Future Medicare: Cheap, But Not Availablet

If the reports from the Trustees for Social Security and Medicare are accurate, our collective unfunded obligations shrank by a whopping $15.56 trillion when the reports were released on August 5th.

The decrease is nearly twice as large as the entire $8.6 trillion in public federal debt outstanding. It’s also larger than the $13.24 trillion in total federal debt when all governmental holdings, such as the Social Security trust fund, are considered.

Don’t you feel lighter? Relieved? More secure?

Of course you do.

We owe this to our lawmakers, who passed legislation changing healthcare.

Virtually all of the improvement— 98.5 percent— came from reductions in estimated future costs of Medicare. Only a tiny amount came from a reduction in the unfunded liabilities of the Social Security programs for old age and disability.

Here’s a quick summary of the changes:

  • The unfunded liabilities of Social Security over the next 75 years declined from $5.66 trillion to $5.40 trillion. This figure represents the difference, in today’s dollars, between expected tax revenue and benefits to be paid. It does not include the $2.5 trillion in Treasury securities in the Social Security Trust fund. These will have to be redeemed early in the period. Redeeming those bonds will require new borrowings from public investors, or new taxes.
  • The unfunded liabilities of Medicare Part D, the prescription drug insurance passed in late 2003, were unchanged from last year at $7.2 trillion.
  • The big changes were in Medicare hospital insurance and Medicare part B, the coverage for doctors and other medical expenses. The unfunded liabilities for those programs declined from $30.6 trillion to $15.3 trillion. The unfunded liabilities of basic Medicare, in other words, were cut in half— thanks to the recently passed legislation overhauling healthcare.

A reasonable person might ask if such miracles are possible. Historically, reports from the Trustees have not been political documents. They have been hard-nosed creations ground out by actuaries. Actuaries aren’t prone to hyperbole, let alone fantasy. The only complaint most analysts level at the reports is that they tend to be a bit on the optimistic side— actual results have pretty consistently been closer to “higher cost” than the “intermediate cost” that is supposed to be the most likely projection.

In fact, reports dealing with unfunded liabilities have bothered both political parties. A discussion of unfunded liabilities based on generational accounting was eliminated from a budget document during the Clinton administration. Another was cut from the President’s Budget during the Bush administration. Basically, the size and growth of our nation’s unfunded liabilities has always been a hot potato.

But the 2010 Medicare report may have launched a new era. When our government reports it has cut the liabilities for Medicare in half, it is reasonable for eyebrows to wrinkle. It is understandable that otherwise credulous people might wonder if some of the actuaries were trained in the Enron School of Number Science.

In fact, the actuaries for Medicare express their own doubts about whether the enormous cost reduction dictated by the law can be achieved. Their expression of doubt starts on page 2 of the report.

 “Over time… the prices paid for health services by Medicare will grow about 1.1 percent per year more slowly than the increase in prices that providers must pay to purchase the goods and services they use to provide health care services. Unless providers could reduce their cost per service correspondingly, through productivity improvements or other steps, they would eventually become unwilling or unable to treat Medicare beneficiaries.”(Italics added).

English translation: Care for Medicare patients may come to resemble what was once called the Soviet Department Store Syndrome— where the prices on everything were incredibly low, but the store had nothing to sell.

Go to page 281 of the report and you’ll find a statement of actuarial opinion from Richard Foster, the chief actuary for Medicare:

 “For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable).”

I’ve been reading these reports for decades. I’ve never read so bald a disclaimer.

The Trillions in Taxes We Don’t Have

This table compares the changes in unfunded liabilities of four major government programs— Old Age Security and Disability Income, Medicare hospital insurance, part B, and part D— with total public federal debt and the net worth of all American households. It shows a decline of more than $15 trillion over the last year. All numbers are in trillions of dollars.

Year OASDI Hospital Insurance Part B Part D Total Total Medicare Public Federal Debt Consumer Net Worth
8/2010 5.40 2.4 12.9 7.2 27.90 22.5 8.70 54.5*
1/2009 5.66 13.4 17.2 7.2 43.46 37.8 7.80 51.7
1/2008 4.70 12.4 15.7 7.9 40.70 36.0 5.13 62.6
1/2007 5.08 11.6 13.9 8.4 39.07 34.0 4.91 62.2
1/2006 4.93 11.0 13.1 8.0 37.03 32.1 4.72 58.0
1/2005 4.32 8.6 12.4 8.7 34.02 29.7 4.41 51.8
1/2004 3.98 8.2 ——-- 19.5 ——-- 31.68 27.7 4.04 46.4