Update for November 6, 1996.
Now that the Election is Over ...


... and the status quo perfectly preserved, the one subject so blithely ignored - or misrepresented - during the campaign, Medicare reform, will emerge as the crisis most in need of attention when the 105th Congress meets in early January.

No national candidate dared discuss seriously the subject of Medicare during the campaign. To do so would have required any candidate to gloss over the problem or lie outright about the solution, because whatever solution is now selected, it will be unpopular with large numbers of voters. There are no comfortable options.

Why Medicare Must be Fixed Now

The financial status of Medicare, the huge health care program for the elderly (essentially, eligibility for Social Security implies eligibility for Medicare), is now a crisis rather than merely a serious problem for three reasons:

  1. The Medicare Federal Hospital InsuranceTrust Fund is projected to have all funds exhausted by FY2002.

    The Medicare program is divided into two components, each associated with a federal trust fund. One component, Supplementary Medical Insurance (SMI) pays for visits to doctor's offices, lab services, home nursing, and similar benefits. SMI is paid for by a monthly premium ($42.50 in 1995 for most beneficiaries) and from general tax revenues. The other component, Medicare Hospitalization Insurance (HI), is financed entirely by the 1.45% FICA payroll tax paid by all employees (plus the employer's matching contribution). In past years this payroll tax has generated revenues greater than Hospital Insurance program costs, allowing a balance to be built up in the Hospitalization Insurance Trust Fund. But because of sharply escalating costs, that trust fund went into a deficit for the first time in Fiscal Year 1995 (meaning that program outlays exceeded receipts for the first time) and the deficit is expected to grow sufficiently to deplete the trust fund's resources by Fiscal Year 2001.

    How serious can that be? Under federal law, for programs financed by trust funds, program spending is no longer authorized if the trust fund's financial resources are depleted. Fiscal Year 2001 starts five weeks before the first presidential election - probably a race between Al Gore and a Republican Governor - of the new millennium. Imagine the political fireworks if this problem hasn't been sorted out by then.

  2. Program costs for both Medicare and Medicaid (the federal health care program for the indigent) are growing too fast...

    Though early estimates for Fiscal Year 1996, just ended on September 30, show that federal medical outlays may not have grown as fast over the last year as estimated earlier, reliable estimates still project federal medical outlays growing at just under double-digit rates, compounded annually, up until Fiscal Year 2002.The 1997 Current Services Budget, which attempts budget projections based upon current law and demographic projections, estimates compounded growth rates over this period at 9.6% for Medicare and 8.7% for Medicaid, compared to only 4.4% for total federal outlays.

  3. .. which leads to the third problem, the impact of Medicare financing upon efforts to balance the budget by Fiscal Year 2002.

    Both the re-elected President and the re-elected Republican Congress have official plans on the books to balance the budget by Fiscal Year 2002. Despite whatever impression might have been left by the polemics of the campaign, the financial role to be played by Medicare in both budget plans is similar - substantial cutbacks in per-capita outlays are required. The table below shows the Medicare projections in the balanced budget plans of the Clinton administration (from the FY 1997 budget), the House and Senate (from the FY 1997 Congressional Budget), and the Current Services estimate (which estimates outlays assuming no change in the law):

    Medicare Projections:
    Clinton, Congressional and Current Services Budget
    FY 1997-2002, Billions $
    FY: 1997 1998 1999 2000 2001 2002 %chg
    Clinton 189.2 203.9 216.7 231.9 250.9 263.5 6.85
    Congress 191.2 205.7 215.8 228.8 241.5 251.2 5.61
    Current Services 196.3 215.3 235.0 256.0 279.5 304.5 9.18
    Source: Red Ink, Table 8.8. Percentage changes shown are annual, compounded.

    Though outlays overall are projected to rise, because of the increase in the number of recipients over these years, the Republican plan requires a 17.5% cut from current services projections and the Clinton plan a little less. These numbers imply either substantial cutbacks in individual benefits or an option likely to be even less popular with the elderly, forcing large numbers of Medicare beneficiaries to switch from fee-for-service to managed care (only 10% of current Medicare beneficiaries have chosen managed care). Though not reflected as a possibility in the numbers above, addressing the gap on the revenue side by either raising the payroll tax or the monthly premium on Supplementary Medical Insurance is also an option, albeit an unpopular one. The final and perhaps most likely possibility would be to tacitly abandon any genuine plan to balance the budget, though this would do little to rescue the endangered Hospital Trust Fund.

A Temporary Fix?

Appointing a bipartisan commission, a blue ribbon panel, or a dedicated task force to address the crisis will do little more than stall the solution and twist the politics somewhat. No matter what the origin of a legislative remedy, it still has to go through the same channels as any other legislation, will still be subject to the same floor debates, will still be decided by recorded vote and either vetoed or signed by the President. More important, the voters will still hold the same politicians accountable for the result.

At this point, a bipartisan solution substantial enough to permanently shore up the Hospitalization Insurance Trust Fund and meet balanced targets seems unlikely in the 105th Congress - a Congress that is likely to be battling the President tooth and nail on every major political issue to be addressed. Any fix will likely be temporary.

Precedent suggest a temporary fix that might not generate public wrath, but would amount to an evasion of responsibility. The FICA payroll tax of 7.65% is divided into three parts: 5.26% for Social Security Retirement, 0.94% for Social Security Disability, and as mentioned above, 1.45% for Medicare. In 1994 the Disability Trust Fund was suffering the same fate as the present-day Hospitalization Insurance Trust Fund - the fund was running a deficit and nearly exhausted. Was the Social Security Disability program reformed as a result? The answer is no. Instead the FICA payroll tax allocation was changed as shown in the table below - the retirement portion of the tax was reduced from 5.6% to 5.26%, which had the quiet effect of reducing the projected life of the Social Security retirement trust fund by twelve years, the politician's secret version of robbing Peter to pay Paul. (Specifically, the 1994 "fix" reduced the esimated date of the depletion of the Old Age Survivors Insurance Trust Fund - the retirement fund, from the year 2043 to 2031).

FICA Payroll Tax Allocation
The 1994 Disability Fix
FICA Allocation 1993 1996
Medicare Hospital Insurance 1.45 1.45
Social Security Disability 0.60 0.94
Social Security Retirement 5.60 5.26
TOTAL FICA 7.65 7.65
Source: Red Ink, Tables 7.5 and 7.7. Employers match these contributions.

One distinct possibility for a temporary fix to Medicare will be to tamper with this formula again - to raise the 1.45% portion of the tax, with the cost falling on Social Security. As unprincipled as that sounds, the warning is being sounded here because this has already been done once.


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