CBO’s latest budget numbers show that more than 13 percent of all federal spending last year went to the Medicare program, while spending on Medicaid and other health entitlement programs added almost another 8 percent. What is more, 31 percent of our spending is financed by borrowing, adding to our burgeoning debt.
CBO projects that federal spending for health entitlement programs will more than double in the next decade. The higher Medicare spending will be driven in large part by shifting demographics – with an estimated 10,000 baby boomers turning 65 each day through 2030 – as well as by rising spending per beneficiary. Actual Medicare spending will exceed these projections by large amounts if policymakers override the reductions in Medicare provider payments scheduled under the ACA or the pending cuts to physician fees under the SGR payment formula without finding offset savings elsewhere in the program. Federal spending will also increase for Medicaid and for the premium and cost sharing subsidies provided within the exchanges as the ACA coverage expansions begin in 2014. The magnitude of spending increases and the distribution across Medicaid and the exchanges may differ from projections depending on state decisions about Medicaid expansion, but spending in both categories seems certain to be on an upward trajectory.
Dedicated Medicare revenue covers only a portion of total program expenses, and the gap is projected to grow much larger as program outlays continue to increase—leading to a growing reliance on general revenues. The cost of inpatient and post-acute care services for current beneficiaries (Part A) is financed primarily by payroll taxes levied on current workers and their employers and by taxes on Social Security benefits for certain high-income recipients. Since 2008, annual receipts into the Part A Trust Fund have been insufficient to cover annual operating expenses. The federal government has covered the annual shortfalls through transfers from general revenue, repaying loans made by the Trust Fund during past surplus years. The Trust Fund will continue to tap general revenue until 2024 when there will be no more loans to call in. Outpatient care (Part B) and outpatient prescription drugs (Part D) are supported in part by premiums from beneficiaries who voluntarily enroll in these programs, by fees collected from certain drug manufacturers and by transfers from states for beneficiaries who are dually enrolled in Medicare and Medicaid. Part B and D premiums are set by statute to cover about 25 percent of program costs, with higher-income beneficiaries now paying higher premiums. General revenues are used to cover the more than 70 percent of Part B and D expenses not covered by premiums or other sources. Every year since 2006, the Medicare Trustees have issued a determination of “excess general revenue Medicare funding” – meaning that they expect more than 45 percent of total program outlays to be covered by general revenues in the near future. By law, the President must respond by submitting legislation to Congress to address the problem, and Congress must consider the legislation on an expedited basis. To date, however, no corrective action has been taken in response to these warnings.
Analyses by the Urban Institute indicate that Medicare beneficiaries, on average, pay far less into the program via payroll taxes and premiums than they can expect to receive in benefits over their lifetimes. The difference is particularly striking among single-income couples, where only one spouse has paid payroll taxes but both spouses receive benefits.
Only 32 percent of current and near retirees over age 55 responding to a Stony Brook Poll survey were aware that their lifetime contributions to Medicare are likely insufficient to cover the benefits they can expect to receive from the program. All others felt that their contributions were at least sufficient to cover their own benefits. This common belief that future benefits have already been paid for, perhaps in excess, makes it all the more difficult for policymakers to entertain program changes that raise contributions or trim benefits.
Even if federal health care spending grows no faster than potential (full employment) GDP—which is a tall order given historic rates of growth—balancing the budget by 2035 would still require large-scale trade offs on spending and revenue: Defense and other non-health spending (approximately 30 percent of which is mandatory) would have to be cut by about half relative to 2012 levels as a percent of GDP if we don’t increase revenues beyond the levels set by the fiscal cliff agreement. Revenues would have to increase from the roughly 19 percent of GDP expected over the next decade to more than 24 percent of GDP if spending cuts are not made. The magnitude of the changes necessary to balance the budget is illustrated in an Altarum model known as the Triangle of Painful Choices. The model sets the goal of balancing the budget by 2035 and assumes that spending on Social Security and interest remain fixed at the 2012 levels as a percentage of GDP. (Of course, with an aging population and interest rates at historic lows, these assumptions may be optimistic.) In this model, if we can hold health spending growth to the same pace as potential GDP and if tax revenue amounts to 19 percent of GDP, then we can balance the budget only if our spending on defense and all other non-health activities is 6 percent of GDP (point A). This is roughly half the 2012 spending level. Higher tax revenues would support correspondingly higher spending for defense and other non-health activities (points B and C, for example)—as long as health spending grows at the same rate as the PGDP. However, our more likely choice set lies to the right of the ABC line, with more rapid growth in health spending requiring even deeper spending cuts or higher taxes. Online simulators such as Stabilize the Debt, Federal Budget Challenge and Budget Hero can also help hammer home the hard choices about revenues and cuts to specific programs needed to put the U.S. on firmer fiscal footing.