Medicare Reform

A week ago, presumed Republican presidential contender Mitt Romney announced his pick for vice-president – Congressman Paul Ryan.  Ryan has authored a budget plan which has passed the Republican house but was stopped in the Democratic Senate.  The addition of Paul Ryan, a man who focuses on policy issues, should elevate the debate between both presidential campaigns and present a clear choice to the voters.  A signature feature of Ryan’s budget is the transition of the Medicare program from a pay for service program to a voucher program; i.e. seniors would be given vouchers to purchase insurance from private insurance companies. During this decade, Medicare expenses are projected  to grow 3.5% per year, while the annual increase in private insurance costs is estimated at 5.4%.  These estimates were compiled by the Kaiser Family Foundation from a number of sources, including the Congressional Budget Office (CBO), the Center for Medicare and Medicaid Services (CMS), Medicare Trustees Report, Census Bureau and others (Source)  The Ryan plan phases in the voucher plan for Medicare so the difference in annual cost increases this decade would not impact anyone – yet.  The plan applies only to those 55 and younger.  In the decade of the 2020s, the difference in annual cost increases would be borne by newly retiring seniors on fixed incomes.

A chart from the Kaiser Family Foundation shows a breakdown of who has paid for medical care for the past fifty years.  I’ve marked it up to show the categories more clearly. (Click to enlarge in separate tab)

In the coming months, we will hear much debate on the Medicare program.  In 2010, the total program cost was $519 billion and increased to $555 billion in 2011, an annual increase of 6.9%.  This was only slightly above the 6.7% growth rate in spending since 1985  (Source).  Medicare costs are projected to rise to $902B in 2020.

Underlying Paul Ryan’s transitioning of Medicare to a private insurance program is the belief that competition in the private market place will reduce the growth in costs.  This cherished assumption has not proved to be the case in the health insurance market, particularly the small business and individual group markets, which have seen annual increases of 10% or more in the past decade.  A June 2012 survey of insurance agents showed that costs were expected to rise from 12 – 20% this year.  My company has seen only one year when the annual increase in our small group insurance plan was less than 10%.  Competitive quotes from other health insurance carriers were even higher.

Who pays for Medicare? 

Income and general taxes pay 42%;  seniors pay 13%; Medicare taxes on salary and wages pay for the other 37%.  The total Medicare tax is 2.9%; the employee pays 1.45%; the employer pays the other 1.45%.  The CBO has estimated that the Medicare program will largely stay in the black for the next ten years but admits that its projections depend on whether existing laws or policies remain in place. 

Who benefits from this?  The answer might seem obvious – seniors, of course!  Less obvious is that the Medicare program benefits the children and family of seniors.  Without the Medicare program, many families would need to help support Mom and Dad because of the impact of sky high medical insurance premiums and medical costs on a senior’s fixed income.  

What other solutions are there to the escalating costs in the Medicare program?  We could, God forbid, share the costs of the program out among all taxpayers.  In 2010, the IRS reports that there was $8 trillion in adjusted gross income reported on individual income tax returns (Source)  A 4.6% tax on that amount would have covered the entire expense of the Medicare program, including all Parts – A, B, C and D.

The problem is that voters like government programs but don’t want to pay for them.  Politicians know this and that is why almost half of the cost of the Medicare program comes out of general tax revenues, where they can remain out of sight to most voters on election day.

Should any politician propose that taxpayers actually pay for something they value, they would be pilloried from all sides.  The rich have spent a lot of time and money lobbying to have a large part of their income exempt from Medicare taxes.  Lobbyists for the poor would argue that the poor simply can’t afford it.  AARP would loudly protest that insurance costs to seniors are already too high. The middle class would point to the rich guys and say, “Take it from them.  They can afford it!”

We get the government and the Congress we want and we want fairy tales.  The politicians know we want fairy tales so most of them tell us fairy tales. When the reality check comes, many of get up and say we have to go to the bathroom, then duck out.

I have a lot of respect for Ryan’s sincerity and chutzpah.  I think his solution passes on too many of the cost increases to seniors in the future.  Perhaps some other politicians might take a cue from Ryan and take on other controversial topics like just a teeny-tiny bit of regulation of assault weapons.  Any takers?

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