July 1995 Bulletin

Medicare Part A faces insolvency

Part B taking increasing share of Gross Domestic Product

The Board of Trustees of the Hospital Insurance (Part A) portion of the Medicare program has projected that Part A will be insolvent by the year 2001, even under the most optimistic of assumptions. Part A costs are financed through a 2.9 percent payroll tax on annual wages.

The Part B (the Supplementary Medical Insurance) portion of the Medicare program is not in danger of bankruptcy for the foreseeable future because its financing is recalculated on a yearly basis to match projected expenses. Beneficiaries fund approximately 26 percent of their Part B costs through a monthly premium. The remaining 74 percent of costs is paid through general tax revenues. However, outlays for Part B are consuming an ever greater part of the federal budget, as well as the Gross Domestic Product (0.93 percent of GDP in 1994, projected to rise to 1.77 percent in 2005, and 4.01 percent by 2030).

If there is not an adequate increase in revenues and direct contributions from beneficiaries, the entire program will add almost $150 billion to the total annual federal deficit by the year 2000. This is about three-fourths of the current total annual deficit. By the year 2040, contributions from payroll taxes and general revenues would have to be more than nine times the current rate, and premiums would have to increase 13-fold, in order to cover anticipated costs.

Factors that have contributed to the growth in Medicare costs include:

Rep. Newt Gingrich (R-Ga.) and other congressional leaders have publicly called for comprehensive Medicare reform to address the cost issues. Rep. Gingrich has created a special task force, thus heightening the sense of urgency on this matter. The House Ways and Means Subcommittee on Health has already begun hearings on the issue. Given the pressure for deficit reduction generally, Medicare reform legislation could pass in 1995 or 1996. Following are some Medicare reform options that are being discussed.

More cuts in provider reimbursement. According to the American Medical Association, from 1981-1993, Medicare projected payments to hospitals and physicians were cut by $98 billion. Physician payments, which account for 23 percent of total Medicare expenditures, were cut by 32 percent.

More managed care in Medicare. The Health Care Financing Administration (HCFA) seems committed to expanding managed care in Medicare so that beneficiaries enjoy the same range of options that are available to the general public. To date, HCFA officials have not publicly stated any intention to force beneficiaries into managed care, but managed care is getting the same kind of attention from Medicare policy makers as it is getting in the private sector, in terms of its cost cutting potential.

More direct support from Medicare beneficiaries. The staff of the Congressional Bipartisan Commission on Entitlement Reform Options offered several alternatives for more direct contribution from beneficiaries. These included: Part A premium indexed to program costs; increasing part B annual deductible indexed to program costs; replacing Part B premium with a high deductible indexed to program costs; copayments for selected services such as home health services, means testing - premiums would be based on modified adjusted gross income increased proportionately to a selected maximum amount; and taxing Medicare benefits as individual income.

More direct contributions from the non-Medicare population. This would include raising the Medicare eligibility age, and raising general tax revenues and the payroll tax.

Individual retirement accounts and medical savings accounts. Medical savings accounts (MSAs) are receiving a lot of attention as a means of increasing the individual's responsibility for his or her health care costs, thereby decreasing society's burden. MSAs also are seen as a way to heighten buyer awareness of health care costs, thereby exerting downward pressure on utilization.

- Prepared by the Robert Fine, JD
director of the Academy's department of health policy.

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