Medicare and Medicaid

P/L analysis of Social Security is sufficient because its expenses are intended to be met by its revenue but federal healthcare spending also requires other analyses because (a) its expenses are not fully met by associated revenue and (b) spending exists in several programs so not all analysts show the same total.   

In the National Commission report Federal healthcare spending for FY2010 is $738B or 5% of GDP. 

The USA Inc report shows a similar total for Medicare + Medicaid, i.e., $725B.  However, their Basic Income Statement (see previous post) shows federal healthcare spending across all programs as $821B or 6% of GDP.  It also shows USA FY2009 Total Healthcare Spending (see future post) as $2.5T,  of which 35% ($875B) is Medicare + Medicare.  That total includes state as well as federal spending.  US government FY2009 total healthcare spending calculated in this way was 8.2% of GDP, up from 2% 40 years ago and growing 2% faster than per capita income for the past 40 years. 

The P/L shows a deficit of $75B on FY2010 Social Security spending, $272B on Medicare and $273B on Medicaid.  The $545B Medicare + Medicaid deficit dwarfs Social Security’s $75B.  But Medicare and Medicaid were not set up with dedicated revenue to match their costs so we must examine both their deficits and their expenses.

The growth rate of the deficit for Medicare + Medicaid is dramatic.  It was relatively stable at $172B in FY1995 and $179B in FY2000 but jumped to $315B in FY2005 then $381B, $398B and $490B in the next years and $545B in FY 2010.  The expense line for Medicaid, however, is stable at 13% or 14% of overall “entitlement” spending.  It jumped from $118B in FY 2000 to $182B in FY2005 then remained close to that level until the recession drove sharp increases in FY 2009 and FY2010.  Medicare spending, however, grew faster.  It, too, jumped between FY2000 and FY2005, from $197B to $299B but it did not stabilize near that level.  It grew from $299B to $330B in FY2006 then $375B, $391B and $430B in the next years and $452B in FY2010.

Before exploring Medicare and Medicaid dynamics we should note that Unemployment Insurance, signed into law in 1935 along with Social Security, operated at close to breakeven until its expenses spiked due to the recession from $45B in FY2008 to $123B in FY 2009 and $160B in FY 2010.  The recession also caused a spike in Medicaid spending because more people needed assistance.

The primary cause of increased Medicaid spending is that it now services 16% of all Americans, up from 2% at its inception.  Payments per beneficiary grew 3% per annum since 1966. In FY 2009 Medicaid provided an average of $4,684 in healthcare payments for 26M low-income children, 12M low-income adults, 7M disabled and 4M elderly Americans.  The number of people needing it jumped 11% from 2009 to 2010 due to the recession.   

The USA Inc report shows Medicaid’s Net Present Cost (expected cost over the next 75 years) now standing at $35T or 239% of FY2010 GDP.   I assume that is an actuarially accurate calculation but it is somewhat misleading.  The calculation is presented because Medicaid is a legal commitment and has no dedicated funding.  But defense spending (see a future post) is also a federal commitment with no dedicated funding.  The only important difference is that defense spending is not formula-driven.   I include Medicaid’s NPC chart for illustration although it may distract from the critical question; what % of GDP do we want to spend for Medicaid?  Having decided that we could design a funding strategy with operational rules.

Medicaid funding is currently shared between federal  and state governments.  States with high per capita income pay around half, those at the low end around a quarter of the total.  Medicaid accounted for 21% of average state spending in FY2009.  Because states must balance their budgets, they must offset increased Medicaid spending with cuts in education or other spending.  That aspect of the funding mechanism should be rethought.

Medicare spending is more problematic because its cost is growing fast.  Spending per capita grows as more new (expensive) technologies become available.  It jumped to a new level with the 2006 rollout of prescription drug coverage.  It will accelerate further when enrollment jumps as “baby boomers” reach 65.  In FY 2009 Medicare provided an average of $8,325 in healthcare payments to 46 million elderly Americans.  Spending per beneficiary is 25 times higher than 43 years ago.  Medicare now serves 15% of the population, up from 10% in 1966 and the percentage will continue to increase as our population ages.   

The Net Present Cost for Medicare is  more meaningful than for Medicaid because Medicare spending is partly offset by dedicated revenue and is formula-driven.  Its current NPC of $23T or 156% of GDP could in theory be addressed by eliminating its current deficit but to do that, average benefits would have to be cut by 53%, the Medicare tax rate raised by 3.9% to 6.8%, or a combination of the two.  That is not a realistic option.

It looks possible to fix Medicare only in the context of holistic changes to our healthcare system that I will explore in a future post.  Medicare currently includes Parts A and B enacted in 1935 to cover (A) hospital inpatient , and (B) outpatient expenses.  Part C, private alternatives to A and B, was enacted in 1997.  Part D, prescription drug coverage, was enacted in 2003 and rolled out in 2006.   Part A is funded via payroll taxes at 2.9%.  Parts B and D are funded in part by enrollees’ premium payments.  

The key fact about Medicare is that an aging population, unhealthy lifestyles and technology advances are driving its costs up 8% annually, much higher than Medicaid. 

 The USA Inc report refers to Social Security, Medicare and etc as “entitlement spending”.  That is an emotionally charged term.  I prefer “commitments” because good people can have very different opinions about what, if any, benefits citizens are entitled to from our federal government.  There is, however, no question what commitments are enacted in current laws and the size and rate of increase of Medicare spending leaves us no choice but to alter our commitments in some ways. 

The next post will examine US healthcare costs more holistically to isolate aspects of our overall heathcare system that could, if changed, correct the problems identified here.

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