Part XIII

Health care is one of the governments biggest costs and almost all of the money spent in this area goes to two major programs: Medicaid ($272 billion) and Medicare ($451 billion). So what are these programs? Medicare is public insurance program that is available for all citizens who are 65 years old or older and the severely disabled. It is broken up into four parts: A, B, C and D. Part A and B were part of the original Medicare program and are an insurance program that covers hospital care (part A) and medical care (part B). Part C was added in 1997, which allows recipients of Medicare to have their benefits administered through private insurers. Part D was added in 2006 and it covers the cost certain prescription drugs. It is important to remember though that Medicare is not “free” healthcare, it is a subsidized insurance program that collects co-pays and has premiums. In 2010 $65 billion was collected from Medicare beneficiaries or about 12.7% of the cost of Medicare. This means the average Medicare enrollee pays about $1,380 per year for their care, though it is worth noting there is support for people who cannot pay their co-pays and premiums. Medicaid is a very different program. It covers the cost of medical care for the poor and the disabled, and their children. It is not administered by the federal government, but by state governments and the criteria for eligibility varies between states, within a mandate set by the federal government. The funding comes from the general federal budget and which is given to the States in the form of grants. The states also contribute funds to cover the cost and can expand coverage within their own states (most states pay roughly half the cost). Additionally there are co-pays for Medicaid but they are minimal and are often as little a few dollars and even that  can be waived by state programs.

 Together these two programs made up 20.9% of the federal budget in 2010. Medicaid is funded out of the general fund and Medicaid is partially funded with a special payroll tax. Every wage earner pays1.4% of their taxable income and employers pay 2.9% of the wages they pay their employees, to Medicare. In 2010 the Medicare payroll taxes collected $180 billion meaning that Medicare had a $271billion short fall (yikes!). So why was there not a drop in benefits? First of all Medicare has never been fully funded by its own payroll taxes. It has always needed some funds from the “general fund” to cover it (the general fund in turn makes up its short falls by selling securities, AKA debt).

 Like Social Security, Medicare has a trust fund, which as of the end of 2010 had $71.4 billion in it. But this trust fund is a bit of a false sense of security because if Medicare were not able to rely on the general fund the trust would have been wiped out long ago and would not even last one year if the general fund could not be accessed.

 But the concern is not that Medicare and Medicaid need to rely on the general fund but that the general fund is already unable to cover all the expenses it needs to as it is, and cannot take the extra burden without selling securities. So why did the federal government create such a large program but not the means to fund it? The answer is complicated because at the time that Medicare and Medicaid  were created the country could afford it to fund it, but that has changed.

So why can we no longer afford to fund these health care programs without borrowing? It is because these programs have got much more expensive then when they were created. This is because as America’s average age has increased and medical care has gotten more expensive, Medicare and Medicaid premiums and pay roll taxes have not kept pace with the increased costs. In 1970, when the oldest of the baby-boomers were 35, Medicare received 24.6% of its funding from the general fund (or about $2 billion). In 2000, when the oldest of the baby-boomers were 55 years old and Medicaid received 27.6%of its funding from the general fund (or about $71 billion). So far so good right? Well the first decade of the 21st Century was rough on Medicare.  In 2010,when the oldest of the baby-boomers were 65 Medicare received 44% of its funding from the general fund (or about $214 billion). That was a big jump in a short time.

 Why the jump? First of all as the average American gets older he or she will need more medical care and often more expensive medical care. In addition the cost of medical care is increasing at a rapid rate. You know how the old timers like to talk about the price of a gallon gas? Well gasoline has nothing on your doctor’s bill. In 1976 the average cost of a gallon of gas was 60¢, by 2010 the average cost was $2.73,or another words the price increased 455% with inflation and increased demand. Sounds bad doesn’t it? Compare that to cost of a standard doctor's appointment that cost on average $49.70 in 1976. In 2010 the average cost is $382.68 or an increase of 769%!

 So how do we tackle the cost of public health care and in end help balance the budget? There are three primary schools of thought on the topic. Either we raise more revenue to cover the costs, or we reduce benefits and increase premiums and co-pays, or we reduce the overall costs of health care so we can cover the care we need with the money we have.

Let's look at these one at time, first raising revenue. To cover the cost of these health care programs the federal government needs to raise an additional $543 billion dollars. We could do this based on an increasing income taxes, cooperate taxes, Medicare taxes or come up with an excise tax that would cover the cost.

 If we did it by increasing income taxes we would have to raise rates by 60.4%, that would mean that a family that made $50,000 to $199,000 a year would have to had paid 25.98% of their income in taxes in 2010, up from the current average rate of 16.2%. If we tried to cover the cost by raising cooperate taxes we would need to raise cooperate tax rates by 284% or in other words tax cooperation at 106% of their profits, which is not mathematically possible.

If we try to cover the cost by an increasing the payroll Medicare tax, we would need to increase the tax rate by 400% or in other words increase wage earners taxes by from 1.45% to 5.8% for individuals and for 2.9% to for employers to 11.6%. Self-employed individual would have to pay 16.8% of their income as opposed to the current 4.2%.

If we came up with a new excise tax (like a new federal sales taxes on gasoline, cigarettes or some other product or service) it would have to have every household in America pay on average $402 a month, so if the excise tax rate was set at 25% (pretty high for an excise tax) it would have to tax something the average American household pays $1,608 a month on. The only thing I could can think of that would achieve this would be a federal property tax could.

The other option would be reduce the cost of health care programs by cutting coverage an increase premiums and co pays. But if we were to cover the cost of these programs based solely on the current payroll tax revenue we increase patient premiums and co-pay sufficiently to cover 77% of their own care. Though it is unlikely that many people in need of federal assistance for health care would  be able to afforded this.

On the other side of the coin we could increase the age requirement. Currently there are 39.6 million people enrolled in Medicare based on their age (there is another 7.6 million based on being disabled). The average enrollee receives $11,762 per year in benefits, for a total of 465.7 billion of benefit played out in 2010. To trim things up to a point where we can afforded both Medicare and Medicaid we would need to raise the age limit enough to remove 6.8 million people from eligibility or about one out of every seven current enrollees. However this might have a similar effect as rising the Social Security retirement age in that it might only push more people into Medicaid until they reach the age requirement for Medicare. So the overall savings might be less than projected.

 Lastly the option is to take steps to reduce the cost of health care. But that is easier said than done. On the one hand if the government stepped in and regulated or deregulated aspects of the medical industry that resulted in a reduction in the cost of providing health care (of which there is no guarantee of). An actual price drop for consumers may not even happen because medical care providers and insurers could simple maintain their current prices as it has already been shown that costumers are willing to pay those prices, and simply increase their profit margins.  Other, more extreme options, such as price controls or a nationalization of health care could be enacted. But these are philosophies that would be extremely radical in American politics and in the end may or may not be very effective. Either way it would certainly be uncharted waters for our country.

 A simpler (if not extreme) option would be to simple eliminating federal funding for Medicaid, and leave support of medical care for the poor solely to the States. If we cut Medicaid out of the federal budget we could just barely cover the Medicare cost of $451 billion. But this would dump a large burden on the State budgets, and even such a drastic action would not solve the root problem of the increasing cost for Medicare.

Ultimate even if we could have balanced the budget in 2010 we would still have a problem looming in the background. In 2010 Medicare cost of $451 billion. In 2012 it is expected to cost $492 billion(so we need to scrounge up another $51 billion by then) and in 2013 it will cost $543 billion so we will need another $58 billion that year. It only gets worse and worse, and by 2021 (only nine years from now)it is estimated that we are going to need $848 billion or almost twice the amount we cannot seem to afford today. So any solution for covering the cost of health care must not only address the current shortfall but also be able to keep up with the rising costs.

 The Verdict:

So what do these options mean? Since we cannot reliable reduce the cost of medical care without taking extremely radical steps (and even then it is not necessary a sure thing) we are left with a complex problem that has a simple, yet difficult, solution. Medical care is expensive and the government has created programs to assist certain people to pay for it. However we are cannot afford to fund these programs as the budget currently stands. So the government needs to raise revenue or reduce benefits, or a mixture of the two, and then the government must continue to adjust the revenue/expense formula to keep up with the increasing cost.

Since increasing revenue is covered in other sections of my blog (Part V, Part VII and Part VIII), what remains is to look at what could be cut or what Medicare or Medicaid recipients could pay for themselves.  As this is more a matter of opinion than anything else I will not weigh in on what is the best way to do this. However, I will provide this information and you can make your up you own mind. Here is a breakdown of Medicare’s and Medicaid's costs in 2009, the most recent year’s records that have been publicly published .Please note that the costs were higher than in 2010 because these figures are the total program costs, not how much it cost taxpayers after premiums and co-pays were collected.

Though these are not the 2010 statistics I assume the break down in cost (and the overall numbers) are similar:

Medicare	Cost in Billions	Percentage of Total
Hospital Care	$220.40	43.80%
Physician and Clinical Services	$109.40	21.70%
Prescription Drugs	$54.80	10.90%
Home Health Care	$29.80	5.90%
Nursing Care Facilities and Continuing Care Retirement Communities	$28	5.50%
Net Cost of Health Insurance *****	$24.10	4.70%
Other Professional Services*	$13.70	2.70%
Durable Medical Equipment***	$7.40	1.40%
Government Administration	$7	1.30%
Other Health, Residential, and Personal Care**	$4.60	0.90%
Other Non-Durable Medical Products****	$2.80	0.50%
Dental Services	$0.30	0.01%
Total cost:	$502.30	100%
Medicaid	Cost in Billions	Percentage of Total
Hospital Care	$136.10	36%
Other Health, Residential, and Personal Care**	$64.40	17.20%
Nursing Care Facilities and Continuing Care Retirement Communities	$45	12%
Physician and Clinical Services	$39.90	10.60%
Home Health Care	$24.30	6.40%
Prescription Drugs	$20	5.30%
Government Administration	$18.20	4.80%
Net Cost of Health Insurance *****	$10.10	2.70%
Dental Services	$7.10	1.80%
Other Professional Services*	$4.50	1.20%
Durable Medical Equipment***	$4.30	1.10%
Other Non-Durable Medical Products****	$0.00	0%
Total cost:	$373.90	100%

*Services provided other than physicians and dentists. These professional services include those provided by private-duty nurses, chiropractors, podiatrists, optometrists, and physical, occupational, speech therapists, etc.

** Care provided in residential care facilities, ambulance services, school health and worksite health care, community centers ,senior citizens centers, schools, and military field stations and mental health and substance abuse facilities

*** Items such as contact lenses, eyeglasses and other ophthalmic products, surgical and orthopedic products, hearing aids, wheelchairs, and medical equipment rentals.

**** Non-prescription drugs and medical sundries

***** Money played to private insurance companies who provided coverage to individual enrolled in Medicare.