Consider This...State of Medicare Health

By Jimmy R. Hammond

Harry Truman sent a message to Congress in 1945, asking for legislation to establish a national health program. Two decades of debate ensued, with opponents arguing the dangers of “socialized medicine.” By the end of Truman’s administration, he had backed away from a plan for universal coverage, but administrators of the 8-year-old Social Security system and others had the idea for a program aimed at expanding coverage and insuring more beneficiaries. Proponents kept the dream alive and in 1965, 20 years after the last significant push, Medicare and Medicaid were signed into law by President Lyndon Johnson as part of his “Great Society” initiatives.

Throughout 30 of the past 40 years, Medicare Part A (hospital care) was funded through payroll tax contributions of 2.9% of the wage base used for Social Security payroll tax withholding. In 1995, the Medicare wage base limit was removed, making all earned income subject to the 2.9% tax. For many Americans, the $1,775 annual limit rose sharply. I remember making a mental calculation when I heard David Letterman was switching to CBS and would be paid $10 million a year. Based on that data, I concluded that Dave went from a Part A tax of $1,775 to $290,000. Wow!

Medicare Part B (doctors & health care) also started in 1965 when ex-President Truman was the first to enroll. The beginning premium cost was $3 per month. This premium payment has increased regularly over the past 40 years to $77 per month.

Since 1965, we have increased the number of Medicare recipients from 12 million to 43 million as of January 2006, according to the US Food and Drug Administration (USDA). We have made numerous enhancements to the original coverage, expanded eligibility, attempted to create another universal health plan under the Clinton administration and, as most Americans young and old are aware, we now have Medicare Part D, a new prescription plan which went into effect on January 1, 2006.

According to the USDA, a new era starts with the new Medicare Part D (outpatient prescription drug coverage). The new outpatient drug coverage works like other health insurance plans. Medicare beneficiaries will be able to choose from at least two prescription drug coverage plans. Those plans will cover drugs for all medically necessary treatments, will pay for brand-name and generic drugs, and will enable beneficiaries to get prescriptions at a pharmacy or through mail order. The standard drug coverage in 2006 will require consumers to pay a $250 deductible and a monthly premium of about $35 and 25% of the first $2,250. After total drug expenditures reach the $2,250 mark, Medicare’s standard coverage pays nothing until the beneficiary spends another $2,800. “It’s important to know that a lot of people will never reach the $2,250 amount,” says USDA spokesman Karr. After spending reaches $5,100, the Medicare benefit will cover about 95 percent for the rest of the year with beneficiaries paying only 5 percent. “None of this applies to the Medicare beneficiaries who qualify for extra help because they will have no premiums, no deductibles, and no gaps in coverage,” Karr says. Some Medicare beneficiaries already get coverage for prescription drugs through union- or employer-provided health plans. If the existing plan is as good or better than Medicare’s prescription drug coverage, Medicare will be providing new support so that coverage stays in place. “Beneficiaries should have heard from their former employer or union this past fall about their coverage options,” Karr says. “Some Medicare beneficiaries also currently get drug coverage from a Medicare Advantage plan, and those beneficiaries should expect to hear from their current plan about what kind of coverage they will be offering,” he says. Some plans are likely to offer coverage that is even more comprehensive than Medicare’s standard drug coverage. The first enrollment period started on Nov. 15, 2005, and runs through May 15, 2006. For those who don’t join a Medicare prescription drug plan by May 15, 2006, the monthly premium rises 1 percent a month. So for people who wait a year to join, the premium would go up by 12 percent.

The early press tended to give the new prescription plan low marks, although many groups like AARP applauded the event as a great first step. Most coverage emphasizes the complexity of plan options and sign-up issues. To assist with the sign-up, friends and family can get help online by visiting www.medicare.gov or by calling 1-800-MEDICARE (1-800-633-4227) or TTY 1-877-486-2048. Operators are available 24/7 and can walk you, your friend, or your family member through the Plan Finder and provide personalized help in comparing and choosing a plan.

Put this event on your calendar: all Medicare programs must be prepared to absorb 78.1 million baby boomers within 5 years. The Baby Boomers will triple the Medicare beneficiaries!

As the USDA reports, Medicare’s financial difficulties will come sooner—and will be much more severe—than those confronting Social Security. While both programs face essentially the same challenge, underlying health care costs per enrollee are projected to rise faster than the wages per worker on which the payroll tax is paid and on which Social Security benefits are based. As a result, while Medicare’s annual costs are currently 2.6 percent of GDP, or about 60 percent of Social Security’s, they are now projected to surpass Social Security expenditures in 2024 and reach almost 14 percent of GDP in 2079. The fund again fails our test of short-range financial adequacy, as assets drop below the level of the next year’s projected expenditures within 10 years—in 2014. The fund also continues to fail our long-range test of close actuarial balance by a wide margin. Though the projected date of Part D Trust Fund exhaustion moved back slightly to 2020, from 2019 in last year’s report, projected Part D tax income falls short of outlays in this and all future years. Part D could be brought into actuarial balance over the next 75 years by an immediate 107 percent increase in program income or an immediate 48 percent reduction in program outlays (or some combination of the two). However, as with Social Security, adjustments of far greater magnitude would be necessary to the extent changes are delayed or phased in gradually, or to make the program solvent on a sustainable basis over the next 75 years and beyond.

Part B of the Supplementary Medical Insurance (SMI) Trust Fund, which pays doctors’ bills and other outpatient expenses, and the new Part D, which pays for access to prescription drug coverage, are both projected to remain financed into the indefinite future, because current law automatically sets financing each year to meet next year’s expected costs. However, expected rapid cost increases will result in a rapidly growing amount of general revenue financing—projected to rise from just under 1 percent of GDP today to 6.2 percent in 2079—as well as substantial increases over time in beneficiaries.

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