Medicare Eligibility: The Next Policy Battleground

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. 

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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.

Cheers,
  Sparky

While Rome Burns

Quick Take
As reported in The Hill yesterday, Federal Reserve Chairman, Ben Bernanke, shared a dire warning on the prospects for the US economy if our elected officials fail to resolve the critical impasse on how to avoid the Fiscal Cliff.  He also pointed out that the economy is already being negatively impacted because the uncertainty and prospect of going over the cliff is creating havoc in financial markets and impacting investment decisions.

With so much at stake it is beyond disheartening to watch the political posturing of the two extremes of political discourse.  On the Socialist left you have, thou shall not cut entitlements to anyone – while on the Tea Party right you have, thou shalt not raise one penny of taxation

Where do you go from there? That’s like being told to increase production while laying off workers.  Yeah, I know that can and has actually be done, which is another topic for another day – but you get the point.

Our country is being held captive by minority extremists at both ends of the ideological political spectrum – neither minority willing to compromise because being correct in their beliefs is more important to them than being part of a plausible – if not entirely agreeable – solution to the challenges that come with governing. 

I often wonder whether folks who relish in being identified as “part” of a political ideology discover through maturation which ideology aligns with their beliefs – or whether they form their beliefs to align with the ideology to which they seek to be identified as being part.  When someone claims they are a bleeding heart liberal, I’d like to see how much they donate to charity each year.  And when they claim to be a staunch conservative, I’d like to watch them discipline their kids.  Talk is cheap and even more so when emboldened by social media.

My point is that I have had it up to my eyeballs with having minority interests capturing and distorting majority attention – and being an obstacle that is much larger than defined by their electoral power.  Every person I have talked to over the past few weeks – Democrats and Republicans alike – is of a similar mind: both revenue increases (taxes) AND expense reductions (entitlements) are necessary.  I believe the majority of Americans know and understand that.  Do you?

Cheers,
  Sparky

WARNING: Fiscal Cliff Ahead

The topic of a fiscal cliff may be only indirectly related to Healthcare Reform – but that is sort of like saying Hurricane Sandy only indirectly impacted the entire Northeastern United States because it only directly hit the coast of New Jersey (and I make that observation having lost a 40-foot pine tree to Sandy – and I live in Northeast Ohio).

Metaphorically and practically, the fiscal cliff represents a whole lot more than just a short path to economic collapse of the U.S. economy – as if that prospect would need a heightened sense of awareness and urgency.  Want to up the ante further? How about if the U.S. economy collapses, then very likely so too does the rest of the world’s economies: global recession.  Got your attention now?

What is the Fiscal Cliff?
The fiscal cliff is a term used to describe the anticipated financial/budget situation beginning next month resulting from mandated tax increases and spending cuts.  The Bush tax cuts will expire on December 31st of this year, as will the Social Security payroll tax holiday.  At the same time, several tax policies that have historically reduced individual and business tax burdens are due to expire, while several new tax provisions of the Affordable Care Act will take effect in January 2013.

On the spending side, the Budget Control Act of 2011 requires automatic spending cuts to begin on January 2nd (the sequester cuts that you have probably read about); extended unemployment benefits are due to expire at year’s end; and – somewhat less than indirectly related to Healthcare Reform – rates at which Medicare pays physicians will decrease by nearly 30% on December 31st.

What Does it Mean?
In total, the Congressional Budget Office forecasts the impact of the fiscal cliff to be a net reduction of $607B to the federal deficit in FY 2013.  Reducing the deficit is generally perceived as a good thing, right?  “Not so fast, my friend,” as Lee Corso says on College Gameday.   Most economists share a grave concern that the sudden onset of these austerity measures would send the U.S. economy into a double-dip recession. 

But most economists and financial analysts also agree that simply legislating additional delays to these measures – the proverbial kicking the can down the road again – is not going to be in the best long-term interests of the economy and will only serve to increase the stakes and consequences of an eventual fiscal collapse.  And, as we know, those charged with addressing this conundrum – elected officials, particularly in the House – tend to be long-term thinkers for only a very short period of time following an election.   And thus the stage is set.

The Election Mandate: COMPROMISE
Within a very short span of time we will learn what the next two years are going to look like in Washington. With both political parties claiming an election mandate that was clearly given to neither let’s see how long the rhetorical posturing and positioning in the media will last – and whether both parties have finally come to realize that the only mandate they were given was to stop sparring like children vying for parental attention and accomplish something meaningful!

There have been early signs of a willingness to compromise.  Republican party strategists that want to seize the new leadership void left in the wake Tuesday’s election will look to distance themselves from Grover Norquist and the Tea Party.  They appear to be willing to trade tax increases for spending cuts (as in, compromise – the way things used to get done in Congress).

In maintaining a Republican stronghold of the House, I believe voters have signaled to Democrats that fiscal conservatism is a pervading belief of the electorate.  Most political observers I think agree that entitlement spending has to be at the center of any meaningful discussion on debt reduction.  And not just at the periphery based upon an assessment of how to minimize constituency impact.  Democrats are going to have to agree to spending cuts that won’t guarantee them automatic reelection.

How this plays out over the next month leading into the holiday recess will have tremendous ramifications in setting the tone and demeanor of the 113th Congress.  And that, in turn, will have tremendous ramifications on the implementation of the Affordable Care Act.  See – took me a while, but I brought it back home.

Cheers,
  Sparky

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