Joe Antos is right: waiting another decade to bend Medicare’s cost curve is not an option. Consequently, the Widen-Ryan reform proposal is a very promising development. Here’s why. Despite the Affordable Care Act, Medicare’s unfunded liabilities are large and growing. Absent fundamental Medicare reform, the mismatch between what Medicare takes in from Part A payroll taxes and what it spends on Part A, B, and D services will, by 2085, exceed 25 percent of taxable payroll (figure 20.6b.1).
In recent years, the Medicare actuary has issued two sets of projections. The official projections contained in the annual Medicare trustees report are required to reflect current law. Yet even according to current law, the 2011 report shows the Medicare shortfall growing to more than 12 percent of taxable payroll within 75 years. This is a useful reminder that notwithstanding the promise of substantial Medicare savings, the Affordable Care Act did little to actually bend the Medicare cost curve. Most of the vaunted savings from the new health law would arrive in the form of draconian cuts in payments to doctors and hospitals. Medicare actuaries project that under current law, Medicare and Medicaid would pay less than 35 percent of the amounts paid by private health insurers for inpatient hospital services in the year 2085. They also project that Medicare payment rates to physicians would be less than 30 percent of private health insurance levels.
These cuts are so deep that no one seriously believes they will take effect. Indeed, in every year since 2002, Congress has overridden a statutorily required reduction in Medicare physician fees; indeed, lawmakers are this week scrambling to prevent the 27.4 percent reduction in physician fees from taking effect on January 1, 2012. Since Congress effectively has ignored its own law more than a dozen times during this period, there is no good reason to suppose they will behave any differently once they are inundated by pleas for relief from the cuts required by the Affordable Care Act.
The alternative fiscal scenario uses much more realistic estimates of where payment levels will be set in future years. This more realistic projection shows a steady increase in Medicare’s unfunded liabilities. To say that these liabilities will reach more than one quarter of taxable payroll by 2085 does not imply we should raise payroll taxes to address this shortfall. It merely is a convenient metric to gauge how the size of the problem is growing over time relative to the nation’s ability to pay. Leaving aside the temporary payroll tax cut, Social Security normally collects 6.2 percent from employees and another 6.2 percent from employers, for a total of 12.4 percent of earnings up to $106,800.
Thus, filling the Medicare fiscal gap would require the equivalent of tripling current Social Security payroll deductions. However, rather than focus on who to soak to bankroll this shortfall, we instead would be better served by aggressive efforts to prevent the shortfall from occurring. This in turn requires fundamental Medicare reform, not tinkering at the edges. There’s no denying the bipartisan Wyden-Ryan reform initiative could be tweaked even further. But all in all, it offers a very consequential and promising step forward.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 20.6b.1, and Excel spreadsheet on Medicare funding shortfalls from 2009-2086 for data, sources, and methods.