In Washington this week, discussions continue in an effort to reach agreement on a comprehensive deal that will avoid the impending Fiscal Cliff. Healthcare remains a central part part of the debate.
While much of the attention regarding healthcare policy over the past few years has focused on healthcare providers and the economics of how those providers are paid – or not – for their services, there has been an elephant in the room all the while that most politicians and elected officials wisely seek to steer clear of: that being, policy decisions impacting the financial burden on Medicare beneficiaries.
With Democrats holding fast to collecting on what they feel the presidential election afforded them – a mandate to raise taxes on the wealthy; and with Republicans demanding real and meaningful action to lower entitlement spending, the Medicare program is very squarely in the horse trading crosshairs. Of course, there is a lot of disagreement and controversy over whether Medicare should be considered an entitlement.
On the one hand, to the extent Medicare expenditures were funded by beneficiaries through taxation it does not fit the traditional definition of an entitlement like Medicaid or unemployment benefits. On the other hand, given a myriad of contributing factors (e.g., most prevalently being advancements in medical technology and the accompanying impact on longevity), significantly more is spent per beneficiary today than was contributed.
According to an Urban Institute research paper, in 2011 a two-earner couple retiring with a combined income of apx. $87,500 (defined as the average wage), would have paid about $116,000 into the Medicare program during their lifetimes. That same couple can expect lifetime Medicare benefits of $357,000 net of premiums. And given the current trajectory, in 2030 an average-earning couple will pay $175,000 in Medicare taxes but receive a benefit of $527,000.
So call it what you will, in the real world where accumulated deficits are resolved through bankruptcy and/or cessation of operations, the phenomenon described above represents a significant funding gap that results in the assessment of financial burden for Medicare expenditures on a broad base of the population not receiving benefits. That sure sounds like an entitlement, does it not?
Regardless of what it’s called, the problem with raising the age of Medicare eligibility as a policy solution aimed at closing the funding gap is that it only avoids expenditures for those seniors otherwise able to afford healthcare. This presents both fairness and pragmatic challenges. For those individuals in the 65 – 67 age cohort unable to pay the cost of their healthcare, some form of cost subsidy will still be required: whether that is through Medicaid, insurance premium subsidization under the Affordable Care Act or cost shifting in lieu of uncompensated care.
Those challenges are causing some members in Congress to consider Medicare means testing as a potential alternative to raising the eligibility age. This is an idea that President Obama has also publicly supported in the past. The approach would lower Medicare benefits as a function of income. From a purely economic vantage this is a more efficient approach because there is a much higher correlation between the targeted population of the policy and the desired financial impact on the Medicare program.
Means testing will not be not an easy sell politically, however, when considering the enormous amount of political clout held by that portion of the electorate to be affected. The media monster that is AARP will almost certainly be effective in portraying any attempt to implement means testing as robbing from the vulnerable elderly. No easy answers here, folks.
Way back in the day, I used to do a lot of work as a financial advisor and was involved in several debt restructurings. What I learned through that experience was the best possible outcome meant having all parties involved equally dissatisfied with the result. I wonder if that’s a scenario that anyone in Washington could possibly accept where a deal on the Fiscal Cliff is involved.