Medicare Could Go Broke by 2019

Escalating costs and expanded benefits are pushing Medicare toward insolvency sooner than expected, the government said Tuesday, increasing pressure on the White House and Congress to rein in healthcare spending.

The trust fund that covers hospital benefits for 41 million elderly Americans will run out of money in 2019, seven years earlier than projected a year ago, according to the annual report of Social Security and Medicare trustees.

The financial health of Social Security has changed little over the last year, the trustees said. The retirement trust fund is expected to run dry in 2042, unless steps are taken to raise revenue or reduce benefits.

The worsening outlook for Medicare is due in large part to rising healthcare costs and other factors beyond government’s control, the trustees said. But last year’s Medicare reform bill, which provided prescription drug coverage and other benefit changes, contributed to the problem, officials acknowledged.

“These new benefits for seniors affect Medicare’s financial outlook,” said Health and Human Services Secretary Tommy G. Thompson, one of six trustees assigned to oversee the big entitlement programs. “These are the right things to do, however. Of course, progress always comes at a cost.”

The more pessimistic projections were considered likely to intensify the election-year clamor over the merits of competing reform initiatives and the wisdom of President Bush’s broader fiscal policies.

Liberal analysts said the figures suggested that Bush’s big tax cuts should be scaled back to shore up Social Security and Medicare as baby boomers begin retiring. Some conservatives called for delaying implementation of last year’s prescription drug benefit and taking other steps to restrain healthcare costs. Others said the funding problems underscored the potential benefits of undertaking even more sweeping changes to increase private sector participation in the systems.

The White House insisted that Bush’s policies were not the principal cause of Medicare’s funding crunch. But the president’s critics were quick to point the blame in his direction.

“In just one year, George Bush’s reckless policies have sped Medicare seven years closer to bankruptcy,” said Sen. John F. Kerry of Massachusetts, the presumed Democratic nominee for president. “We need a real plan to preserve and protect Medicare and bring fiscal responsibility back to the White House.”

Some analysts were less alarmed by the findings. The political reaction to the trustees’ report was dismissed as “much ado about nothing” by Uwe E. Reinhardt, a Princeton University healthcare economist. “We’ve been there before many, many times,” Reinhardt said. “Each time the sky is falling, and it didn’t fall.”

The Medicare reform bill passed by Congress in November creates a new prescription drug benefit, which takes effect in 2006. It also gives private insurance companies and managed-care plans up to $46 billion in higher payments over 10 years and incentives to compete with traditional Medicare for the prescription drug business and the general healthcare needs of a huge and growing segment of the population.

When Congress passed the bill, the Congressional Budget Office said it would cost $395 billion over 10 years. The Bush administration’s Medicare actuary has since projected the 10-year cost at $534 billion.

Administration officials said the additional costs imposed by last year’s law have accelerated Medicare’s insolvency by about two years. The other five years of deterioration are attributable to increased healthcare spending, lower tax revenues than had been projected, revised assumptions and better data, they said.

According to the report, Medicare’s trust fund will stop running a surplus this year, instead of in 2013 as projected a year ago. That means payroll taxes deducted from workers’ wages will be less than the benefits paid out to retirees, a situation that occurred at times during the 1990s.

Until 2009, however, Medicare costs that are not covered by payroll taxes can be covered by interest on the $256 billion in Treasury bills held in the Medicare trust fund. By 2009, however, those interest earnings will be insufficient, and the trust fund will have to start redeeming its Treasury bills to make ends meet.

In 2019, the trust fund will be depleted, the trustees said. At that point, payroll taxes will cover only a portion of annual benefits, and the rest will have to come from general tax revenues.

A similar scenario confronts Social Security, although the time frame is longer. In both cases, the fundamental cause is the looming retirement of the baby boom generation, which will leave fewer workers supporting more elderly Americans. The problem will be exacerbated by longer life spans and rising healthcare costs, which increased 35% from 1998 to 2002, the trustees said.

Medicare’s annual costs are equal to 2.7% of the nation’s gross domestic product today but will increase to almost 14% over 75 years if no changes are made, the trustees said. Social Security benefits represent 4.3% of GDP now, but they will increase to 6.6% by 2078. The cost of Medicare will surpass Social Security in 2024.

Social Security’s problems could be solved by boosting payroll taxes 15% or reducing benefits 13%, the trustees said. The Medicare trust fund, however, would require a more drastic cure: a 108% revenue increase or 48% benefit reduction.

Although the demographic shift and financial squeeze have been anticipated for years, efforts to deal with the funding crisis have been stymied by the divisive politics of entitlement reform: Ultimately, any solution will require some combination of benefit cuts and tax increases.

“Those who depend on Social Security and Medicare urgently need the best efforts of those of us in public life and the private sector to address the long-term funding issues,” said Treasury Secretary John W. Snow, another trustee. “These programs should be seen as a shared responsibility, and not a political or partisan opportunity.”

His admonition did little to deter finger-pointing on Capitol Hill.

Republican lawmakers said the new Medicare law’s increased emphasis on private competition between insurance companies and prescription drug plans, provisions that were opposed by most Democrats, ultimately would help control spending.

“The trustees’ report validates the reasons Republicans had in reforming Medicare and enacting a prescription drug benefit last year,” said House Ways and Means Committee Chairman Bill Thomas (R-Bakersfield). “The overall health of Medicare depends on these reforms and our future action.”

Republicans said the outlook would be more dire if Democrats had succeeded in passing a more expansive drug benefit.

But Democrats said Republicans had worsened Medicare’s long-term prospects by adding tens of billions of dollars in payments to private health companies and prescription drug plans.

“The Bush administration’s inept management of the economy and its sweetheart deals for the pharmaceutical industry and the insurance industry ... are bringing Medicare closer to the brink,” said Sen. Edward M. Kennedy (D-Mass.). “It’s no secret they’re doing all they can to destroy Medicare by privatizing it.”

Robert Moffitt, director of health policy studies at the conservative Heritage Foundation, said lawmakers of both parties were to blame for Medicare’s financial woes. “There is a bipartisan problem here,” he said.

Some analysts worried that the ongoing partisan bickering over the Medicare law made it unlikely that officials in Washington could agree to work on a long-term solution to Medicare’s financing challenges.

“There’s so little trust right now that it’s hard to imagine a bipartisan commission on the future of Medicare,” said Tricia Neuman, director of Medicare policy at the Kaiser Family Foundation.

Former Rep. Congresswoman Barbara B. Kennelly (D-Conn.), president of the National Committee to Preserve Social Security and Medicare, accused the administration of using alternative accounting methods to “lower expectations about the future of Social Security and Medicare” to build a case for a shift to individual retirement accounts and an increasing role for private health insurance companies.