Wednesday, April 23, 2014
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Is Medicare Going Bankrupt? Not Really

Medicare will go bankrupt in seven years unless drastic changes are made. So we were warned - in 1969. Experts pegged the countdown to disaster at eight years in 1981 and four years in 1997. In fact, every report by the program's Trustees, since the first one was issued in 1970, has projected pending bankruptcy, sometimes in as little as two years.

Is Medicare Going Bankrupt? Not Really

Medicare will go bankrupt in seven years unless drastic changes are made. So we were warned – in 1969.

Experts pegged the countdown to disaster at eight years in 1981 and four years in 1997. In fact, every report by the program’s Trustees, since the first one was issued in 1970, has projected pending bankruptcy. Some of those reports saw it coming in as little as two years.

Last week, the Trustees reported that insolvency is now due in 2024, five years earlier than they predicted a year ago. Is this really news?

Each forecast is based on conditions that prevailed at the time. These include two main elements – spending growth and tax revenue. Both of these can change wildly from one year to the next.

Take the most recent report. The faster insolvency timeline has nothing to do with changes in Medicare, itself. It is primarily based on reductions in tax revenue caused by the slow economy. An economic upswing could easily add the five years back in next year’s forecast.

In other words, Medicare didn’t suddenly become more burdensome or costly. The environment around it changed. We, as individuals, would find it harder to pay for health insurance if our income declined. The government is no different. That was true in 1969, and it is today.

In fact, the very notion of Medicare going “bankrupt” is misleading. The warning refers to one part of the program. That is the Trust Fund that holds money for Part A, the part that covers hospital costs. Medicare “bankruptcy,” as the term is commonly used, would occur if the Fund were exhausted.

However, exhausting the Fund would not trigger a financial default as a conventional bankruptcy would. Hospital benefits would remain in place. While they would shrink by about 10%, other sources could be tapped to cover the shortfall.

Part B of Medicare, which covers physician services, and Part D, which covers prescription drugs, automatically receive all needed funding out of tax revenue. References to “bankruptcy” in those parts of the program have no meaning at all.

So talk of Medicare’s impending “bankruptcy” is nothing new and it doesn’t accurately reflect its situation.

Nevertheless, critics of Medicare ask why it faces financial threats of any sort. Isn’t that evidence of government inefficiency in providing health care?

The answer is that Medicare is no different from private insurance. Costs for private coverage have risen even faster than Medicare’s. But insurance companies can hike premiums to raise funds. Medicare doesn’t have that option.

None of this is to deny that Medicare faces a crushing cost burden in the years ahead. The double-barreled threat of rampant health care inflation and aging baby boomers will likely send spending through the roof.

If warnings of impending “bankruptcy” help us to focus on those problems, then perhaps they serve a purpose. But they are not an accurate portrayal of reality.

To check out more Check Up items go to www.philly.com/checkup

About this blog

Check Up covers major health events in our region and offers everything from personal health advice to an expert look at health reform. Read about some of our bloggers here.

For Inquirer.com. Portions of this blog may also be found in the Inquirer's Sunday Health Section

Michael Cohen id the president of the Institute for Safe Medication Practices in Horsham.

Daniel Hoffman is the president of Pharmaceutical Business Research Associates (PBRA) in Glenmoore, Pennsylvania, a healthcare research and consulting company specializing in key account positioning and messaging.

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