The Actuarial Foundation

On the edge of change: Time for a Medicare checkup

This brochure was prepared by actuaries to take an unbiased look at the financial problems facing Medicare. Actuaries use statistics and financial analysis to objectively forecast what's likely to happen and how much events will cost individuals, business, and the government.

Millions of Americans look to the safety net of social insurance as they face retirement. Two of the major programs run by the federal government are

Social Security, a federal program that pays 44 million retirees, their spouses, workers' survivors, and the disabled a monthly cash benefit, and
Medicare, a federal insurance program that covers hospital, physician, and other medical care for 38 million people age 65 and over and the disabled.

Medicaid is another government program started at the same time as Medicare in 1965. However, the two are very different. Medicaid is a welfare program for those who cannot pay for medical care. It is jointly financed and administered by the federal and state governments. Medicare, like Social Security, is a social insurance program, entirely financed through and administered by the federal government. Eligibility is not based on income.

How sick is Medicare?
Both Medicare and Social Security have shaky long-term financial futures, but Medicare needs more immediate care. Social Security is about 30 years away from serious financial difficulties. Medicare is headed for insolvency in a little over 10 years. During the lifetime of the next generation, Medicare's income will cover only 60% of its expenditures. Now is the time to look at the fundamental changes needed for the long- term.

In 1996, Medicare expenditures made up 12% of the federal budget, more than double the 1975 level. The Congressional Budget Office estimates at the current rate, by 2006 Medicare would consume 18% of the federal budget — more than the U.S. education, crime, and defense budgets combined.

What's the cause?
The main causes of Medicare's financing problems are:

rising cost and use of medical services
the "graying" of America
fewer workers supporting more Medicare beneficiaries

In 2010, 77 million baby boomers — those born between 1945 and 1965 — start retiring. Then, the number of Medicare beneficiaries will increase much faster than the number of workers supporting Medicare through payroll taxes. Today, four workers pay taxes to support each Medicare beneficiary. By 2030, there will be only two workers for each beneficiary

The chart shows how Medicare costs will rise under the current system as a percentage of the Gross Domestic Product (GDP)measure of the value of all goods and services produced in the United States.

Much of Medicare's financing problems center on Part A, Hospital Insurance (HI). Part A coverage is earned during your working lifetime, like Social Security. It helps pay for costs of hospitalization and skilled nursing, hospice, and home health care. Beneficiaries pay deductibles and coinsurance for services they receive unless they have private "Medigap" insurance to pay for them.

Part A is funded from a 2.9% Medicare payroll tax. Half is paid by current workers on their earnings, which is matched by employers. Self-employed workers pay the entire 2.9% themselves.

In 1996, Part A Medicare spending exceeded these tax and other revenues by over $5 billion. This shortfall was made up by drawing down the assets in the HI Trust Fund. If expenses keep increasing faster than the income supporting Medicare, the Trust Fund will be exhausted in a little over 10 years.

Part B, or Supplementary Medical Insurance (SMI), is voluntary. About 95% of those eligible participate by having a monthly premium deducted from their Social Security checks. Part B covers most doctor, lab tests and other outpatient charges. But the premiums cover only about a quarter of every dollar spent for these services. The other 75 cents come from general tax revenues. Each year, the government sets premium and tax revenue payments to match all SMI costs, which have tripled over the past decade.

The pie charts show the sources for financing Medicare and how the portion of costs not covered by income (the deficit) will grow unless legislative changes are made. With no action, by 2030 this deficit could represent about 20% of all Medicare costs.

What's the remedy?
An ideal outcome would be to keep all of today's Medicare benefits with no new costs to be paid by our older and disabled citizens -- and with no higher taxes for workers and employers. But this is simply not possible.

Experts and legislators have proposed several approaches to slow down increases in Medicare spending or bring more money into the system. Here are some ideas that have been proposed to bring in more money:

Make beneficiaries, especially those with higher incomes, pay higher Part B premiums
Raise payroll taxes on employees and employers

Some suggestions to slow down spending include:

Raise the eligibility age past 65
Reduce growth in payments to medical service providers
Increase copayments by beneficiaries
Enroll more in managed care programs
Provide high-deductible insurance for major illnesses combined with medical savings accounts

Each proposal for reform calls for some sacrifices. Each remedy has side effects, and it's not clear yet which proposals will work best in the long run. However, the longer we wait for reforms, the more painful the inevitable surgery will be, possibly with deep benefit cuts and tax increases.

What can I do?
A lot. Your congressmen and senators need your views on Medicare. No one wants higher taxes or lower benefits, but some measures must be taken or the system faces certain disaster. Become as educated as possible and keep your respective representative informed of your thoughts. They do listen and welcome your ideas.

To get a list of resources for Medicare and retirement information, contact:

The Actuarial Foundation
475 North Martingale Road, Suite 600
Schaumburg, IL 60173-2226

847.706.3535

www.actuarialfoundation.org

The Healthcare Financial Management Association (HFMA) hosts nationwide public education sessions explaining Medicare and what it covers. For more information on local events in the "HFMA Serves America: Making Medicare Easier" initiative, call (800) 252-HFMA (4362) ext. 362 or visit the Website: www.hfma.org.

A consumer education brochure from:

THE ACTUARIAL FOUNDATION
Preparing for tomorrow's possibilities

The Actuarial Foundation‘s mission is to contribute to the understanding and resolution of present and future social and economic problem, using the skills of actuaries.

and from

HFMA ¨

the Healthcare Financial
Management Association

Medicare Survey