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New Medicare Report: Is It Based on a Rosy Scenario?

New report also confirms Medicare and Social Security headed for insolvency in the long term

Aug 06, 2010

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If the government pushes hospitals and doctors to become more productive and less wasteful, does that mean it will happen?

That question permeated the long battle in Congress over President Obama’s health care reform bill.    Supporters of reform said there had to be a better way.  Productivity in health care has lagged behind the rest of the economy for decades, and health care costs are now far higher for Americans  than for citizens of most other industrial nations. 

Now, as became clear on Thursday in the latest report from the trustees for Medicare and Social Security, it is time to put the theory to the test.

The trustees predicted that the new health care law could generate so much better productivity that the Medicare trust fund would stay solvent until 2029 – 12 years longer than predicted just one year ago.

The new estimates offer  few clues about where that new efficiency will come from.   They are simply based on the fact that the new health care law requires that Medicare payments to hospitals and doctors will be adjusted to reflect higher productivity. At least initially, it won’t matter whether that productivity actually occurs.  

The new law calls for a raft of pilot programs and a new research center to test experimental approaches for delivering health care and charging for it.  But it’s anybody’s guess which ideas will work and when – if ever -- the savings will materialize. 

What if the improvements don’t occur?  At some point, the Congress would face a grim choice: let Medicare pay more than it planned, or watch legions of health care providers refuse to serve Medicare patients.   That’s exactly what has happened, year after year, as Congress temporarily waived rules aimed at slowing physician reimbursements.

“The outcomes are far from certain,’’ the new report cautioned.  “Many experts doubt the feasibility of such sustained improvements and anticipate that over time the Medicare price constraints would become unworkable and that Congress would likely override them.”

In the meantime, the new report confirmed that both Social Security and Medicare are still headed toward insolvency as the nation’s 76 million baby-boomers reach retirement age in growing numbers.

Daunting Future

For the first time since 1983, outlays for Social Security this year are expected to exceed revenues from payroll taxes. The shortfall is expected to be $41 billion this year, which reflects the steep drop in revenues during the recession. But while the shortfalls are expected to disappear as the economic recovery gains speed, they are expected to reappear in 2015 and widen rapidly after that. 

The long-term outlook for Social Security remains about as bleak as last year: Without action by Congress to either raise taxes or cut benefits, the trust fund’s reserves of $2.5 trillion will run out in 2037. At that point, the government would have to cut benefits by about 22 percent, and more in subsequent years, in order to balance incoming revenues with outlays.

Medicare faces a much more daunting future. Its main hospital insurance trust fund is already paying out more than it receives from payroll taxes, and will be insolvent in 2029, even if health care reform delivers on all its promises. And while the problems of Social Security stem mainly from the surging number of retirees, Medicare’s problems are compounded by health care prices that have climbed faster than inflation, year after year.

“The report shows that we have work left to do,’’ acknowledged Kathleen Sebelius, Secretary of Health and Human Services and one of the trustees. “To achieve the gains projected in this report, we must continue to work hard with our partners across the country to implement the reforms in the Affordable Care Act effectively and on time.”

John Rother, executive vice president of AARP, the premier senior citizen advocacy group, said the report from the Social Security trustees “reaffirms that the program is financially strong in the short-term and can be strengthened for the future with relatively modest adjustments.” Rother said the trustees’ report confirmed that Social Security can pay full benefits for decades, and approximately 75 percent into the future even if nothing is done. “AARP renews its call to act in the coming few years to shore up the system’s long-term ability to pay promised benefits to retirees, survivors and those with disabilities,” he added. “We should not wait for a crisis to develop to act. Americans should be confident that their earned benefits will be there for them when they need them.”

Betting on Productivity

The trustees’ new report was delayed by four months this year, as the program’s actuaries tried to calculate the health care law’s impact. The projections are prepared by the chief actuaries for the old-age programs, with heavy consultation from outsides experts and economists. In addition to Sebelius, the trustees include Treasury secretary Timothy Geithner, Labor secretary Hilda Solis and Michael J. Astrue, the Social Security commissioner. The trustees normally include two people from outside the government, one Republican and one Democrat, but those posts are vacant at the moment.

Virtually all the projected improvement in Medicare’s long-run outlook stems from a big bet on higher productivity. Under the law, Medicare is supposed to increase its reimbursements to hospitals and doctors more slowly, on the assumption that productivity in health care climbs as quickly as in the rest of the economy.

Because of changes enacted in 1983 to boost payroll taxes and gradually postpone the retirement age, the Social Security trust funds have accumulated a surplus of $2.5 trillion and also earn billions of dollars in interest. But the annual cash surplus in payroll taxes has been diminishing for years, and the deep economic recession briefly eliminated it this year – several years earlier than expected. The setback had no impact on benefits, because the trust fund simply dipped into its reserves, and the annual surpluses are expected to briefly reappear as the economic recovery gains strength. On Thursday, the trustees confirmed that Social Security will start running deficits again in 2015 and those will grow steadily wider until the trust fund is exhausted in 2037.

Former President George W. Bush waged an unsuccessful campaign to overhaul Social Security, both by cutting the growth in future benefits and by letting people divert some of their payroll taxes to private retirement accounts. The plan would have created enormous deficits for the next decade or so, and would have eventually led to a dramatic drop in guaranteed benefits. Democrats staunchly opposed the plan, and public opposition remained high. By 2006, Bush had abandoned his effort.

Analysts say Social Security’s looming problems could be fixed by relatively modest adjustments to taxes and future benefits. Those adjustments include another postponement in the so-called normal retirement age, which is now 66 but will hit 67 in 2022. Other ideas include raising the amount of annual income that is subject to payroll taxes. At the moment, taxes are not imposed on annual income above $106,800. Yet other proposals would slow the growth of future benefits by indexing them less to the rise in wages than to inflation. 

Complex Problems

The outlook for Medicare actually improved from last year, mainly because the trustees expect that cost reductions in the health care reform bill will take a bit of pressure off its long-term problems. The Obama administration foreshadowed that conclusion earlier this week, when the Center on Medicare and Medicaid Services predicted that the new law will save Medicare $575 billion over the next decade. As a result, the trustees said, Medicare’s main hospital insurance trust fund will not reach insolvency until 2029. 

Even so, the trustees warned that Medicare’s problems are much bigger and far more complex than those of Social Security. For one thing, it isn’t certain that the savings projected from increased productivity and from cost-containment efforts by the new Independent Medicare Advisory Board will actually materialize

But even if those savings do occur, the main trust fund is already running sizeable deficits that are expected to get much worse. Even staunch supporters of the new health care law say it marks only a small first step toward slowing the out-of-control rise in the cost of health care services.

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