NCPA - National Center for Policy Analysis


June 26, 2008

Medicare's financial problems are so immense they seem beyond resolution, and even financial experts are at a loss over how to begin closing Medicare's yawning financial gap, says James C. Capretta is a fellow at the Ethics and Public Policy Center.

The most recent report from Medicare's board of trustees only adds to the sense of hopelessness:

  • Medicare's liabilities are expected to exceed revenue dedicated to paying for the program by $36 trillion over the next 75 years, and the trust fund that pays for hospital services is expected to go bankrupt in 2019.
  • Total Medicare spending is projected to more than triple as a share of the national economy, rising from 3.2 percent of gross domestic product (GDP) in 2007 to 6.3 percent in 2030, 8.4 percent in 2050, and 10.7 in 2080.
  • Federal individual income tax collections amount to only about 8.5 percent of GDP; therefore, covering just the increase in Medicare spending expected by 2030 would require a 36 percent across-the-board individual income tax hike.

Unlike Social Security, Medicare's problems go well beyond shifting demographics.  Since there is no limit on the quantity of services Medicare beneficiaries can use each year, both the volume and the intensity of care provided can increase over time. 

For instance:

  • The Congressional Budget Office (CBO) estimates that from 1975 to 2005, Medicare's cost per enrollee went up, on average, 2.4 percentage points faster than per capita GDP did each year.
  • Medicare's trustees assume that this long-standing trend of costs outpacing the source of program income will continue in the indefinite future.

The Medicare entitlement should be converted into a limited government contribution toward insurance, offered by private plans or the government.  Enrollees would then be free to select whatever insurance plan, including a public option, they found most attractive, says Capretta.   

Source: James C. Capretta, "The Train Wreck Ahead," Weekly Standard, June 16, 2008.

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