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Medicare in 5 charts: A 2018 midterm report

Jon Greenberg
By Jon Greenberg September 11, 2018

Until recently, Republicans and Democrats debated the future of Medicare in fairly predictable ways. Republicans would offer plans to trim or cap benefits over time, and Democrats would skewer them for putting the squeeze on vulnerable Americans in their retirement years.

This year, the big shift is on the Republican side.

They’ve largely gone silent.

The Democrats, meanwhile, still tie the GOP to efforts to undermine Medicare, this time accusing them of doing so in order to pay for President Donald Trump’s tax cuts for the rich.

Behind the political rhetoric lies a real policy conundrum: Medicare is expensive, and there isn’t enough money to cover future bills. Medicare today costs nearly $600 billion a year, and its main trust fund is on track to be depleted in 2026. Republican tax cuts made the situation a bit worse.

Regardless, the basic formula of today’s workers covering current bills no longer works.

So here’s our primer on Medicare –– its underlying problems, the possible solutions and more of what voters need to know — as the country heads into the midterm elections.

Medicare 101

Medicare is big and expensive because it serves almost one out of six Americans. It’s health insurance primarily for people 65 and older, but it also helps millions of citizens with disabilities. Multiply that by the number of families with someone in the program, and it touches nearly every household in the country.

Medicare has four main parts, but three – B, C and D – are optional. People can decide to use them and pay premiums for the coverage. The core program, Part A that covers hospital care, is an entitlement. Anyone who qualifies gets the coverage, and the government funding is automatic, not subject to the annual budget decisions of Congress.

The program has a thousand nuances, but the one inescapable fiscal challenge centers on Part A and the Hospital Insurance Trust Fund. Under current law, people who qualify can claim those benefits, and Washington is expected to pay. Close to 90 percent of the money to pay for Part A comes from payroll taxes. Coming in a distant second are taxes on wealthier Social Security recipients, which provide about 8 percent of total revenues.

In their 2018 report, the Medicare Trustees forecast that the fund would run out of money in 2026.

One key driver that sends the trust fund balance to zero goes back to the payroll taxes that bring in about 90 percent of the money. As time goes by, the country has a shrinking number of workers to pay for a rising number of aging baby boomers. The demographic bubble that powered the youth movement in the 1960s and 1970s has thrown off the ratio of workers to retirees today.

For Medicare’s finances, everything revolves around the size of the taxable payroll. With that as the yardstick, this chart shows the costs of care (the green line) rising faster than its revenues (the gray line).

Overall, the Medicare Trustees project two paths for the size of the program relative to the economy -- one based on current law and one based on what the Medicare actuaries think might actually happen. Under both, Medicare’s share of GDP goes from about 3.7 percent today to about 5.6 percent in a bit over 15 years.

After 2035, the projections split. The one based on current law has costs leveling off. The other one rises rapidly, adding about half a percent of GDP every decade.

Lower wages and the Republican tax cuts made things worse

Between the trustees’ 2017 and 2018 reports, the Hospital Insurance Trust Fund lost three years of liquidity. A year earlier, they expected the fund to last until 2029.

Why the downgrade? Wages and tax cuts.

The chief actuary at the Centers for Medicare and Medicaid Services Paul Spitalnic said wages didn’t rise as much as CMS economists expected, with the inevitable hit on revenues.

"Payroll taxes, the amount of revenue coming into the trust funds were lower in 2017," Spitalnic said at a June 6 forum at the American Enterprise Institute.

Spitalnic said that brought the depletion date two years sooner.

Economists are baffled why wages have barely budged while corporate profits and the economy in general have gone up and unemployment is at historic lows. Some point to a lackluster rise in productivity. Others say in too many places, employers enjoy a local monopoly on jobs (technically, that’s a monopsony) and have the market power to keep wages down.

There are many possible explanations, but so long as wage growth is sluggish, or worse, fails to keep pace with inflation, Medicare revenues will suffer.

The other lost year came from the 2017 tax law.

When Republicans cut income taxes, that also cut the Medicare taxes on Social Security benefits for higher income retirees. Lower taxes meas lower revenues for the trust fund.

The trustees listed a few other congressional changes that could raise or lower costs. For example, the Bipartisan Budget Act of 2018 eliminated a body that was designed to put a brake on rising health care costs. The Independent Payment Advisory Board, created under Obamacare, had the job of suggesting ways to extend Medicare solvency through very specific changes in treatments that would improve quality while saving money. Without the board, which faced bipartisan opposition, the CMS actuaries expect costs to be slightly higher.

A Republican silence

In the face of Trump’s promise to leave Medicare untouched, Republican enthusiasm for tackling its costs have waned, at least in public.

In late 2017, House Speaker Paul Ryan was saying 2018 was the year to take on entitlement reform.

"Frankly, it's the health care entitlements that are the big drivers of our debt," Ryan said Dec. 6, 2017. "That's really where the problem lies, fiscally speaking."

The House Budget Committee took up the cause and passed a plan to trim over $500 billion in Medicare spending over 10 years.

The plan never came to a vote in the full House.

Health policy researcher Paul Ginsburg at the University of Southern California links the hush in Republican quarters to their readiness to accept rising deficits.

"Not talking about the deficit issue has been a major, major switch for them," Ginsburg said.

Between the Republican tax cuts and the most recent bipartisan omnibus spending bill, nearly $2 trillion have been tacked on to projected deficits. Ginsburg said all he hears now is talk about the benefits of the tax cuts.

Even as the Medicare Trustees, which include Treasury Secretary Steven Mnuchin, pushed the depletion date closer three years, Mnuchin said Social Security and Medicare "remain secure."

"The administration’s economic agenda — tax cuts, regulatory reform, and improved trade agreements — will generate the long-term growth needed to help secure these programs and lead them to a more stable path," he said June 5.

Mnuchin’s theory that economic growth can solve the underlying problems of fewer workers, more retirees and higher health costs, is, to put it mildly, strongly debated.

To put hard numbers on it: The American Academy of Actuaries said eliminating the long-term Medicare deficit "would require an immediate 59 percent increase in standard payroll taxes or a 30 percent reduction in expenditures—or some combination of the two."

What would that mean for the payroll tax? Well, today the rate is 1.45 percent. A boost would make it 2.3 percent. For the median wage and salary earner who makes $879 a week (see the Bureau of Labor Statistics), that would mean an extra $7.50 in taxes each week, or about $390 for the year.

That might not sound like much, but accounting for inflation, wages have actually slipped in the past year. Any hike would make life that much tougher.

Why it matters

The specter of a zero-balance Hospital Insurance Fund is so daunting, politicians have always moved to prevent it.

Based on an analysis by the  Committee for a Responsible Federal Budget, when the trust fund runs out, hospital insurance spending is limited to revenue and spending gets cut.

How it would be reduced, whether the cuts would be across the board or targeted, no one can say for sure. The trustees said in 2026, the year of depletion, the cuts would have to be 9 percent and would rise gradually from there.

Still, as hard as that would be, the program would not shut down. Billions of dollars would still be flowing in, and billions would still be paid out.

But hospitals would face some brutal fiscal pressures. They could try to pay doctors, nurses and other staff less. They could try to raise prices on private insurers. They could provide fewer services. Ginsburg warned that "beneficiaries could have noticeably less access to care."

Should any of this actually happen, between now and then, federal budget watchers see another problem. Over the decades, surpluses in the Hospital Insurance Trust Fund have been banked as loans to the government in the form of Treasury notes. As of the latest report, the government writ large owes the trust fund about $289 billion. In the march to depletion, all that money would need to be paid back plus interest.

That would add something in the neighborhood of $300 billion to the federal deficit over the next eight years.

A sampler of Medicare attacks, fact-checked

PolitiFact has tracked a number of Medicare claims this election season.

Trump said his administration was making Medicare, and Social Security, stronger. Based on the shrinking liquidity of the trust fund, we rated that False.

Other Republicans haven’t talked about Medicare much as we head into the midterms, but when they do, they tend to say that Democrats have undermined it.

And they tend to bring this up in Florida where one out of five people are 65 or older.

A PAC supporting Republican Gov. Rick Scott in Florida’s closely watched Senate race accused Democratic Sen. Bill Nelson of "cuts to Medicare providers." We rated that Mostly False, mainly because Nelson has a long track record of shoring up Medicare, and the vote the ad focused on actually cushioned Medicare from an even larger reduction.

By the way, you might hear an old misleading chestnut that Democrats pulled $700 billion out of Medicare to pay for the Affordable Care Act. (Trump touted the figure at a Sept. 6 Montana rally.) The health care law did put Medicare on a path of more slowly rising spending, but it also tapped higher income taxpayers to put more money in to keep it solvent.

The theme among Democrats is to charge Republicans with seeking to cut Medicare (along with Social Security and Medicaid) to pay for tax cuts to the wealthy.

Democrat Jacky Rosen took this tack in Nevada. We rated it Half True, because while the tax cuts would put pressure on all spending, the package deal allowed deficits to rise, so you could say deficits helped pay for the tax cuts.

A PAC aligned with Minority Leader Sen. Chuck Schumer, D-N.Y., lofted an ad making the same charge against Republican North Dakota congressman Kevin Cramer. Cramer had said in interviews that he supports entitlement reform to shore up Medicare and Social Security. We rated the PAC’s claim Half True.

Lastly, the idea of Medicare for All has found support among the more left-leaning part of the Democratic Party. Sen. Bernie Sanders, I-Vt., said the Koch Brothers sponsored "a study that shows that Medicare for All would save the American people $2 trillion over a 10-year period." Well, the study said that might happen. It also said Medicare for All might increase costs by $3.3 trillion. We rated this one Half True.

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Our Sources

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Medicare Trustees, Medicare amendments since the 2017 report, June 5, 2018

Centers for Medicare and Medicaid Services. 2018 Expanded and Supplemental Tables, June 5, 2018

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Congressional Research Service, Medicare Primer, Aug. 2, 2017

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