Time To Burst The Longterm Medicare Affordable Funding Myth: The Medicare Problem Is Not About Insurance Or Voucher Funding; Its About Delivery Costs

Over the next 35 years, the number of people on Medicare will double, while the workforce that pays the Medicare payroll tax will increase only by 28 percent. Most of Medicare funding, Part A Hospital Insurance, and Parts B and D, Supplemental Medicare Insurance, comes from the Medicare payroll tax, and general revenues. The latter are primarily federal income taxes and fees. There is a slight current revenue to expense shortfall, which is filled by interest on and spending of accumulated Medicare assets.

For sake of simplicity, let us assume the Medicare payroll tax and general revenues are sufficient to fully fund current Medicare. In other words there is a one to one ratio of revenues and taxes to medical costs. Let us also initially assume for simplicity that going forward per person general revenues and the payroll tax revenues increase at the rate of inflation. If per person medical costs just increase at the rate of inflation, then after 35 years, there will be twice as many Medicare enrollees with a total Medicare expense twice the current amount, in inflation adjusted current dollars. Unfortunately, the workforce supporting Medicare will increase by only 28 percent and the payroll tax and general tax revenues will likely increase by that amount also. The revenue to expense ratio will move from the current 1 to 1 in our example to 1.28 to 2, or from 100 percent to 64 percent.

If the medical establishment and consumer demand remain as they are, then it is likely that medical costs will continue to experience cost increases substantially above the rate of inflation. If medical costs increase by 2 percent a year above the average inflation rate for the next 35 years, costs will double in inflation adjusted dollars. The ratio of expected revenue to cost will jump from 1.28 to 2, to 1.28 to 4, or from 64 percent to 32 percent. Variations of the trend would continue beyond the next 35 years based on continuing medical cost increases and demographic shifts.

Medicare as it currently is cannot continue if it is to be funded by payroll taxes and general revenues. The cost structure of medicine and changing demographics make Medicare's continued funding unlikely, as recognized by the Medicare Trustees, from page 49 of the "2010 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS":

the total number of Medicare beneficiaries approximately doubled over the last 35 years and is expected to double again over approximately the next 35 years. During this same historical period, the number of covered workers also increased rapidly (by about 55 percent), but is projected to increase much more slowly (about 28 percent) over the next 35 years. This relative demographic shift and its implications for Medicare costs, relative to workers’ earnings or to the GDP, are fairly well known.

Any funding solution will have to reduce medical costs to seniors and other Medicare enrollees by amounts in the range of 70 percent or more. Seventy percent is a drastic amount of money to cut and the current medical system cannot continue to supply all the medical services it does to Medicare beneficiaries at 30 percent of the cost. No one expects either vouchers, price controls or reduced Medicare medical reimbursements to be able achieve a 70 percent cost reduction.

The recently passed new health care law, the Patient Protection and Affordable Care Act, is a pipe dream, unworkable solution that will not solve the Medicare funding problem. As the Medicare actuaries stated in the 2010 Medicare Trustee report, from The Statement of Actuarial Opinion, pages 281-282, of the "2010 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS":

Further, while the Patient Protection and Affordable Care Act, as amended, makes important changes to the Medicare program and substantially improves its financial outlook, there is a strong likelihood that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The best available evidence indicates that most health care providers cannot improve their productivity to this degree—or even approach such a level—as a result of the labor-intensive nature of these services.

Without major changes in health care delivery systems, the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the prior law. Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as Congress has done repeatedly in the case of physician payment rates, would lead to far higher costs for Medicare in the long range than those projected under current law.

For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable). I encourage readers to review the “illustrative alternative” projections that are based on more sustainable assumptions for physician and other Medicare price updates. These projections are available at http://www.cms.gov/ActuarialStudies/Downloads/2010TRAlternativeScenario.pdf. [Emphasis added].

The Patient Protection and Affordable Care Act does not even solve the problem of insuring the medically uninsured yet alone solve the funding/cost problem, according to CBO.

From page 1, of the Statement of Douglas W. Elmendorf, CBO Director, "CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010" before the Subcommittee on Health Committee on Energy and Commerce, U.S. House of Representatives, March 30, 2011:

About 23 million nonelderly residents will remain uninsured: About one-third of that group will be unauthorized immigrants, who are not eligible to participate in Medicaid or the insurance exchanges; another quarter will be eligible for Medicaid but are not expected to enroll; and the remaining fraction will include individuals who are ineligible for subsidies, are exempt from the individual mandate, choose not to comply with the mandate, or have some combination of those characteristics. [Emphasis added].

Medicare as we idealize it cannot continue. Nor can the American medical system as we have experienced it. The present medical industry structure cannot survive. Government cannot afford to pay for medical services for large segments of the US population and private individuals and employers can no longer continue to afford historical medical services over the next few decades.

Medicine needs to go through a complete restructuring to lower it labor, capital and delivery system costs.

Government needs to remove many barriers that it has created so as to allow competitive and economic forces to lower consumer prices for medical services and to allow the marketplace to match supply with demand at economic prices.

State and federal governments need to remove licensing restrictions on out of state doctors and to relax the restrictions so as to allow non-US trained doctors to practice medicine in the US. Also ways have to be found to relatively quickly substantially increase the training and number of doctors in the US. Medical schools have not kept up with the demand and have acted like cartels limiting the supply of new doctors.

There is also a need to create and allow whole classes of medical providers below the doctor level with much less training. Something like an Associate Doctor degree, sort of akin to paralegal. Much of medicine is mundane and routine and can easily be systematized and provided by someone with much less training than a medical doctor. Restrictions on pharmacists need to be relaxed. The FDA needs to be mandated and restructured to lower the costs to pharmaceutical companies for drug approvals.

There is also a need to change the entire government approach to hospitals, their licensing and funding. US hospitals are much too expensive for the services and medical benefits they provide.

While some may think more government involvement in medicine is needed to lower costs and increase the supply of medical providers, more government involvement will only introduce more rigidities and more price controls, which will impede the substantial progress that is needed to improve medical delivery and lower costs. Government needs to remove the regulatory and legal barriers, restrictions and imposed costs that have stopped medicine from adopting low cost solutions to meet increasing consumer demand.

At the same time, the purse string and economic costs for consumer medical spending must be in the consumer hands so that the consumer can evaluate the cost versus benefit of the medical service, budget their desire for the service against its cost to them and make medical providers competitive.

Much too much legislative focus has been on the insurance cost part of medicine. Much more focus and legislation is needed on the actual medical industry to enable it and to motivate it to lower costs. Insurance costs are more a reflection of the underlying industry that is insured than they are of the insurance industry. Unfortunately, the prime energy and focus of the Patient Protection and Affordable Care Act was directed at the wrong problem. An economic solution to medical services is still needed.