Medicare: Past, Present and Future

Studies | Health

No. 299
Sunday, July 01, 2007
by Andrew J. Rettenmaier and Thomas R. Saving



  • 2006 Medicare Trustees Report.
  • Medicare and Medicaid were created in 1965 at the height of President Johnson's Great Society and War on Poverty.  Medicare is a federally funded health care program for seniors and the disabled.  Medicaid is a joint federal-state program for the poor and near poor.  Although each state operates its own program, the federal government sets the parameters for Medicaid and matches state spending. 
  • Researchers can track total health care spending since 1929 - and the public and private composition thereof - using National Health Care Expenditure data from the Centers for Medicare and Medicaid Services (CMS). 
  • See Ronald J.  Vogel, "The Tax Treatment of Health Insurance Premiums as a Cause of Overinsurance," in Mark V. Pauly, ed., National Health Insurance: What Now, What Later, What Never? (Washington, D.C.: AEI Press, 1980). 
  • In doing so, Medicare Part A is technically drawing down the accumulated value of past surpluses credited to a Trust Fund.  This practice will continue until the Trust Fund is exhausted by 2018, at which time the program will only be able to pay what it collects in payroll taxes.  However, if general revenues are allocated to redeem the trust fund bonds in the years leading up to its exhaustion, Congress is likely to continue to allocate these funds after 2018.  The real issue is: What programs and entitlement benefits will have to be cut or what taxes will have to be raised in order to fund the cash flow deficits that have already emerged and will continue to grow indefinitly?  To see a more detailed discussion about how the Medicare Trust Fund works, see Thomas R.  Saving, "Answering the Myths about Social Security," National Center for Policy Analysis, Brief Analysis No.  509, March 22, 2005.
  • Private insurance spending includes both privately purchased medigap (supplemental) and employment-based policies.  Also see Table II notes.
  • Based on estimates from the "Review of Assumptions and Methods of the Medicare Trustees' Financial Projections" in 2000. 
  • This figure uses the GDP price deflator to be consistent with the deflator used in producing the previous figure.  Based on the 2000 Technical Panel's recommendation, the Trustees adopted the assumption that the long-run real per capita Medicare growth rate would be one percentage point above the growth rate of per capita GDP.  With the addition of the projections of Medicare spending into the indefinite horizon in the 2004 Trustees Report, the growth rate assumption was adjusted to assume that after the 75th year of the projection, per capita health care spending would grow at the same rate as per capita GDP.  However, for the 2006 Report the Trustees adopted a smoother adjustment path.  This path allows for higher growth rates in the early years of the projection with a gradual movement to similar growth in per capita health care spending and per capita GDP.
  • Given the financing arrangement for Medicare Part A, projecting its future deficits is simply a matter of measuring the difference between projected expenditures and tax revenues.  However, for Medicare Part B and Part D, projecting deficits is not so simple.  Since these programs are partially financed through general revenues, they are part of the federal budget, just like NASA or welfare benefits.  Thus, in some sense Medicare Part B and Part D can never be in deficit.  However, the general revenue transfers required to fully fund Part B and Part D will place increasing demands on the federal budget and, thus, nonentitlement revenues.  One way to project Part B and Part D deficits is to measure the difference between projected expenditures and the sum of premiums and general revenue transfers, both fixed at the current share of nonentitlement revenues.  Since Medicare Part A is currently funded entirely with payroll taxation, it is not part of a general revenue base budget, and it is reasonable to require that taxation alone be used to fund its future deficits.  However, the current level of transfers to Medicare Part B and Part D can be treated as part of a base federal budget.  To leave other federal programs unaffected, the share of Medicare transfers that are part of total federal nonentitlement revenues remained at its current level.  That is, by letting Medicare transfers grow with the economy by fixing their share of GDP at the 2006 level, other federal programs are also allowed to grow with the economy.  Thus, only the growth of Medicare in excess of the growth in the economy will generate an increased tax burden on the population.
  • Like the previous option, the share of federal nonentitlement revenues transferred to Medicare in 2006 are assumed to remain constant at their share of GDP when the Part A tax rate is at its current level.  Part A revenues are assumed to be as projected in the 2006 Medicare and Social Security Trustees Reports based on a fixed payroll tax rate of 2.9 percent and the revenues allocated to Medicare generated from the taxation of Social Security benefits.  In this exercise, increases in Medicare premiums pay the remaining funding requirements again assuming no change in projected spending.  As this exercise will show, the implied premium levels would likely cause many retirees to seek alternative insurance coverage and, as a result, currently projected Medicare spending may not be realized under this scenario.  Outlining these options simply serves to illustrate the implications of each, using projected spending as the base. 
  • John C. Goodman, Gerald L. Musgrave and Devon M. Herrick, Lives at Risk: Single-Payer National Health Insurance Around the World (Lanham, Md.: Rowman and Littlefield, 2004).
  • Henry J. Aaron, William B. Schwartz and Melissa Cox, Can We Say No? The Challenge of Rationing Health Care (Washington, D.C.: Brookings Institution Press, 2005). 
  • Ibid., page 106.
  • For additional details see Andrew J. Rettenmaier and Thomas R. Saving, The Diagnosis and Treatment of Medicare (Washington, D.C.: AEI Press, 2007).
  • See the discussion in Mark V. Pauly and John C. Goodman, "Tax Credits For Health Insurance and Medical Savings Accounts," Health Affairs , Vol. 14, No. 1, Spring 1995, pages 126-39.
  • Alternatively, the deductible could be pegged to a particular percentile in the distribution of total spending.
  • We assume that disabled Medicare beneficiaries remain in the conventional program.  We have not attempted to identify the effects of a high-deductible policy on the rate of growth in health care spending.  The RAND Health Experiment results are essentially demand-side level effects.  A high deductible for all aged Medicare beneficiaries would also induce supply-side responses among providers as they compete for spending below the deductible amount.  Both the demand- and supply-side responses would be expected to lower the rate of growth in health care spending. 
  • Of course the precise amount depends on the type of beneficiary in terms of their incomes, current health risks, location and whether they currently have some form of private supplemental insurance. 
  • These are estimated across all beneficiaries and thus include beneficiaries with and without medigap insurance (see Table II).
  • A complete HSA proposal includes a prepayment component which allows the government transfer to the HSA to be phased-out for all workers while at the same time producing deductibles that are scaled to a worker's lifetime earnings.

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