Medicare in Poor Financial Health, Trustees Say

The financial condition of Medicare is growing progressively worse and its problems will eventually eclipse those of Social Security, the trustees of the government’s two biggest social programs reported Monday.

But the warning, for all its urgency, appeared unlikely to spur major action on such a sensitive issue in an election year. Far from cutting back, Congress and the president have expanded Medicare with the creation of the prescription drug benefit.

“There is no crisis,” Rep. Pete Stark (D-Fremont), the senior Democrat on the House health subcommittee, said in a sharp response to the report. “Much as President Bush manipulated intelligence to justify an unnecessary war in Iraq, his administration is using these projections to rationalize dismantling Medicare.”

Social Security and Medicare help virtually every American family, and the trustees’ report provides an annual accounting of the programs’ long-term financial health. By law, four of the six trustees are senior officials of the administration in office and two are independent experts chosen to represent the public.

Compared to Medicare, Social Security faces a rosy future.

This year’s report projects that the massive Social Security trust fund will be able to pay full retirement and disability benefits for another 34 years. That will change in 2040. Unless benefits are reduced, taxes are increased or additional funds are allocated from some other source, Social Security will run out of reserves and will only be able to cover 74% of promised benefits. The 2040 date is one year closer than the trustees had projected in 2005.

If Congress chose to plug the Social Security gap solely by raising more revenue, it would have to jack up Social Security’s share of the payroll tax -- now 12.4%, shared equally by employers and workers -- by an immediate 2.02 percentage points. If it chose to close the gap by cutting benefits, it would have to slash them by 13.3% below current levels.

Medicare faces a more serious problem. Its “financial difficulties come sooner -- and are much more severe -- than those confronting Social Security,” the report said.

The huge Medicare trust fund that pays for inpatient care will only be able to cover 80% of estimated billings in 2018, and its condition will deteriorate dramatically after that. The 2018 date is two years closer than the trustees had projected in 2005.

Medicare has been in financial straits before. As recently as 1997, the Medicare fund that covers hospital bills had only four years of solvency left. But this time the financial challenge is made much greater by the approaching retirement of 78 million baby boomers.

“The message of this report is urgency,” said Health and Human Services Secretary Mike Leavitt. “I do not want to stand here another year with just another bad report and another year of inaction. It’s time to act.”

Leavitt and Treasury Secretary John W. Snow urged Congress to adopt the president’s budget proposals for $36 billion in Medicare cuts over the next five years, along with automatic spending reductions of 0.4% a year if the program’s costs exceed specified levels.

Bush has also called for the creation of a bipartisan commission on entitlement programs to study the pension and healthcare burdens of an aging society and make recommendations.

Although Congress may go along with the idea of a commission, there is little enthusiasm among lawmakers for more cuts.

“At some point, Congress is going to have to get down to the difficult business of restraining the cost growth of these programs,” said Sen. Charles E. Grassley (R-Iowa), chairman of the Finance Committee, which oversees Social Security and Medicare. But he stopped short of promising action soon.

Medicare’s funding is extraordinarily complex. Financing is cobbled together from payroll taxes; premiums and cost-sharing paid by beneficiaries; and the government’s general fund. The various funding streams serve different purposes.

In 2003, Congress approved a requirement that could start the discussion on Medicare’s future. It provided that the president must propose changes -- and Congress must consider them -- if two consecutive trustees’ reports project that Medicare would draw 45% or more of its financing from the general fund in the near term. The first such warning -- for 2012 -- was issued in this year’s report.

“That could give the president a good rationale for having a major Medicare reform proposal in next year’s budget,” said health economist Marilyn Moon, a former trustee. But she went on to call the requirement an indicator of “a very phony crisis.”

Part of the dilemma for Bush and the Republican-led Congress is that they have significantly increased Medicare benefits in recent years, tapping into general revenue to do so.

For example, spending per beneficiary is expected to grow by nearly 33% this year, largely as a result of the new prescription benefit.