Medicare is set to die in 2024 at the age of 59.
That’s when the program is projected to run out of enough money to cover the healthcare benefits of Americans age 65 and older. And Medicare’s financial illness has prompted renewed efforts to strengthen the popular entitlement program’s funding.
“We have to figure out ways to try to slow the rate of growth of health care costs and strengthen the financing of the system in order for it to continue to serve a usable purpose in the future as it has in the past,” said John Palmer, a Medicare expert and Syracuse University professor.
Changing the nearly 50-year-old Medicare program was once considered political suicide. Now, Medicare is combating skyrocketing costs as the nation continues to gray and the baby boomers begin to become eligible for the program’s benefits. At the same time, the pool of younger workers paying into Medicare through payroll taxes is shrinking.
“As the population is aging and the size of the beneficiary population is growing so rapidly going forward — growing a lot more rapidly than the work force — it becomes harder to finance it,” Palmer said.
Consider the numbers:
- About 49.4 million Americans benefit from Medicare, according to the Kaiser Family Foundation, a non-partisan research organization specializing in healthcare issues.
- Of those, about 3.1 million are in New York, which is about 16 percent of the state’s population.
- By 2030, the number of Medicare beneficiaries is expected to nearly double to 80 million, according to AARP, an advocacy group for those over the age of 50.
- Medicare’s administrative costs — less than 2 percent — are lower than the 10 percent private insurers usually incur, according to AARP. Still, Medicare’s expenses have outpaced inflation.
- In 2012, Medicare accounted for 14 percent — or $650 billion — of all federal spending. But it’s projected to increase from $650 billion this year to $1 trillion in 2022, according to AARP.
In 1965, Congress created Medicare to give health insurance to those age 65 and older – no matter their income or medical history. Before Medicare, it was difficult for the elderly to get adequate and affordable health insurance because they were among the most expensive groups to cover, said Palmer. He was a presidentially-appointed a public trustee for the Medicare and Social Security programs from 2000-2007.
The Medicare fund — called Part A – that covers hospital care is paid for by a payroll tax of 1.45 percent each from workers and employers. In addition, beneficiaries also pay premiums for Medicare Part B that covers doctors’ costs.
Now, with lower birthrates and longer life spans, the number of workers for every retiree is declining. That means a smaller group of workers will need to support a larger group of retirees, putting a financial strain on Medicare.
When Medicare started in 1965, it had about three workers paying into payroll taxes compared to one beneficiary getting coverage, said Palmer said. He added, “And that ratio is dramatically changing. The labor force is not growing nearly as rapidly but the elderly population is.”
Among the proposed solutions:
- Cut payments to health care providers
The new health care law – called the Affordable Care Act or Obamacare – cut Medicare spending by $716 billion, according to the Congressional Budget Office. It does this by reducing payments to Medicare hospitals and doctors when they see a patient.
President Barack Obama and Congressional Democrats have recently said they are willing to squeeze more savings from Medicare by cutting payments more to hospitals, drug companies and other providers.
The government might also cut some spending on Medicare’s coverage for medications, Palmer said. But, he said, hospitals and physicians are already under stringent reimbursement limits under the law. “So the question is how much more can you go beyond that?” Palmer said.
- Raise payroll taxes to generate new revenue
The main source of funding for Medicare hospital services comes from the payroll tax, as workers and their employers each contribute 1.45 percent of earnings for a combined contribution of 2.9 percent. Estimates on the effect of raising Medicare’s payroll taxes varies.
In a report in June by the AARP, Henry Aaron, a senior fellow in economics studies at the left-leaning Brookings Institution in Washington, D.C., calculated that Medicare’s deficit could be erased by an increase in payroll taxes by 0.5 percent each on workers and employers. That would mean total 1-percent increase, bringing the combined payroll tax to 3.9 percent.
But in the same report, Stuart Butler, healthcare expert at the conservative Heritage Foundation, argues that raising the payroll tax would slow economic growth and harm Americans’ ability to afford health care in the future. “Raising the payroll tax rate means the people who will pay the most to reduce Medicare’s burden on our children and grandchildren would be our children, and especially our grandchildren,” he wrote.
- Reconsider Bowles-Simpson proposals
Two years ago, a specially appointed Fiscal Commission — headed by Democrat Erskine Bowles and former Republican Sen. Alan Simpson of Wyoming — called for broad-reaching budget changes. But their proposals went nowhere. Today, both political parties are reconsidering the commission’s ideas.
For Medicare and Social Security, the plan called for reducing benefits to higher-income families.
During the presidential campaign, Republican candidate Mitt Romney called for Medicare to provide less support to wealthier beneficiaries. Individuals with incomes more than $85,000 a year already pay higher premiums for coverage of a doctor’s services through Medicare. Like Romney, Obama wants to increase premiums for those with high incomes and raise the number of beneficiaries who must pay higher premiums because of their income.
- Turn Medicare into a voucher program
U.S. Rep. Paul Ryan, R-Wis., the Republican vice presidential candidate, has also called for giving Medicare beneficiaries a set amount to buy insurance in the private market. But the plan has been heavily criticized and dubbed by many as a voucher or coupon system.
Medicare’s troubles generate widespread concern. In early October, for example, more than 100 protesters marched through downtown Syracuse opposing any cuts to Social Security, Medicare or Medicaid, the state and federally funded insurance program for the poor.
At the rally, Eric Kingson, a professor of social work at Syracuse University, sharply criticized Ryan’s proposal as a “coupon program.” And Charlie Albanetti, spokesman for Citizen Action of New York, rejected calls for major changes in Medicare. In New York, the more than 3 million Medicare beneficiaries bring in $34.1 million in benefits, said Albanetti.
“We think that the program is strong,” said Albanetti, “and has a lot of time left before adjustments need to be made that would impact benefits.”
(Jon Harris is a senior with dual majors in magazine journalism and political science.)
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