NCPA - National Center for Policy Analysis

Medicare by the Scary Numbers

June 25, 2013

When the latest Medicare trustees report came out at the end of May, the White House spin masters told us Medicare's finances have improved and one of the reasons is ObamaCare, say John C. Goodman, president and CEO of the National Center for Policy Analysis, and Laurence J. Kotlikoff, a senior fellow with the National Center for Policy Analysis and an economist at Boston University.

Here's the real story:

  • In their report, the trustees acknowledge that current law envisages dramatic reductions in future Medicare outlays which may be "difficult to sustain."
  • The unfunded liability in Medicare, the trustees tell us, is $34 trillion over the next 75 years.
  • Looking indefinitely into the future, the unfunded liability is $43 trillion -- almost three times the size of today's economy.
  • Based on more plausible assumptions, such as those reflected in the "alternative" scenario for Medicare produced by the Congressional Budget Office in June 2012, the long-term shortfall is more than $100 trillion.

The trustees report's predicted expenditures are based on the assumption built into the law that next Jan. 1 there will be a 25 percent decrease in the fees that Medicare pays doctors. The reason has nothing to do with ObamaCare. In the Balanced Budget Act of 1997, Congress declared that Medicare physician fees could grow no faster than the economy as a whole. Since then, though, Congress has postponed the cuts on 14 occasions, not allowing them to take place. Why assume things will be different now?

A second problem does stem from ObamaCare. In order to pay for the expansion of health insurance for the young, the new health law calls for steep cuts in the growth of health care spending on the elderly.

  • Whereas Medicare spending per person in real terms has been increasing at about the rate of growth of real gross domestic product (GDP) per person plus two percentage points, the ObamaCare law calls for a spending growth rate of GDP plus 0.04 percent.
  • Assuming this slower growth rate will materialize, over the next decade it produces about $716 billion in savings.

But the savings don't stop there. The health reform law mandates slower growth in health care costs forever through the use of such initiatives as electronic medical records and "coordinated care." However, three separate Congressional Budget Office (CBO) reports have found that these programs don't work to cut costs.

As a result, Medicare will have to resort to a fallback mechanism: more cuts in provider fees. Were these cuts to be implemented, and if Medicare spending grew no faster than the economy as a whole, the problem of Medicare would be solved.

Yet studies by the Medicare actuaries in 2012 show that for this formula to work, the suppression of provider fees would have to be draconian. In the end, from a financial point of view, senior patients would become less desirable than welfare recipients.

Source: John C. Goodman and Laurence J. Kotlikoff, "Medicare by the Scary Numbers," Wall Street Journal, June 24, 2013.


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