Medicare Surplus Could Run Dry in 5 Years, U.S. Warns


Medicare’s hospital trust fund is operating in the red for the first time since the program was created in 1965, and the surplus that took a generation to build could be exhausted in five years, the system’s trustees reported Wednesday.

Reacting to the grim news, President Clinton and Sen. Bob Dole (R-Kan.), maneuvering on a sensitive election year issue, invited each other Wednesday to forge a bipartisan deal to rescue the financially ailing program.

Both men proclaimed themselves dedicated protectors of the 36 million Medicare beneficiaries. But the two political leaders have supported very different solutions, and chances of a swift agreement continued to appear scant Wednesday.

The figures released by the trustees--three Clinton Cabinet secretaries--came as the government formally reported that the trust fund will be exhausted in 2001, a year earlier than previously forecast. The numbers: Medicare spending last year was $3.7 billion greater than expected, reflecting surging spending for skilled nursing care, home health care and increased use of hospitals by the elderly. At the same time, tax revenue fell $2.4 billion below forecasts.


The hospital trust fund is now drawing down a surplus that had mounted to $129 billion in fiscal 1994 before losing $36 million in 1995. The plunge is expected to accelerate each year until the fund is exhausted in five years.

Republicans want to trim $168 billion from the growth of Medicare over the next six years by allowing spending to rise 7.5% a year instead of the current projection of 10%. The administration has proposed smaller savings of $116 billion over the six years.

The report, as dire as it seems, suggested that insolvency could strike even sooner than the official projection of 2001. Although Medicare technically will not run out of funds until 2001, the report estimated that the program would finish 2000 with just $3 billion in the trust fund. That represents less than a week of outlays: If the projections in Wednesday’s report are too optimistic, therefore, the fund would go broke more quickly.

Even if the administration and Congress could agree on a package in the $120-billion to $150-billion range, it would preserve the trust fund only until sometime between 2006 and 2010.


The president and Dole, his presumptive Republican challenger, declared that Medicare needs a short-term fix to keep it financially healthy well beyond the turn of the century.


“We have the ability right now to put 10 years into the life of the Medicare Trust Fund, and we ought to just do it,” Clinton told reporters before meeting with the House Democratic caucus. “We ought to just go in and do that.”

On the Senate floor, Dole said: “I call on the president to come forward with a real initiative. . . . This is a real problem. It won’t go away.”


Beyond the variation in numbers is a deep disagreement on philosophy, with the Republicans more committed to moving beneficiaries into health maintenance organizations and other forms of managed care.

Both the president and congressional leaders are resolutely ducking the harder, longer-range question of financing Medicare for the baby boomers. Today, 36 million people draw benefits. How will the system provide for the 76 million baby boomers? They will begin drawing benefits in 2011, when the oldest boomers start turning 65.

The answer offered by both political parties is the formation of a commission or council to craft a bipartisan solution.

The financial implications of the long-range task would be staggering. Medicare now is financed by a payroll tax on all salaries, with 1.45% each paid both by workers and their employers. To maintain the current level of benefits for the baby boomers, the tax rate would have to rise to 12% each for workers and employers, according to a study by Watson Wyatt Worldwide, a benefits consulting firm.


“This is an enormous cash flow monster that has to be fed somehow,” said Sylvester Schieber, a senior vice president of the firm.

Medicare, which now consumes about 2.5% of the gross domestic product, would gobble up more than 7% of that national output in 2030. The gross domestic product is the value of the multitude of goods and services produced by the U.S. economy.

“Where does the money come from” for the baby boomers? asked Dr. David Friend, director of health care issues for Watson Wyatt. “I see nothing in the plans of either the administration or the Congress to deal with this.”

All the long-range solutions seem dismal: cut benefits drastically, raise the payroll tax sharply or take the money from general revenue, making the budget deficit even worse.


Each of the trustees--Treasury Secretary Robert E. Rubin, Health and Human Services Secretary Donna Shalala and Labor Secretary Robert B. Reich--participated in a news conference Wednesday to declare their support for Medicare and to call on Republicans to enter negotiations.

“We urge Congress to come back to the . . . bargaining table,” Reich said.

Dole, leading the charge for Republicans, said in his Senate remarks that the administration “can’t have it both ways,” scaring seniors about the Republican Medicare proposals and promising a fix for the program. “I would be prepared to work with the administration if they want to work on a bipartisan basis,” Dole said.



Medicare covers those over 65 and the disabled of all ages. Hospital bills are paid under Medicare Part A, through the special trust fund. Doctor bills are covered under Part B, for which beneficiaries pay a premium of $46.10 a month. The premium payments cover about 25% of total costs of Part B, with the rest coming from general tax revenue.

Although the report signaled the loudest alarm on Part A, it also said that total outlays for Part B jumped 11% last year, reaching $65 billion. The trustees called on Congress to take “prompt, effective and decisive action” to control costs.

The trustees also reported that Social Security’s retirement trust fund will be unable to pay full benefits in the year 2029, a year earlier than their previous forecast.

Because the system is basically sound for three decades and more, there is sufficient time to develop a solution to keep it sound for the baby boomers, Social Security Commissioner Shirley Chater said.