May 7, 1995
"Why Medicare is So Sick"
San Jose Mercury News
By Timothy Taylor
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PRESIDENT Clinton and the Republicans actually agree about the basic situation of Medicare: it's going broke. They differ only about the appropriate political tradeoff to fix it.

Skyrocketing costs are at the heart of Medicare's troubles. In 1970, the total Medicare budget was $7 billion. By 1980, it had risen to $35 billion. By 1990, $110 billion. By 1999, it will reach $263 billion, which is larger than Clinton's projected defense budget for that year.

These higher costs have been driven by two factors: more elderly people consuming more medical services. The share of the U.S. population that is over 65, almost all of whom are eligible for Medicare, is growing from 9.7 percent in 1970 to 12.3 percent in 2000.

Each of these people was also having more spent on their medical care. Medicare spending per enrollee, expressed in 1990 dollars and thus adjusted for inflation, rose from $1,194 in 1970, to $2,051 in 1980, to $3,328 in 1990.

These trends are continuing. By the year 2000, Medicare's per person spending will reach $5,729 (again in 1990 dollars), according to the nonpartisan Congressional Budget Office. By 2025, 18.2 percent of the U.S. population will be over 65.

The growth of Medicare spending has been supported by higher taxes. The "hospital insurance" part of Medicare (so-called "Part A"), which also covers some skilled nursing and home health care, represents more than 60 percent of Medicare spending. It's funded by a payroll tax of 1.45 percent on workers, and a matching tax paid by employers.

This tax has been expanding. Back in 1977, for example, it was a rate of 0.9 percent, and applied only to the first $16,500 earned. Now the rate has increased by more than half, and it applies to all income earned.

The rest of Medicare is the "supplementary medical insurance" (so-called "Part B"), which covers mainly doctor visits and outpatient hospital care. The original plan was that premiums from the elderly would pay for half of this insurance, and general revenues from the federal government would cover the rest.

But the share of costs covered by premiums from the elderly has been slipping. Premiums now cover only about a third of Medicare's supplemental program; by 1999, they will cover only about a quarter. General federal tax revenues are picking up the slack.

Both Clinton and the Republicans agree, underneath all the rhetoric, that political decisions need to be made on how to limit the growth of health care spending on the elderly. There are essentially no limits to what the ingenuity of well-meaning health care providers will devise for the elderly. Think about what new technologies and treatments can be developed to counter or slow every step in the aging process.

The Medicare trustees recently reported that Medicare won't have enough money to cover its bills by 2002. As an aging population makes greater use of medical technology, the shortfall will only become worse.

"To restore actuarial solvency" over the long run, according to estimates recently cited by the House Ways and Means Committee, either "the tax rate would have to be increased by nearly 175 percent or program costs would have to be reduced by nearly 65 percent."

But higher Medicare spending has protected the elderly from the rising cost of health care. The non-elderly spend about 4 percent of their income on health care, while the elderly spend about 12 percent. But thanks to Medicare, the proportion of income spent on health care by the elderly has increased only very slightly in the last decade.

Medicare is popular among all age groups, and extremely popular with that block of 33 million potential voters called "the elderly." But faced with impending bankruptcy, both Clinton and the Republicans have advocated holding down the rise in Medicare spending -- which is different than cutting it.

Clinton's comprehensive health care bill would have restructured Medicare spending through a combination of different government controls, higher contributions for supplementary insurance premiums, and managed competition. Newt Gingrich and the Republicans want to use many of the same tools, although some of them would add policy tools like special savings accounts for medical expenses.

The only real difference between the two sides is their view of how the savings should be used. Clinton still hankers after a comprehensive health reform bill, in which Medicare savings would help fund care for those without health insurance. The Republicans want to use Medicare savings to help meet their promises for a balanced budget and a tax cut.

Restructuring a major entitlement program like Medicare needs bipartisan support, but both sides are playing political games. Clinton is pretending that Medicare spending can be held down without any limit on the amount of care the elderly will receive, a stance that raises false hopes and makes the necessary reforms more difficult to enact.

The Republicans are calling for bipartisan action on Medicare. But they are learning that if they want to take all the credit for tax cuts and a balanced budget, then Democrats will also let them take all the blame when it comes time for tough decisions on holding down spending.

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