Medicare at Risk. Alyene Senger John W. Fleming. March 2013 VISUALIZING THE NEED FOR REFORM 2010: $4,136 $128,000 $188,000 $60,000 $6,000

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1 Medicare at Risk VISUALIZING THE NEED FOR REFORM Federal Deficit Medicare Shortfall $6, : $4,136 $188,000 $128,000 $60,000 Single Female March 2013 Alyene Senger John W. Fleming

Medicare spending is growing faster than the rest of the federal budget Entitlement spending is the main cause of long-term runaway federal deficits.

2 Medicare spending is growing faster than the rest of the federal budget Entitlement spending is the main cause of long-term runaway federal deficits. Medicare is the fastestgrowing program due to retiring baby boomers and rising health care costs. PERCENTAGE OF GDP 14% 12% 10% 8% 6% 4% Medicare All Other Non-Interest Spending Social Security Medicaid, Obamacare Subsidies 2% Source: Congressional Budget Office (Alternative Fiscal Scenario). 0% Chart 1 Medicare at Risk

Medicare shortfall is driving federal deficit spending The Medicare

and the money it spends on health care benefits.

law are sustained, by 2040, Medicare s shortfall will account for 81

Addressing runaway federal deficits requires targeting Medicare.

3 Medicare shortfall is driving federal deficit spending The Medicare shortfall is the difference between the money the program brings in and the money it spends on health care benefits. Even assuming that unrealistic cost-containment policies in current law are sustained, by 2040, Medicare s shortfall will account for 81 percent of the federal deficit. Addressing runaway federal deficits requires targeting Medicare. PERCENTAGE OF GDP 7% 6% 5% 4% 3% 2% 1% Total Projected Federal Deficit Medicare Shortfall 4.1% 3.3% (81% of total federal deficit) Sources: Medicare Trustees 2012 report, Congressional Budget Office, extended baseline. 0% Chart 2 Medicare at Risk

A main cause of Medicare s growing insolvency is that the ratio of workers to beneficiaries is falling.

4 The number of workers per Medicare beneficiary is falling Workers contributions to Medicare aren t set aside for their own retirement they pay for current beneficiaries. A main cause of Medicare s growing insolvency is that the ratio of workers to beneficiaries is falling. WORKERS PER MEDICARE BENEFICIARY Source: Medicare Trustees 2012 report. Chart 3 Medicare at Risk

5 Longer life expectancy means longer enrollment in Medicare The average life expectancy in the United States has increased since Medicare was created, but the program s eligibility age has remained constant at age 65. As a result, seniors collect benefits for almost three times as long compared to when the program started. 80 YEARS OF AGE Average Life Expectancy years Years Enrolled in Medicare 5 years Source: U.S. Census Bureau. Age of Medicare Eligibility (unchanged at 65) Note: Some figures from 2009 through 2020 have been extrapolated. Chart 4 Medicare at Risk

6 In projecting Medicare s cost, more realistic assumptions show an even worse outlook The Medicare trustees are required to base their projections on current law as it is written. These projections rely on unrealistic assumptions, such as Congress allowing staggering provider payment cuts that will harm seniors access to care. The alternative scenario paints a more likely picture of the program s cost. Either way, the future is bleak. Sources: Medicare Trustees 2012 report, CMS Office of the Actuary. MEDICARE S TOTAL 75-YEAR UNFUNDED OBLIGATIONS $35 TRILLION $30 $25 $20 $15 $10 $5 $0 Total: $26.9 trillion $14.7 trillion $5.3 trillion Current Law Outpatient and Physician Services Hospital Insurance Total: $36.9 trillion $20.5 trillion $9.7 trillion $6.8 trillion Prescription $6.8 trillion Drugs Alternative Scenario Chart 5 Medicare at Risk

7 The burden of Medicare spending $8000 on American households is rising Medicare is consuming more of household income than ever before, a trend that will continue. Absent reform, the situation ion will soon require either economy-crushing new $6000 taxes or painful benefit cuts in the program. MEDICARE SPENDING PER AMERICAN HOUSEHOLD $8,000 $6, : $4, : $7,989 $4,000 $2, : $129 $ Sources: Medicare Trustees 2012 report, U.S. Census Bureau. Chart 6 Medicare at Risk

8 Medicare benefits are paid for by working Americans Approximately 88 percent of seniors Medicare benefits are funded by taxpayers. Medicare Part A is mandatory coverage funded by the payroll tax. But Medicare Parts B and D, which cover outpatient services and prescription drugs, respectively, are voluntary and funded primarily by general revenue. 40% 30% 41% $223.3 billion 36% $195.6 billion FUNDING SOURCES OF $549.1 BILLION SPENT ON MEDICARE IN % 10% 8% $42.5 billion 3% $19.2 billion 12% $68.5 billion 0% General Revenues Current Workers Payroll Tax Contributions All Other Drawing Down Medicare HI Trust Fund Medicare Beneficiary Premiums Source: Medicare Trustees 2012 report. Chart 7 Medicare at Risk

9 Seniors receive more in Medicare benefits than they pay in Many believe that seniors pay for their own Medicare benefits, but in fact, current workers finance current enrollee benefits. In addition, most Medicare beneficiaries end up receiving more than what they paid in to the system. $400,000 $300,000 FIGURES ARE FOR BENEFICIARIES WHO RETIRE AT 65 IN 2011 AND EARNED THE AVERAGE WAGE $357,000 $357,000 Total Benefits Received $200,000 $170,000 $188,000 $297,000 $238,000 DIFFERENCE $100,000 $0 $110,000 $60,000 Single Male $128,000 $60,000 Single Female $60,000 One-Earner Couple $119,000 Two-Earner Couple Paid by Beneficiary Source: C. Eugene Steuerle and Richard B. Fisher, How Lifetime Benefits and Contributions Point the Way Toward Reforming Our Senior Entitlement Programs, NIHCM Foundation, August Chart 8 Medicare at Risk

10 Obamacare raids Medicare to pay for other new programs Projected Medicare savings from Obamacare don t improve the program. Instead, they pay for other new programs created under the law that aren t even for seniors. By slashing reimbursement rates instead of introducing real reform, the health law jeopardizes seniors access to providers. Source: Congressional Budget Office report. CUTS IN MEDICARE DUE TO OBAMACARE, Hospital services Payment rates in Medicare Advantage DSH* payments and other Medicare provisions Home health services Skilled nursing services All other services Hospice services $156 billion $145 billion $66 billion $39 billion $33 billion $17 billion $260 billion Obamacare cuts $716 billion from Medicare $0 $50 $100 $150 $200 $250 billion * Disproportionate Share Hospital, meaning payments that go to hospitals that serve a large number of low-income patients. Chart 9 Medicare at Risk

11 Cutting provider payments to lower Medicare costs will hurt access 80% PHYSICIAN PAYMENT RATES 100% of Private Insurance Payment Rates 75% Ratcheting down Medicare payments to contain the program s cost growth will limit seniors access to care. Medicaid, the government health program for the poor, already sets provider payment rates far below private insurance, creating similar barriers to care for enrollees. 58% 26% 58% 50% Medicare Medicaid* 25% Sources: CMS Actuary s 2012 Illustrative Alternative Scenario. * Average of all states % Chart 10 Medicare at Risk

12 Seniors face severe access problems because of Obamacare cuts Obamacare makes deep cuts to provider payments to offset the cost of new programs that aren t for seniors. If these deep cuts go into effect, many providers will operate in the red, making it very difficult for seniors to access their services. PERCENTAGE OF HOSPITALS, SKILLED NURSING FACILITIES, AND HOME HEALTH AGENCIES THAT WOULD OPERATE AT A LOSS 45% 40% 35% 30% 25% 20% 15% 10% 15% 25% 40% 5% Source: Medicare Trustees 2012 report. 0% Chart 11 Medicare at Risk

13 Small Medicare reforms can make a big difference Keeping Medicare as we know it is unsustainable. A simple reform such as raising upper-income beneficiaries premiums and gradually phasing out taxpayer subsidies for the wealthiest retirees (about 3 percent) would save hundreds of billions of dollars. PROJECTED MEDICARE SAVINGS DUE TO HERITAGE S MEANS TESTING $200 $150 $ : $39 BILLION $ : $179 BILLION Source: Calculations by the Heritage Foundation s Center for Data Analysis based on baseline data in the current projections and data provided by the Peter G. Peterson Foundation. $ Chart 12 Medicare at Risk

Heritage plan would rein in excessive Medicare

would financially preserve Medicare for future

Center for Data Analysis using data from the

14 Heritage plan would rein in excessive Medicare spending Heritage s comprehensive Medicare reform would financially preserve Medicare for future generations while also improving it as an insurance program for America s seniors. MEDICARE SPENDING AS PERCENTAGE OF GDP 6% 5% 4% Current Law Heritage Plan 6% 4.5% Source: Calculations by the Heritage Foundation s Center for Data Analysis using data from the Congressional Budget Office s 2012 Long-Term Budget Outlook. 3% Chart 13 Medicare at Risk

15 The Health Care Intiative is one of 10 Transformational Initiatives making up The Heritage Foundation s Leadership for America campaign. For more products and information related to these Initiatives or to learn more about the Leadership for American campaign, please visit. The Heritage Foundation is a research and educational institution a think tank whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. As conservatives, we believe the values and ideas that motivated our Founding Fathers are worth conserving. As policy entrepreneurs, we believe the most effective solutions are consistent with those ideas and values. 214 Massachusetts Avenue, NE Washington, DC (202)

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