Cutting Medicare and Medicaid future liabilities

The previous post discussed possible changes in Social Security, which consumes the largest share of the $3.760 billion of expected government spending in 2012. The next largest share, just behind Social Security, is Medicare and Medicaid, at about $775 billion. Almost 60 percent of Medicare is financed like Social Security, by contributions from employees and their employers. This share will decline as the cost of health care keeps increasing and more people become eligible for Medicare.

But while Medicare and Medicaid current costs are about the same as Social Security’s costs, Medicare’s FUTURE liabilities are far worse. At more than $89 TRILLION Medicare's total unfunded liability is more than five times larger than that of Social Security. In fact, the Medicare prescription drug benefit the Bush administration enacted in 2006 (Part D) alone adds some $17 trillion to the projected Medicare shortfall, about as much as the entire current unfunded liability of Social Security. And despite the political hype, the best current estimates are that Obamacare actually added at least another $1-2 trillion to the future Medicare liabilities.

Unlike Social Security, where relatively modest changes can keep the system solvent, there are no simple solutions to the Medicare and Medicaid problem.

There are no simple solutions primarily because the current Medicare system has thoroughly distorted the market in the medical field, with all sorts of drug companies, medical suppliers, hospitals and doctors “gaming” the system to maximize profit and/or work around bureaucratic idiocies, and because Medicare has fostered all sorts of unrealistic public expectations about the level of health care people ought to get essentially for free from the government. In the end, the medical field is subject to the same market forces as any other field.

This Democratic Congress tried to make the health care bill look ”revenue neutral” by assuming long-delayed cuts in doctor’s Medicare fees would be implemented – cuts that now amount to about 30%. But doctors already lose money on many Medicare patients, and if their fees are cut another 30% many (perhaps most) will do what any business would do with a money-losing line of services – they will simply stop taking Medicare patients!

The way the system is set up, Medicare patients have absolutely no incentive to “shop around” for their medical care. Indeed, most have no idea at all what their real medical costs are (especially since Medicare statements consist of highly inflated fees “reduced” to the Medicare rates - who can tell what the real price was?). So of course everyone wants the best, the newest, the most expensive treatment , whether or not it is the most effective, let alone cost-effective treatment. It’s like having a credit card that someone else is paying for – why show any restraint?

I’m inclined to think that the only real solution is to scrap the entire system and start over from scratch. There certainly is a valid case to be made in a first world society for subsidized care for the elderly, in which the extraordinary medical costs that may hit the elderly are shared more equitably across the population. On the other hand, is it really sensible for Medicare to spend tens or hundreds of thousands of dollars on medical costs in the last three or four weeks of a terminally-ill patient’s life? Wouldn’t good hospice care be more reasonable, far less expensive, and perhaps even more comforting to the patient and their family?

In the end, there are market realities. Some things we simply can’t afford, no matter how much we would like them. Some things (such as doctors and nurses) are in short supply and have to be rationed, whether we like it or not. The current Medicare system has so distorted the medical market that we might even be better off without any government program. Yes, without Medicare some people wouldn’t get the treatments they need (but some don’t get it now). But if we retirees actually had to pay for our own medical services, or at least pay a good portion of the costs, we would be forced to shop around a lot more carefully, and doctors, hospital, drug companies and medical supply houses would therefore have a strong incentive to cut their costs and prices.

In any case, it a clear that we as a nation simply can’t afford the absurd costs that the current Medicare system will pile up in the coming years. We can either choose to rework the system into a more rational one now, or wait for it all to fail catastrophically in a decade or two.