No, Medicare Recipients Haven’t Earned All Their Benefits

In his interview with 60 Minutes that aired Sunday night, Speaker of the House Paul Ryan made a compelling case for reforming Medicare. But in trying to make a political point about the need to maintain the status quo for beneficiaries in retirement, Speaker Ryan actually understated the problems the program faces:

We have to make sure that we shore this program up. And the reforms that we’ve been talking about don’t change the benefit for anybody who is in or near retirement. My mom’s now enjoying Medicare. She’s already retired. She earned it. But for those of us, you know, the X-Generation on down, it won’t be there for us on its current path. So we have to bring reform to this program for the younger generation, so that it’s there for us when we retire, and so that we can keep cash flowing to current generations’ commitments. And the more we kick the can down the road, the more we delay, the worse it gets.

There’s just one problem with this explanation: the benefits Ryan claimed his mother’s generation “earned” don’t begin to match the money paid into the system.

Money In Doesn’t Equal Money Out

In its 2015 document highlighting the long-term budget outlook, the Congressional Budget Office (CBO) conducted an analysis of average payroll taxes paid and benefits received. It found the latter exceeded the former by a wide margin—a margin that will grow over time:

Under the assumption that all scheduled benefits are paid, real average lifetime benefits (net of premiums paid) for each birth cohort as a percentage of lifetime savings will generally be greater than those for the preceding cohort. For example, benefits received over a lifetime are projected to equal about 7 percent of lifetime earnings for people born in the 1940s, on average, but 11 percent for people born in the 1960s. By contrast, real average lifetime payroll taxes relative to lifetime earnings will rise from 2 percent in the 1940s cohort to almost 3 percent for the 1960s cohort.

Both the text and accompanying chart (below) come with a significant caveat: Medicare payroll taxes fund only a share of overall Medicare spending, and that share has declined significantly in recent years—from 67 percent in 2000 to about 40 percent last year. General revenue covers a growing (currently about 47 percent) percentage of Medicare’s finances; individuals do pay a portion of the federal government’s general revenue through income taxes, but it’s harder to differentiate what portion of an individual’s income taxes fund Medicare in any given year.

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We Have To Fix Our Medicare System

No matter the details, the fact that most seniors receive more in benefits than they paid in payroll taxes speaks to the urgent need to right-size our entitlements. Regardless of how we do it, our nation will be much better off if we confront these problems sooner rather than later. Because continuing our Lake Wobegon system—in which everyone receives more than they paid in—will guarantee a fiscal crisis of epic proportions.

This post was originally published at The Federalist.

Weekly Newsletter: June 16, 2008

Durable Medical Equipment Legislation Introduced

Last Thursday, several House Members led by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) introduced legislation (H.R. 6252) to delay implementation of competitive bidding for durable medical equipment. The legislation would nullify contracts which suppliers signed with Medicare earlier this spring and delay implementation of the first round of bidding by at least six months, with the second round delayed by over a year.

In recent years, some conservatives have raised concerns that the prices on the Medicare fee schedule for durable medical equipment were in excess of market prices. In 2002, testimony by the Department of Health and Human Services Inspector General revealed that the prices paid by Medicare for 16 selected items of durable medical equipment were higher than prices paid by Medicaid, the Federal Employee Health Benefits (FEHB) plans, and consumers purchasing directly from retailers. The Inspector General projected that using the lower prices by other payers for these 16 common items alone would have saved Medicare more than $100 million annually.

While there have been logistical difficulties associated with the first round of competitive bidding, some conservatives may still be concerned about the implications of a delay to a program that will save the federal government—and Medicare beneficiaries—billions of dollars by aligning the prices paid by Medicare for medical equipment and supplies with those in the private sector. Delays of the type contemplated by the legislation would delay competitive bidding’s implementation to a future Administration, and could enable a future President and future Congresses to take legislative action to eliminate the program altogether.

The RSC has prepared a Policy Brief on this issue, available here.

“Underinsured” Study’s Findings Subject to Interpretation

Last week several researchers associated with the Commonwealth Fund released a new study claiming that the number of “underinsured Americans” has risen sharply in recent years. According to the authors’ measure of “underinsurance”—medical expenses exceeding 10% of income (5% for low-income populations) or an insurance deductible of 5% of income—the number of “underinsured” Americans rose 60% from 2003 to 2007. This survey follows on the heels of a similar 60 Minutes broadcast on health
insurance that termed an individual receiving free care from an outreach clinic as “underinsured” due to his $500 annual deductible.

Some conservatives may have concerns both with the methodology of the study as well as its underlying rationale. The article releasing the study’s findings did not cite a recent Congressional Budget Office report noting that the percentage of out-of-pocket costs paid directly by individuals—as opposed to a third party insurance carrier or government program—declined from 31% to 13% of all health expenditures from 1975 to 2005. In addition, the survey’s authors did not assess the extent of private savings— whether in a Health Savings Account (HSA) or other vehicle—that could be drawn on by “underinsured” individuals to pay for medical expenses.

More fundamentally, the survey did not consider whether the subject individuals knowingly chose to select a plan with higher deductible exposure in order to receive lower premiums. Some conservatives may believe that implicit in the survey methodology are two questionable premises—the first that no rational person would choose to become “underinsured” according to the study’s definition of the term, and the second that policy-makers, particularly the federal government, should craft “solutions” to respond to this perceived problem. Instead, some conservatives may believe that additional reforms to create a true market in health care have the potential to slow the overall growth in health care costs, which may ultimately make the debate over “underinsurance” moot.

Article of Note: Switzerland in Massachusetts?

Last Friday’s monthly Health Matters column in CongressDaily highlighted the recent budgetary difficulties that the rising cost of health care has created for reformers in Massachusetts, which has seen the estimated cost of its comprehensive plan soar in the two years since its creation. Author Julie Rovner notes that both in its construction and its newfound financial obstacles, the Massachusetts plan looks surprisingly similar to a health reform model first adopted in Switzerland in 1994. While the Swiss model has several characteristics that conservatives may applaud—a wide choice of comprehensive plans, including those with higher deductibles that can yield savings on insurance premiums—as a model of consumer-directed health care, it also includes several forms of regulation—a mandate to purchase insurance coverage, guaranteed issue and community rating restrictions, and a prohibition on profit by carriers selling the standard benefit policy—which some conservatives may argue undermine the savings generated from a more open and transparent health system.

Whether in Switzerland, Massachusetts, or all 50 states, many conservatives have argued that health care needs more competition, not less—not just greater choice among policies for individuals and broader access to information about the price and quality of care, but a streamlining of the bureaucratic regulations that have raised the cost of health insurance. With health care costs continuing to rise at a rate that likely could make reforms like the Massachusetts experiment unsustainable, conservatives may argue that a dose of competition is just the novel concept needed to slow their unrestrained growth.