Medicare is in the forefront of the discussions about our country’s budget deficits; but most people, including current beneficiaries, don’t really understand how it works. Meanwhile, the media, along with politicians on all sides, seem intent on exploiting the public’s lack of knowledge to further their own ends. To better understand the role Medicare plays in our economy and how it affects the national debt, I’ve put together what I consider an objective and accurate course in Medicare Basics.
First of all, there are actually four parts to Medicare: A, B ,C and D. However, it’s just Medicare Parts A & B that are relevant in debt discussions.
Medicare Part A covers hospital, skilled nursing and hospice care. With a few exceptions, anyone who is a citizen or permanent resident and had (or whose spouse had) Federal Insurance Contribution Act (FICA) funds deducted from their wages for a combined total of 10 years qualifies to receive Part A coverage for life beginning at age 65. It’s the Medicare portion of the FICA tax, 1.45% of employee wages plus another 1.45% contributed by employers, that finances Part A health coverage.
While Part A covers hospitalization costs, Medicare Part B covers doctors’ services and outpatient care. With some exceptions, only people entitled to receive Part A benefits can enroll in the Part B program. Unlike Part A, Part B is optional and requires payment of a monthly premium. Up until 2007, everyone who chose Part B paid just 25% of what it cost the government to cover an individual under the plan. Since then, the cost of Medicare Part B coverage is means-tested so that people with incomes higher than $85,000 or couples making more than $164,000 pay 30-80% of the average cost. This year, most people paid $96.40 for Part B coverage, while those with high incomes paid up to $384.60. It also should be noted that 89% of seniors also buy private ‘gap’ or supplemental health insurance to cover what Medicare doesn’t.
The Medicare portion of FICA taxes collected from workers and their employers (for Part A) and the premiums paid for Part B are recorded in two separate accounts called, respectively, the Hospital Insurance (HI) Trust Fund and the Supplemental Medical Insurance (SMI) Trust Fund. The actual payment, however, goes into the Treasury along with all the other taxes and fees the government collects. Meanwhile, the costs for both programs are, in reality, paid out of the general fund. In this sense, the use of the term “trust fund” is a misnomer.
If, at the end of each financial period, the amount spent on Medicare Part A beneficiary hospital needs is less than what was collected in FICA taxes, that excess amount is recorded in the HI Trust account as loaned to the Treasury. In effect, it’s an I.O.U. that the Treasury writes to the fund and “pays” interest on. During the years when there were many more workers than retired seniors, this was a common occurrence. In those years, if the government’s budget was balanced, the Treasury used this ‘borrowed’ money to pay off the national debt. In the years that the budget was running a deficit, the ‘borrowed’ money was used to cover government expenses.
When the amount collected during the year fails to cover all the expenses incurred by Medicare Part A beneficiaries, the missing amounts are recorded as loans repaid by the Treasury, lowering the I.O.U. total. But, nothing really changes. The cost of the program is still paid through the government’s general fund. This is actually the case now! From now on, as reported in the 2011 Trust Fund Actuarial Report, the HI Trust Fund for Medicare Part A will never take in enough to cover the costs of the program. The biggest reason for this, according to the Fund’s actuaries, is that the retiring of baby boomers, longer life spans and lower birthrates mean fewer people are paying into a system supporting increasingly larger numbers of beneficiaries.
Meanwhile, misinformation about what this means is filling the media. When the actuarial report came out, all the major media outlets announced that the Medicare fund will be ‘broke’ in 13 years. What is factually true is that the surplus that was collected over the years and ‘loaned’ to the Treasury to pay government bills will be used up by 2024. USA Today even reported that seniors’ benefits would then be reduced. Again, in reality, nothing will change. The money to pay for Medicare Part A beneficiaries’ health care will come from the government’s general fund (or from government loans) as it always has. The deeper issue is that the Medicare Part A program has begun costing more than it’s taking in, and that is happening now, not 13 years from now, adding another factor to our record high annual deficits.
Medicare Part B’s trust fund, on the other hand, can’t go broke since it is, by law, meant to be largely financed by the government. But of course, that along with the HI Trust Fund situation, is precisely the reason our health care costs have been identified as our biggest budget challenge and a threat to our economic future. Medicare has become a comfortable rite of passage for seniors but, whether people like it or not, changes are coming. Some of these changes are already in the works. Is it possible that people aren’t aware of them? Opinion polls suggest as much. We’ll take a look at what’s ahead for Medicare and its beneficiaries in our next blogs.