May 11, 2007

Medicare Trustees See Financial Challenges

The annual report of the Medicare trustees has estimated slight improvement in Medicare’s financial health, but long-term challenges remain.

• Last year, the trustees projected the Medicare program’s insolvency in 2018. Now, the latest projection postpones that by one year to 2019.
   
• The recently issued trustees’ report again indicates that Medicare must be shored up, if it is to survive and serve baby boomers and future generations.

The health program for the elderly continues to need its financial health strengthened.

• The Medicare trustees said Medicare will spend $483 billion this year. That makes Medicare the second-largest federal spending program.  Only defense spending is greater.
   
• At the rate Medicare is growing, its Part A trust fund will become insolvent in 2019.
   
• That minor reprieve is hardly good news. The trustees said, “Medicare’s financial difficulties come sooner — and are much more severe — than those confronting Social Security.”
   
• For the second year in a row, the report generated a warning that the government’s general revenues will make up more than 45 percent of Medicare outlays. That two-year trigger will require the President to propose a budget next year that cuts Medicare’s expenses. Congress will have to deal with this situation right away in its FY2009 budgeting.

Health care leaders would urge policymakers to look to market-based solutions like those at the heart of the Part D drug benefit.  This model could help preserve and strengthen Medicare more generally.

• Behind the one-year improvement in projections stands a reduction in Medicare’s hospital spending. Hospital admissions in the program fell by 4 percent last year.
   
• Extra tax revenue helped improve Medicare’s financial picture. So, a healthy economy is also key.The Medicare drug benefit, which relies on consumer choice and competition, is predicted to spend significantly less in the next ten years than previously thought.
   
• Introducing market-based features of consumer choice and competition more widely into Medicare can further improve the program’s fiscal picture.

Medicare faces some serious long-term financial hurdles. The baby boom generation’s coming retirement won’t make this an easy problem to solve. The Medicare trustees urged action:  “The sooner these challenges are addressed, the more varied and less disruptive their solutions can be.” Policymakers should take a page from the successful Medicare drug benefit.  It has given seniors lots of options to choose from, has sparked healthy competition which has contained costs — which have outperformed original cost projections handily. The benefits of more choice and competition will only brighten Medicare’s future.