September 19, 1995
"When the Boomers Retire, Kaboom - Medicare Needs a Transfusion"
San Jose Mercury News
By Timothy Taylor
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The Federal Hospital Insurance Trust Fund, often abbreviated HI, is the heart of Medicare. It's the trust fund that collects the Medicare payroll tax and pays for the hospital and skilled nursing care of elderly Americans. In April, the HI trustees published their annual report. Their words (from pp. 25-29 of the report) are in italic type. My interspersed comments offer some emphasis and explanation.

The balance in the Federal Hospital Insurance Trust Fund at the beginning of 1995 was 117 percent of the estimated outgo for calendar year 1995, which exceeds the minimum 100 percent level recommended by the Board of Trustees by a small margin. However, the tax rates specified in the law are sufficient, along with interest earnings, other income, and assets in the fund, to support program expenditures only over the next 7 years, under the Trustees' intermediate assumptions... Under all three sets of assumptions, moreover, the HI trust fund is projected to become exhausted within the next 6 to 11 years.

The trustees carry out three projections for the future of the trust fund. On the intermediate projection, the fund runs out of money in 2002. The pessimistic projection says 6 years; the optimistic projection says 11 years.

To bring the HI program into actuarial balance even for the first 25 years under the intermediate assumptions... either outlays would have to be reduced by 30 percent or income increased by 44 percent (or some combination thereof) throughout this 25-year period.

You may be wondering who the trustees are. Three are members of the Clinton Cabinet: Robert Rubin (Treasury), Robert Reich (Labor), and Donna Shalala (Health and Human Services). Two others hold government positions: Shirley Chater, commissioner of Social Security, and Bruce Vladeck, administrator of the Health Care Financing Administration. The other two, Stanford Ross and David Walker, are simply identified as "trustees."

Currently about four covered workers support each HI enrollee. This ratio will begin to decline rapidly early in the next century. By the middle of that century, only about two covered workers will support each enrollee. . . . Not only are the anticipated reserves and financing of the HI program inadequate to offset this demographic change, but under all the sets of assumptions the HI trust fund is projected to become exhausted before the demographic shift has even begun to occur.

Medicare has a severe medium-term problem over the next decade or two, and then an even worse long-term problem when baby boomers retire en masse.

The trustees note that some steps have been taken to reduce the rate of growth in payments to hospitals, including the implementation of the prospective payment system for most hospitals. Experience to date suggests that this reimbursement mechanism, together with payment limitation provisions enacted by Congress, has helped to constrain the growth in hospital payments and has improved the efficiency of the hospital industry. Extension of this payment system to other providers of HI services and further legislation to limit payment increases to all HI providers could postpone the depletion of the HI trust fund for about another 5 to 10 years. Much more substantial steps would be required, however, to prevent trust fund depletion beyond 2010 when the baby boom generation begins to reach age 65.

Piecemeal reforms can buy only a few more years of solvency. The present tiff over having the elderly pay somewhat more for physician services under Medicare, controversial though it is, is only a minor change. Prospective payment is the system where Medicare pays hospitals a fixed amount for a patient who has a certain diagnosis. The idea is that if hospitals know they won't get extra money for more intensive, expensive care, they will have an incentive to hold costs down.

The HI program is severely out of financial balance... With the magnitude of the projected actuarial deficit in the HI program and the high probability that the HI trust fund will be exhausted in less than 11 years, the trustees urge Congress to take additional actions designed to control HI program costs and to address the projected financial imbalance in both the short-range and the long-range through specific program legislation as part of broad-based health care reform.

The bankruptcy of Medicare is not Republican scare-mongering. This group of top Clinton administration officials agrees that Congress needs to take prompt action. The mention of "broad-based health care reform" is a quietly partisan reminder that Clinton has warned of this problem, and even offered a proposal of his own.

To facilitate this effort, the Trustees further recommend legislation to re-establish the Quadrennial Advisory Council for the Medicare program. This action would help provide critical information that will be needed by the administration and Congress as they deliberate the future of the HI program.

Big surprise - the solution is to appoint a committee. But for a political issue this electrifying, both political parties probably do need insulation to handle it.

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