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What Medicare's looming financial crisis means for patients
Scripps Howard News Service


June 22, 2005

WASHINGTON - If you think Social Security is facing a financial crisis, as President Bush maintains, wait until you get a load of the Armageddon facing Medicare.

Despite the attention afforded Social Security as Bush stumps for his reform plan, Medicare faces significantly greater fiscal challenges. The Medicare Hospital Insurance Trust Fund that pays hospital benefits already is operating in the red and is projected to run dry by 2020 - 21 years before the expected depletion of Social Security trust funds.

The impact on consumers could be substantial, possibly resulting in higher payroll taxes, additional out-of-pocket expenses for beneficiaries or cuts in services offered by the national health-care program for senior citizens and others.

Quick facts about Medicare
Scripps Howard News Service

A glance at Medicare:

- Medicare is the federal health insurance program covering nearly 42 million Americans - 35.4 million seniors and 6.3 million people under age 65 with permanent disabilities.

- Total Medicare benefits are expected to reach $325 billion in 2005, accounting for 13 percent of the federal budget.

- Net federal spending on Medicare is estimated to reach $444 billion by 2010.

- Medicare has four parts: Part A, hospital insurance, accounts for 45 percent of the spending in 2005; Part B, physician, outpatient and preventive services, accounts for more than 35 percent of 2005 spending; Part C, for those enrolled in HMOs, is 15 percent; Part D, the drug benefit, begins in 2006.

- Reports show 71 percent of beneficiaries have two or more chronic conditions, 29 percent are in fair-to-poor health. And 51 percent live on incomes below 200 percent of the poverty line.


The Henry J. Kaiser Family Foundation.

Robert Moffit, director of the Center for Health Policy Studies at the Heritage Foundation think tank, said projections indicate that 20 percent of all federal tax revenues will have to be used to fund Medicare by 2026 - and that doesn't even include costs associated with the prescription-drug benefit approved by Congress and signed by Bush in 2003.

The Department of Health and Human Services reports that 41.7 million people are currently covered under Medicare. Those 41.7 million will wind up costing the program, not counting the drug benefit, a projected $13 trillion.

In their 2005 report, Medicare trustees acknowledge the system's financial difficulties will "come sooner - and are much more severe - than those confronting Social Security." While both programs face similar demographic challenges - an aging work force poised to collect its benefits - Medicare also is faced with skyrocketing health-care costs that are draining the system.

The Bush administration maintains that changes made to the system in 2003 - which included kicking in an additional $400 billion - address the looming fiscal problems. On June 17, the president visited Maple Grove, Minn., to discuss Medicare but failed to mention the system's potential fiscal problems. He instead spread word about the pending prescription-drug benefit and touted a Medicare modernization effort that stresses preventive medicine.

"You know, the government would pay $28,000 for ulcer surgery - I don't know if I got the right number, but it's close to that - but not one dime for the prescription drugs that would prevent the ulcer surgery from being needed in the first place," Bush said. "Or the government would pay $100,000 for heart surgery, but not the $1,000 a year necessary to stop the heart surgery from being needed in the first place, and that didn't seem to make sense to me. That's an example of what I mean by the system was outdated and it wasn't doing what it was supposed to do."

Bush said Congress joined him "to fix this problem, to modernize Medicare." But it will require more than that to get the system on an even financial keel.

Health and Human Services Secretary Mike Leavitt recently said the administration is taking additional steps to address the problem. Bush has consistently pressed for medical-malpractice reform, which he maintains will cut insurance premiums, with the resulting savings passed on to consumers. He also has urged the medical community to adopt modern technology that will make the system more efficient and less time-consuming.

The administration also is looking with interest at an experimental program, which isn't scheduled to begin until 2010, where Medicare recipients in selected parts of the country will no longer have access to the Medicare entitlement. Instead, the government will provide them with vouchers to purchase health insurance from private vendors, with the hope it will wind up costing less.

But the trustees say more needs to be done. Two who also happen to be economists, John L. Palmer of Syracuse University and Thomas R. Saving of Texas A&M University, report that Medicare's financial condition "has deteriorated dramatically over the past five years."

Medicare's costs are expected to grow at a much faster rate than those of Social Security, they said.

"The impending retirement of the baby boom generation, continued lower birth rates and further increases in life expectancy thereafter will cause the costs of both programs to grow faster than the economy," Palmer and Saving said.

Medicare's costs, they added, are also fueled by ever-increasing scientific knowledge, new technology implementing that knowledge and the number of people taking advantage of those medical breakthroughs.

Those problems can easily be seen. The Hospital Insurance Trust Fund, which pays for inpatient hospital and related care, also known as Medicare Part A, is funded by a payroll tax. The trustees found that the fund is "inadequately funded over the next 10 years," with the shortfall beginning in 2014.

While Congress and the White House will have to grapple with the Hospital Insurance Trust Fund eventually, beneficiaries face the biggest concerns over Medicare Part B, which pays for physician and outpatient services. Unlike Part A, which receives payroll tax revenue, Part B gets about 75 percent of its financial support from federal general fund revenues, supplemented by monthly premiums paid by enrollees.

Beginning in January, that monthly premium for Part B reached $78.20 - a 17 percent increase over 2004 - the biggest jump in the program's 36 years. That sum is expected to increase to $92 by 2010. Deductibles and co-payments also were raised, meaning that in 2006 nearly 38 percent of a 65-year-old retiree's Social Security check is being sent back to Washington in the form of Medicare premiums, deductibles and co-pays.

The picture is further complicated by the introduction of the new prescription-drug benefit set to begin in January. Like Medicare Part B, the drug benefit will receive a significant subsidy from the U.S. Treasury. The rest of the tab comes from premiums and co-pays.

That outlay could prove significant. The drug benefit, the first major entitlement added to the program since its inception, was supposed to cost $395 billion over 10 years when it was approved in 2003. Earlier this year, Medicare officials upped the estimate to $720 billion over the same period, meaning beneficiaries likely will wind up paying more for the program than they anticipated.

The average monthly premium for drug coverage is now expected to be $37.37 - an increase of $2.37 over the projection offered in 2003.

"Medicare is the toughest problem substantively," Moffit said. "It is also the most difficult problem politically."



Contact Bill Straub at straubb(at)

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