The Medicare Scare: Fact and Fiction

Washington Matters

The Medicare Scare: Fact and Fiction

You wouldn't know it from the public debate, but seniors may turn out to be the biggest winners if health care reform is enacted in a form similar to the bill being pushed by Senate Finance Chairman Max Baucus and other Democrats. Instead of being the biggest obstacle to passage, seniors ought to be the biggest supporters -- if only for selfish reasons.

Most seniors are quite happy with Medicare, and they're scared to death by headlines suggesting that their benefits are being slashed to provide coverage for the uninsured. They don't want that kind of benefit redistribution, and it's not hard to understand why. But there are two big problems with this line of thinking. One is that Medicare is simply not sustainable in its present form and a health care overhaul may be its best chance for recovery. The second is that Democrats aren't proposing to cut Medicare -- only to slow its growth.

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To understand why Medicare was in trouble long before President Obama entered the picture, consider the case of a typical American born in 1944 who began working at age 21 in 1965, when Medicare was created. Let's say he retired this year at the age of 65.  According to a study by Andrew Biggs, a scholar at the  American Enterprise Institute, a conservative think tank, our typical American paid taxes into the Medicare fund that totaled about $65,000 (the exact amount depends on earnings). By the time he's likely to die at age 83, he will have collected about $174,000 in benefits -- a net profit of $109,000.

Some will say that's just the interest on his prepaid taxes and that if the worker had invested the money, he'd have done better. Maybe. But then he'd have had to pay for his parents' medical care out of his own pocket because that's what his prepaid taxes were used for. Income (or benefit) redistribution? You bet, but who's getting the handout? And just to confuse matters a bit, consider that whites do significantly better than blacks and other minorities because whites have a longer life expectancy and generally collect more in benefits.


But I digress. This system -- the one that exists today -- is going bankrupt. By 2017, eight short years from now, according to the Medicare trustees, the trust fund will be empty. The simple fact is that without health care reform, Medicare can't pay for itself (in fact, it never has), and real cuts are unavoidable.

Critics of the health reform bill ignore that inconvenient truth and instead focus on what they describe as $400 billion in cuts to Medicare over 10 years under the Baucus bill. But, in fact there are no "cuts." The $400 billion would be a slowing of growth. Instead of Medicare spending rising 6.6% a year, it would rise 5.9%. Only in Washington is that a cut. And incidentally, it's a far smaller slowing of the growth than the 12% rollback the Republican Congress passed in 1997.

The $400 billion would be taken out of Medicare Advantage, which is administered by private insurers. Those reductions would mean higher out-of-pocket costs for the 10 million seniors in these programs, and some insurers may close altogether. That will hurt. The reductions will also mean smaller payments to doctors and others. Would that mean a shrinking of some services? Probably. So Democrats are being disengenuous when they claim it is just a matter of eliminating waste and fraud. That's an insult to intelligence. Undoubtedly, there would be some who find it more difficult to see a doctor and have to pay more out of pocket. But there will probably be more pain if Medicare is allowed to get closer to bankruptcy before Congress acts.

What's more, Medicare beneficiaries will probably gain more than they lose. As the New York Times noted recently, bill sponsors have done a lousy job of publicizing the proposed increases in payments for prescription drugs, the fastest rising element of health care costs for seniors, as well as the free preventive care that would be added. That's why AARP, the largest organization representing Americans over age 50, isn't objecting.

So what exactly are seniors so upset about?  Do they know? Because I don't.