD. With 78 million baby boomers edging closer to Medicare eligibility, utilization of the program is expected to skyrocket.

“Currently, Medicare expenditures represent 3% of our nation’s gross domestic product (GDP),” Morrisey explains. “In 2035, Medicare is estimated to be over 8% of GDP, and that takes into account an assumed 3% growth in the economy.”

Signs of Trouble

The Medicare program comprises three main components: Part A, which pays for hospital and nursing home care; Part B, which reimburses for physician services and other outpatient care; and Part D, covering prescription drugs.

Dr. Morrisey stresses that while the focus of attention is primarily on Part A, all three sectors of Medicare are showing signs of trouble. “Part A is scheduled to be insolvent in 2017, meaning there is enough money in the Medicare trust fund to cover benefits until this time,” says Dr. Morrisey. “Of course, benefits will continue to be paid after 2017 — but the program will be operating in the red.”

He adds that the long-term financial status of Medicare Part A is only part of the problem. “Parts B and D are also in trouble,” he says. Twenty-five percent of Part B coverage is funded from premiums paid by enrollees, while 75% of the program is funded by income taxes. “Tax revenue is down substantially due to the recession, but Medicare’s financial problems predate the global economic slowdown.”

Dr. Morrisey emphasizes that increased use of healthcare — combined with rising healthcare costs — are key reasons for Medicare’s financial problems. “It’s not the retirement of the baby boom generation that causes most of the problem; we can probably deal with the larger number of retirees,” he explains. “Rather, it’s their greater use of services per person and the higher prices paid for those services that are the problem. The care helps people live longer and better lives, but it’s driving the system over the edge. When you add in advances in technology, the system is just unsustainable.”

Looking for Solutions

While the national conversation about healthcare reform has shed a short-term spotlight on Medicare’s money problems, the issue is likely to fade into the background until it reaches a critical point. “Until this issue is viewed as a crisis, it’s likely that no legislative action will be taken to address it,” says Morrisey. “Legislators are reluctant to deal with the problem, in part, because it’s so politically dangerous.”

Dr. Morrisey says that in general, significant action to improve Medicare’s finances will mean reductions in benefits, changes in the role that Medicare plays, and/or very substantial increases in taxes. Possible solutions discussed among health policy analysts include:

  • Changing Medicare from a general entitlement to a benefit for low-income individuals;
  • Changing the benefit structure from fee-for-service to a managed care arrangement;
  • Transforming Medicare into a voucher system in which the program would give seniors a specified amount of money to purchase private health insurance that could be supplemented as needed.

“The problem with these options is that a sizeable portion of the population would be hurt by any one of these measures — either current or future Medicare beneficiaries or the taxpayers,” stresses Morrisey. “But bold action will be required to solve the problem, and it’s better for our nation to address this issue before the crisis is literally upon us.”

Article last updated: November 17, 2009 9:44 AM