The Cost of Medicare

The medical care of every U.S. citizen over age 65 is rigidly regulated by the federal government through the Medicare program. Each service, from heart transplant right down to drawing a tube of blood, has a fixed price and its payment is authorized only by absolute necessity. One would naturally expect therefore that the Medicare program would be cost effective. Let's examine whether it is. Basic Medicare is in two parts, Part A, which covers hospital and home health care minus a fairly hefty deductible and Part B which after a deductible covers 80% of costs for doctors, lab testing and medical devices. There are also Medigap plans, Medicare Advantage plans, and more recently Part D prescription plans to supplement Parts A and B, all tightly regulated.

Part A is funded by the payroll tax, taken out of your paycheck, which goes into a Part A trust fund. When Medicare started in 1965 the tax took up 0.3% of employee's incomes. Today it's 10 times that at 2.9% unless you make over $125K in which case it's 3.8%. As of 1994 the tax applies to 100% of your income. Considering all those increases you would expect the Part A trust fund to be in good shape, but it's not. It pays out more than it's takes in every year and the trustees of the fund in this year's report predicted it will be depleted in 2028 at which time all hell will break loose unless something happens before that like increased taxes.

Part B requires the seniors to pay a premium which is deducted from their Social Security and presently is anywhere from $120/mo to $390/mo depending on income. Through the years, and especially in recent years, the premiums have risen dramatically but, just as with Part A, they are falling further and further behind in covering expenses. When Medicare started these premiums were designed to cover half of Part B expenses with the rest coming from the income taxes on the general public. The premium receipts now cover only 25% of expenses with the other 3/4 being added on to the progressively enlarging $20 trillion national debt.

According to the 2016 trustee's report, the cost of both parts are rising faster than the rate of inflation and continue steadily to take up a larger share of the GDP, presently 2.1% and expected by the trustees to rise to 3.5% in 2037 when present 44 year olders reach Medicare age. For the whole Medicare program as it stands today the trustees report that the unfunded liability, which is the amount that is promised in the future for all present eligible citizens but not covered by taxes, is in the range of $40 trillion. Unfortunately there's just no place to get that kind of money.

As was previously described through the years progressively more onerous regulations have been added to the program, primarily aimed at stopping the ever continuing rising cost, to no apparent avail. New, even more complex regulations are scheduled to begin in 2017 in the hope that this time the correct regulatory brew will be achieved. Unfortunately the politicians and bureaucrats seem unwilling or incapable of seeing that their regulation approach is not working and that they are missing the structural problems with the Medicare program.

The original political impetus for Medicare was the presence of a sizable group of seniors who were no longer able to work and had been unable or unwilling to make arrangement to provide for medical care. They received charitable care which was often substandard. In the setting of a strong economy, and without impugning his political motives, Lyndon Johnson and his Democrat congress decided to address this problem by assuming payment for the medical care of all seniors, a much larger task than was necessary. As it has turned out this was the first mistake.

Another costly mistake was the failure to provide for future demographics. Many conceive that the payments they have made through the years are kept in individual accounts from which benefits are paid. But in fact it is the active workers who are paying the present Medicare bill. As the population has aged and the proportion of active workers has declined, the program has thus become somewhat of a Ponzi scheme in which through the years decreasing numbers of workers are funding benefits for increasing numbers of seniors.

But the biggest problem has been the flagrant disregard by intelligent well educated politicians and bureaucrats for the most fundamental laws of economics that can only be explained in my humble opinion by stubborn blind adherence to ideology. Let's realize the implications of all this economic talk. Money wasted, present and future, represents real life losses for you and your family. And in the medical realm it translates into serious interference in the provision of and innovation in your medical care. Stay tuned!