A Little Compromise Will Save Medicare

A person who was unhappy with the outcome of the election suggested that the voters gave President Obama a “Mulligan” on election day – a second chance to do things right.  That’s one way to look at it.

But if you belief that, then you also have to say the same thing about the divided Congress – it, too, was being given at least one more chance to get things right.

That means agreeing to the surprisingly little compromise on which the future of Medicare will depend.

It’s hard to understand how two sides looking at the same reality and sharing the same goals could be so far apart in coming to an agreement about what to do.  Nowhere is this more evident than in the Medicare program debate.

Both sides acknowledge that Medicare is as popular as any entitlement, is as well run as any health insurance program, and addresses a need that is only going to grow in the coming years.

They also agree on certain facts.  The first is that Medicare hasn’t yet contributed to our debt.  The second is that it won’t for at least another 12 years, because there are enough reserves in the Medicare Trust Fund to offset any program deficits for that long.  The third is that the size of the program deficit last year was $19 billion. 

They also agree that on its present course, Medicare will eventually become too expensive to maintain.

There are two down-the-road problems with the Medicare program. 

The first is related to Medicare and healthcare inflation.  On its current inflationary trajectory the cost of Medicare will grow as the cost of healthcare in general grows.  Medicare alone will consume 6% of our GDP by the time today’s young adults become Medicare-eligible, and up to 7% of our GDP by the time babies being born today become Medicare-eligible.

The second is related to the current $19 billion Medicare deficit.  If this deficit isn’t closed, then it will grow over time, wipe out the Trust Fund, and undermine the entire Medicare program.

We need Congressional action to address both of these problems.

Congress has already taken some actions to address the first problem – the long-term inflationary growth in the Medicare program.  

The $716 billion in rate cuts included in the Affordable Care Act reduced Medicare’s long-term projected share of GDP from 10% to 7%.  This is a significant difference, accomplished without cutting a single benefit because the time horizon is so long.

If that were all we needed, Congress could recess before it even convenes.

But $716 billion isn’t enough to prevent the Medicare share of GDP from growing from 4% today to 6% twenty-five years from now.  And one part of that cut – an immediate 30% reduction in some provider rates – will likely be “fixed” at least in part by the new Congress as it has every year since 2002.

So we need another strategy, one that involves compromise. 

And the beginning of that compromise could be in two small steps that Congress and the President might take to address the second problem – closing the $19 billion deficit today. 

One step involves taxes and the other step involves spending.

In 2011, according to the Medicare Trustees 2012 Annual Report, Medicare revenues were $530 billion and Medicare expenses were $549 billion. If that gap were closed moving forward, then the Medicare Trust Fund would remain solvent.  And the Medicare program would be secure no matter what Medicare's share of future GDP is.

Closing a $19 billion gap in a $549 billion program shouldn’t be an insurmountable problem for governmental leaders.  It shouldn’t demand much political posturing.  And it doesn’t require a “grand bargain.”

If it were to be done just through a Medicare tax increase, it would cost every Medicare taxpayer (typically under the age of 65) an average of less than $10 per month.

If it were to be done just through a reduction in Medicare benefits, it would cost each Medicare beneficiary (typically over the age of 65) just over $30 per month.

What if we all shared the burden together?  That might mean an average $7 per month tax increase and an average $10 per month benefit reduction.

The American people might well agree to such a Medicare bargain.  And be thankful for the compromise. 

Happy Thanksgiving!