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Medicare Trust Funds Alternative Scenario

By May 26, 2011Commentary

Medicare’s solvency is of no small import to the tens of millions of Americans who either currently do or in the future will depend on it to cover most of their health care expenses.  In recent years the program has been spending more than it takes in, reducing Medicare’s assets for future years.  If this continues, eventually the program will draw on general revenues, which are already in a phenomenal state of deficit.  The 2011 Trustees report must use current law in evaluating the program’s financial condition, but the Trustees had a more realistic analysis prepared.   (OAO Report)

That analysis keys on the dirtiest of the reform law’s dirty little secrets–it attempted to both make Medicare look more solvent and pay for the enormous subsidies required by the PPACA through drastic cuts to Medicare’s provider reimbursement.  For the providers paid through the Hospital Insurance Fund, primarily inpatient hospitals, the reform law mandated reductions in annual updates which have been made to account for increases in hospitals’ and other providers’ cost of providing services.  The law assumes that those providers will be able to increase productivity and create other efficiencies which they have no history of being able to do.  The authors of the alternative scenario point out that all economic analysis to date indicates that service industries in general, and health care providers in particular, have very little ability to increase productivity in the way that manufacturers can, yet they are now to be held to the same standard.  The authors also interviewed prominent health economists, who said these reductions were unsustainable.  In the alternative scenario, therefore, the payment reductions are eliminated after 2020.  In reality, they will likely be gone before that.

In addition, the official projection has to assume that the scheduled 30% reduction in physician payments will occur and that the SGR system will continue.  The alternative scenario assumes it will not happen and that SGR will go away and physicians will get annual cost updates.  If the current law were really followed for all Medicare providers, within a short time many would have very serious financial problems and would likely stop servicing beneficiaries, exacerbating access problems.  The effect of the alternative scenario is that Medicare will both begin to account for a much greater portion of GDP and the federal budget and require seniors to pay more in premiums and cost sharing much sooner than the official projections.  It is apparent to anyone that the crisis has arrived and yet we now see the typical attempt to make political hay out of any real proposals to do something about the program’s unsustainable costs.  Disaster lurks.

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