Medicare by the Scary Numbers
White House spin pretends otherwise, but the unfunded liabilities may exceed $100 trillion.
By John C. Goodman and Laurence J. KotlikoffEven before the latest Medicare trustees report came out at the end of May, the White House spin masters had already crafted a story to go with it. Medicare's finances have improved, we're being told. The trust fund will last longer. The unfunded liability is lower. One of the reasons is said to be ObamaCare.
The core of the new health reform doesn't kick in until next year, but already it's improving things for seniors? 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 president's new budget also paints a rosy picture of Medicare's present and future finances.
Yet even with these unrealistic assumptions about Medicare costs, the future looks bleak. 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.
Take one source of optimism that the trustees are compelled to transmit in their latest report. Its predicted expenditures are based on the assumption built into the law that next Jan. 1 there will be a 25% decrease in the fees that Medicare pays doctors. That means that every doctor in America who participates in Medicare will take a 25% pay cut. 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 GDP per person plus two percentage points, the ObamaCare law calls for a spending growth rate of GDP plus 0.04%. 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.
How is this supposed to happen? There have been a number of demonstration projects that were supposed to find more efficient ways of delivering care. But three separate CBO reports have found that these programs—such as the use of electronic medical records and "coordinated care"—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. Medicare fees would fall below the reimbursement rates for Medicaid next year and fall further and further as the years go by. By 2030, for instance, doctors treating Medicare patients would be paid 40% of private health-insurance fees. The Medicare reimbursement to hospitals for inpatient treatment would fall to 60% of the private-insurance level.
From a financial point of view, senior patients will become less desirable than welfare recipients. Medicare's Office of the Actuary is predicting that one in seven hospitals will completely leave the Medicare system by 2020 because of these pay cuts.
This is not a new problem. When the Affordable Care Act was passed in 2010, Medicare's chief actuary, Rick Foster, said the cuts envisioned would damage access to care. Harvard health economist Joe Newhouse predicted that seniors may have to seek health care at the same places frequented by Medicaid patients today—at community health centers and the emergency rooms of safety-net hospitals.
So not much is looking up after all. If Congress caves to political pressure and continues to restore cuts in provider fees, as it has done since 1997, the unfunded liability in Medicare will be far greater than what the trustees are now showing.
Meanwhile, the fiscal gap separating the present value of all future projected federal expenditures—Social Security, Medicare, Medicaid, ObamaCare, defense, gassing up Air Force One, servicing existing debt, you name it—and all future federal taxes and other receipts is, based on the CBO's projections, a staggering $222 trillion.
Anyone in Washington who thinks we can keep pretending that there is no long-term fiscal tsunami heading our way should look at that number—and examine his conscience.
Mr. Goodman, president and CEO of the National Center for Policy Analysis, is the author of "Priceless: Curing the Healthcare Crisis" (Independent Institute, 2012). Mr. Kotlikoff is a professor of economics at Boston University and co-author of "The Clash of Generations" (The MIT Press, 2012).