Medicare reform is needed now – Andover Townsman
Our previous article explained that Medicare is financed by the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds and both have specific funding issues.
In 2016, the HI fund paid out $300 billion in Medicare Part A expenditures. The trustees expect that this fund will be able to pay 100 percent of its bills through 2029. At the end of 2016, the fund held $200 billion in assets and is projected to remain steady and even grow for a few years but then decline quickly as payments to providers exceed payroll tax receipts. Unless action is taken to increase revenues and decrease expenditures, in 2030, the HI Fund will generate only enough in dedicated payroll tax revenues to cover 85 percent of its payments to providers and will be considered insolvent. This indicates a long-term trend. By 2040 the number drops to 75 percent.
A July 2017 study published by the Society of Actuaries, reported that to maintain fund solvency “would require an immediate 60 percent increase in standard payroll taxes or a 31 percent reduction in expenditures–or some combination of the two.”
In 2016, the SMI fund paid out $400 billion for Part B and Part D provider services. Unlike the HI trust fund which relies solely on dedicated payroll taxes to pay its bills, 25 percent of the SMI fund is financed by retiree premiums and 75 percent with general tax revenues. These income sources are reset yearly to meet the next year’s expected costs. Because the government guarantees that inflows will be sufficient to cover outflows, this fund cannot technically become insolvent. However, that is hardly reassuring. The relentless growth of Medicare costs means higher premiums for beneficiaries, higher taxes for taxpayers, and bigger deficits for the government. Most policymakers agree that these sources are reaching their financial limits of what they are willing or able to pay.
Medicare Reform. Medicare is one of the largest federal spending programs and is growing faster than other parts of the federal budget. Since two key fiscal policy goals are to reduce deficits and stabilize the federal debt, significant cuts and changes to Medicare will be central to the broader debate and fall into one of two categories.
The first shifts Medicare costs from the government to beneficiaries, especially the more affluent ones. They include increasing premiums; delaying the age of eligibility, reducing covered services and changing the structure of Medicare to a voucher system, placing retirees at the mercy of a complex and fragmented health care industry.
The second focuses less on who is paying and more on how much we are paying. One strategy redesigns the reimbursement system promoting greater financial accountability for both patients and providers. Heavily subsidized insurance plans that blind consumers to the actual cost of services and fee-for-service provider payment arrangements encourage unnecessary and costly services. Plans with higher cost-sharing deductibles and copays and lower premiums could incentivize patients to become more educated and frugal shoppers. Financial incentives to reimburse providers on the value instead of the volume of the care they provide may also help rein in costs.
Policymakers need to address the problems facing Medicare while still balancing the interests of beneficiaries, taxpayers, and health care providers. They disagree on how best to do that, but agree on two points. First, Medicare reform is necessary and achievable. Second, the sooner reforms are enacted, the more gradually they can be phased in and the less painful they will be.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. Sentry is a fee-only financial planning firm that does not work for any financial institution, sell financial or insurance products of any kind, or accept commissions or referral fees. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com