Office of Representative Howard Hughes
Interoffice Memorandum
For the Agenda of: Panel Discussion
Date: January 15, 2012
To: Rep. Howard Hughes
From: Chief of Staff, Student
Subject: Response to a Proposal for Reducing Medicare Expenditures by Enrolling in HMO’s.
Medicareis a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other special criteria. Medicare in the United States somewhat resembles a single-payer health care system but is not. Before Medicare, only 51% of people aged 65 and older had health care coverage, and nearly 30% lived below the federal poverty level. "Original Medicare" plans (when Medicare Advantage has not been elected) cover 80% of the Medicare-approved amount of any given medical cost; the remaining 20% of cost must be paid by either a Medicare Supplement plan, which is a "supplemental insurance" from a private health insurance company (normally requiring a monthly insurance premium paid to that company by the holder), or out-of-pocket via the patient's own personal funds (check, money order, cash, etc.). Medicare Advantage plans are not Medicare Supplements but take the place of "Original Medicare". In return for a premium, these plans share costs and cap out of pocket expenses.
The Medicare program also funds residency training programs for the vast majority of physicians in the United States.
The Social Security Act of 1965 was signed into law on July 30, 1965, by President Lyndon B. Johnson as amendments to existing Social Security legislation. This legislation included the establishing of the Medicare program. At the bill-signing ceremony, Johnson enrolled former President Harry S. Truman as the first Medicare beneficiary and presented him with the first Medicare card, and Truman's wife Bess, the second.
Because Medicare, Medicaid, and Social Security make up a huge portion of the federal budget, it will be difficult to significantly reduce the deficit without addressing their costs. High healthcare inflation and a growing number of senior citizens in the population have helped increase costs. Americans largely seem to recognize that the costs of these programs are going to have a significant impact on federal spending and on the government's ability to address other priorities within the ne Three things are combining to create a "perfect storm" of financial liability headed right for our children and grandchildren: rising health-care costs per beneficiary, many more beneficiaries, and fewer workers per beneficiary.
In 1970, the average cost per Medicare beneficiary was under $2,000 in today's dollars. Now it's over $10,000. Meanwhile, the number of Medicare beneficiaries has doubled. You can see why the overall cost of Medicare has risen from about $40 billion in 1970 to $467 billion today.
The problem only gets worse as baby boomers retire. Household health care spending nearly will double in the next 20 years from 23 percent of total compensation to 41 percent. In the same 20 years, Medicare's share of federal spending also nearly will double, from 13 percent to more than 23 percent.
Now comes the final component of the storm. In 1970, there were more than four workers for each Medicare beneficiary. Now there are slightly under four. In 20 years, there will be just two and a half.
Seniors -- the primary current beneficiaries of Social Security and Medicare -- are least likely among age groups to see a near-term crisis from those programs. Fifty-seven percent of seniors believe the programs' costs will create a crisis for the U.S. within 10 years or are already doing so, compared with roughly two-thirds or more of other age groups. The lower level of concern among seniors could reflect that they currently receive benefits under the programs and see them as "working," and thus not in a crisis. It could also reflect the fact that most proposals to change Social Security and Medicare exempt those who are now aged 55 or older, meaning these will likely not affect their own situations.
Elderly people who are now drawing Medicare have had deductions from their paychecks since the inception of the program. They feel that they have paid in, and now are eligible to draw “their” funds out as health care. The problem with this is that the money paid in does not cover the medical costs of the Medicare program for several reasons. First of all, many of the older people now covered by Medicare did not work all that many years under the program. The amount they paid in might have been a very small amount considering the years they are drawing benefits. People are living longer and are therefore on Medicare for an increasing longer number of years. And, the cost of medical care, as everyone knows, has skyrocketed in recent years.
The second and larger problem has more to do with how much those benefits cost. America's general rate of inflation is around 3 percent per year, but the price of health care rises much faster: Health insurance premiums rose 7.7 percent in 2006, which is actually down from 14 percent in 2003, according to the Wall Street Journal.
Why the deficit? First, like Social Security, Medicare relies on taxes from working people to pay for retiree benefits, and the Baby Boomer generation is about to retire en masse and probably live for a very long time - the scoundrels. However, this demographic trend is not at the main root of the crisis.
The Medicare Modernization Act, with its signature prescription drug benefit, Medicare's first major overhaul since its inception in 1965, has been troublesome from the start.
According to Medicare trustees, rising health care costs and slow job growth could push the Medicare trust fund into insolvency in 2019--seven years sooner than was projected previously. The Medicare overhaul bill hastens the insolvency by two years by increasing payments to private insurers who accept Medicare recipients and through higher care reimbursements for rural hospitals.
The program's dismal financial forecast comes as the number of baby boomers, adults born between 1946 and 1964, will swell Medicare's enrollees from nearly 42 million currently to about 61 million by 2020.
Those concerns make it essential that Medicare's drug benefit which is paid for by general tax revenues--not the Medicare trust fund--be efficient and affordable as possible.
The concern over Medicare's current affordability erupted recently when the agency announced that monthly premiums for physician and outpatient care increased 17.4 percent--from $66.80 to $78.20. The increase was due mainly to rising health costs and increased reimbursements for doctors.
When it began in 2006, the Medicare drug benefit provided prescription drug coverage for Medicare's seniors and will end upcosting $534 billion through 2014.
The second "cost-increase" trend is more severe than the first "aging population" trend. You're probably more familiar with the first trend, though, because it also underlies the Social Security crisis that Congress debated a few years back.
However, we should really say Social Security "problem," reserving the word "crisis" for Medicare. According to the CBO, Medicare has around 32 trillion dollars in unfunded liabilities over the next 75 years, compared with Social Security's four trillion. We've heard more about the Social Security problem, though, because its best solution - privatization - makes Wall Street some scratch.
Solving the Medicarecrisis leaves no such winners. For solvency, we can raise taxes, cut benefits and/or cut spending elsewhere. The magnitude of the problem and the diversity of the political landscape will probably demand a mixed sacrifice in each of the three departments.
Everyone has their own ideas about the size of government, but what's important is that we use common sense and not “scrap” the whole Medicare program. There are several alternatives to going to HMO’s which has been a losing proposition for the Medicaid programs.
One idea, for example, is to cover only the oldest percentage of the population, rather than everyone over a certain age. Since 1965, the population’s expected life span is getting longer and longer.
Since there is a “base line” amount the average person needs to live (poverty level, average living expenses for one person, etc.) a larger percentage of wages could be taken from those making far over the average needed to live.
A third idea is that those who have a certain stated amount of private health care coverage could be “opted out” of Medicare.
But, our recommendation should not be to do away with the Medicare program as it stands.