Is Medicare Out of the Woods?

The Medicare Trustees have just released their annual report and, according to today’s Wall Street Journal, “Medicare Trustees’ Report Eases Concerns on Funding”.  In 2012 Medicare expenses, most of which are paid out of general government tax revenue, amounted to $574 billion, up 4.6% from 2011.  Although this is a smaller annual increase than usual, it still represents a rate of growth which is much too fast to be sustainable over the long run.  After all, the economy (i.e. GDP) is only growing at a rate of 2% per year and so a rate of 4.6% for Medicare is more than twice as fast as the economy is growing.  Such a rapid rate of growth for Medicare has been going on for many years and simply cannot be continued much longer.
The problem is that Medicare is an open ended entitlement program which pays whatever is needed by its currently 50.7 million retired enrollees, whose number is also increasing rapidly.  The only way that Medicare can possibly survive indefinitely is to be turned into a defined contribution program whereby each enrollee’s annual support is limited to a fixed amount.  Of course, this places responsibility on each enrollee to pay attention to the cost of her/his own medical care.  This is a big change from the present system of government responsibility and so it will take a major change of thinking to make such a big switchover.  But a new system can be phased in over time so that everyone can get used to it.
We really only have two choices.  We can postpone any action along these lines until the cost of the current system is so outlandish that the government is given the authority to severely ration healthcare for senior citizens.  The alternative is to set up, and phase in, a new system so that every enrollee bears responsibility for the cost of her/his own care.  Right now we have the luxury of deciding which of these two systems we want to adopt.  But if we put off the choice much longer, it will be forced upon us by financial necessity.

2 thoughts on “Is Medicare Out of the Woods?

  1. Postponement is the only choice. The idea of reining in Medicare is political suicide. No one will be allowed to fix the system as the article describes until the systems problems become worse than the solution. Freshly printed money can be used to pay for all expenses until such time that the public starved of medical care demands a change.
    Until that happens, the government can become slow to pay — and I am talking years to never. This option has a huge advantage in that special treatment can easily be accorded to the medical needs of the select few all the while politicians (who are the select few) can keep touting that they are doing every thing possible to bring medical care to the voters. The idea of reining in Medicare is political suicide. No one will be allowed to fix the Medicare until the system’s problems become worse than the solution.

  2. As usual, Pierce, you may be right. First of all, it is unlikely that anything will change as long as interest rates remain so low and therefore deficit spending is almost “free” money. But the economy may be starting to pick up more quickly and, if true, the Fed will be forced to raise interest rates to ward off inflation. In the meantime the one thing which the Republican House can do on its own is to put the brakes on spending increases for the discretionary programs which Congress controls. Of course, entitlement programs are on autopilot and they will keep growing fast. But the faster that entitlement programs grow, the more tightly discretionary spending will be squeezed, in order to hold down the overall size of the deficit which people do pay attention to. The more that social programs and military programs get squeezed with no growth, the more their many supporters will complain. This could lead before too long to forcing Congress to make changes in entitlement programs.
    This is my most likely scenario. We’ll see who’s right before long!

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