Reports of Medicare’s death are greatly exaggerated

at 08:43 AM ET, 04/23/2012

Around this time last year, Americans got a dire warning: Medicare was heading into the red, quickly. “Medicare to go broke in 2024,” one headline proclaimed. “We know,” Sen. Kelly Ayotte (R-N.H.) told Fox News, “that Medicare is going broke by 2024.”

Those predictions of Medicare’s impending doom came from the 2011 Medicare Trustees Report, an annual look at the entitlement program’s finances. The dense, 267-page tome is never much of a page-turner. Most of it is obtuse, economical analysis and endless charts — not, of course, that there’s anything wrong with endless charts. But there’s one figure that always gets a lot of attention: The date by which, if things stay on current course, the Medicare trust fund will become insolvent.

At 12:45 p.m. today, the Medicare Trustees will release their 2012 report. It’s likely to elicit a similar round of headlines. Before that happens, it’s worth understanding why projections of the fund’s insolvency actually say very little about whether Medicare is going bankrupt. Reports of Medicare’s death are, as Mark Twain would put it, greatly exaggerated.

First, a bit of background on what exactly the Medicare Trust Fund pays for. It covers about 85 percent of Medicare’ hospital insurance program, known as Part A. Other medical services, things like doctors’ visits and prescription drugs, are paid for by general revenue and seniors’ premiums.

In 1970, the Medicare Trustees began issuing annual reports on the financial state of the Medicare Trust Fund. It has faced a projected shortfall “almost from its inception,” a 2009 Congressional Research Service report found. In 1970, the Medicare Trustees Report predicted that the fund would be insolvent just two years later, in 1972. Pretty much every year after that, the Trust Funds’ insolvency has never seemed that far off:

Flash forward four decades, and Medicare still has the dollars to cover hospital visits. How does that happen?

It mostly has to do with the fact that the trust fund doesn’t really decide Medicare’s fate. Instead, it’s an accounting term. When we talk about the Medicare Trust Fund, we’re pretty much referring to where our payroll taxes to finance the insurance program get stored. If the Trust Fund runs out, that means it can no longer cover everything it’s supposed to pay for. But Congress could — and, many think, would — make up the difference by borrowing, cutting spending elsewhere and using the savings to plug the hole, or finding new sources of revenue.

“The fund is a fiscally neutral element in the goods and services of Medicare finances,” Theodore Marmor, Spencer Martin and Jonathan Oberlander wrote in one article on the topic. “Congress can change the taxes that finance Medicare if it has the will. Likewise, it can change the benefits and reimbursements of the program.”

The trust fund’s solvency depends on both what it takes in, via payroll taxes, and what it pays out in medical benefits. That means its solvency can fluctuate for reasons completely removed from the cost of Medicare. If the recession lowers the number of Americans who work and contribute to Medicare’s payroll taxes, for example, the Trust Fund gets fewer contributions.

The Trust Fund might not speak strongly to Medicare’s financial future. Politically, however, it has proved a powerful tool. Many major legislative changes to Medicare have happened at times when the Trust Fund has been projected to run out of money within the next decade.

In 1970, when the Medicare Trustees projected the fund would be exhausted in 1972, Congress reduced payments to providers, primarily physicians and hospitals. The same thing happened in 1997, when the trustees projected the funds would run out in 2001. Then, Congress quickly passed the Balanced Budget Amendment, which again cut into doctors’ reimbursements.

“The appeal to ‘insolvency’ as a danger,” Marmor, Spencer and Oberlander write, “needs to be recognized for its symbolic and strategic value in framing the debate over Medicare.”

Their bottom line is that there’s a big difference between the Trust Fund running out of money and the death of the Medicare. In fact, no one quite knows what would happen if the Trust Fund actually ran out of money. “There are no provisions in the Social Security Act governing what would happen in such an event,” the Congressional Research Service report concluded.

What it would not mean, however, is that Medicare would screech to a halt. Programs covering doctors’ visits and prescription drugs could continue on pretty much unfazed. As for hospital coverage, Congress could look for other revenue sources, or it could borrow, or it could move money over from other parts of the budget. Given Medicare’s political popularity, it’s difficult to imagine legislators letting the program go underwater.

 
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