Medicare's Next Patient: The Federal Budget Deficit

When it comes to cutting budgets, fiscal conservatives often drag out easy villains like peanut subsidies and bridges to nowhere. But while those obvious targets are great for scoring political points, they represent a tiny fraction of the overall deficit. To really slash costs, the government will need to go after at least one of its big three expenses: Social Security, the military or Medicare. As the recent debt-ceiling negotiations demonstrated, it isn't hard to see which program is the most vulnerable.

With two wars rumbling along and threats dotting the horizon from North Korea to Somalia, chances are that the military's budget won't be dropping much any time soon. As for Social Security, former President George W. Bush's disastrous 2005 push for privatization has ensured that the third rail of American politics will remain mostly untouched, at least for the time being.

That leaves Medicare, one of America's most popular -- and expensive -- social programs. In 2010, the health-care subsidy for the elderly cost more than $524 billion, eating up 15.2% of total government spending. Even worse, its costs are projected to rise at a rate of 5.4% per year, surpassing $1 trillion in just over a decade. Politicians across the spectrum agree that the program needs to be reformed, but -- with the wrath of the powerful senior lobby threatening the future of any politician who touches it -- it's also clear that any changes are going to come at a huge cost.

How It All Started

Even before it was enacted, Medicare faced some determined enemies, most notably the American Medical Association. As part of a massive public relations push, the group hired a well-regarded B-list actor to produce an album linking the health-care program to communism.

Sponsored Links

The record, Ronald Reagan Speaks Out Against Socialized Medicine, not only outlined the argument against Medicare, but helped lay the groundwork for the future President's political career. On the album, Reagan envisioned a dire future following the passage of Medicare: "Behind it will come other government programs that will invade every area of freedom as we have known it in this country until one day ... we will wake to find that we have socialism.... We are going to spend our sunset years telling our children and our children's children what it once was like in America when men were free."

Reagan's diatribe notwithstanding, President Lyndon B. Johnson signed Medicare into law on July 30, 1965, while sitting beside the program's first two beneficiaries -- former President Harry S. Truman and his wife, Bess. At the time, the program had a promising future: With baby boomers just beginning to enter the job market, the country had over 106 million people of working age and only 18.4 million retirees taking money out. In other words, for every retiree receiving Medicare funds, there were more than five and a half workers putting money in.

A Victim of Its Own Success

Over the last 46 years, Medicare has made the lives of America's oldest citizens a lot easier. By underwriting much of the cost of aging, it helped raise the life expectancy of the average 65-year-old male from 76 years to almost 81. At the same time, it also provided incentives for researchers to develop medical procedures that treat chronic age-related health problems. Today, ailments that were once a death sentence -- including diabetes, heart attacks, cancer and strokes -- are now treatable.

Unfortunately, Medicare has also driven up the costs of health care. The program pays caregivers for every procedure that they perform, a policy that encourages doctors to administer unnecessary tests and procedures. More importantly, the demographic bump that once funded Medicare is now working against it: This year, the first of 72 million baby boomers will hit 65 and begin using the program. The U.S. currently has 40 million residents aged 65 or older and roughly 176 million employed workers between the ages of 18 and 64. In other words, the ratio of five and a half workers for every retiree has dropped to less than four and a half.

Within the next 10 years, another 36 million Baby Boomers are slated to join the ranks of Medicare recipients, almost doubling the number of recipients in the program. By comparison, America's stock of potential workers is growing at a much slower rate. Following the current trend, the ratio of people paying into Medicare versus those taking money out is on track to drop below 3 to 1.

Potential Solutions

U.S. Rep. Paul Ryan's (R-Wis.) controversial proposal was designed establish an annual Medicare subsidy of $15,000 per person, which recipients would use to pay for private health-care plans. According to Ryan, this would result in lowered costs, as various plans would compete to offer the most service for the lowest price. Ideally, this would lead to an environment in which a much lower Medicare expenditure would result in a comparable level of service.

Ryan's critics disagree. Noting how health-care costs have grown during the past few decades, they worry that Ryan's reduced Medicare benefit would leave many of the elderly unable to afford their health-care needs. Currently, Medicare pays for 80% of covered expenses, leaving participants to cover the remaining 20%. Under Ryan's plan, any gap between total health-care costs and the government's $15,000 would come out of pocket, potentially leaving many retirees struggling to survive.

The White House's solution, which was part of last year's Affordable Care Act, cuts Medicare payouts to private doctors, taxes benefits for wealthy recipients, and establishes blanket fees for certain conditions to minimize unnecessary procedures. Perhaps most importantly, it will also set up a board to determine the most cost-effective treatments.

A Victim of the Debt Ceiling?

Some of the White House's provisions already have been enacted, while others will be slowly integrated over the next seven years. For the time being, however, it still isn't clear how they will affect Medicare's bottom line -- or its services.

Recently, another event may have superseded the Ryan/White House debate. The recent battle over the debt ceiling resulted in the creation of a 12-member "super committee" that has been tasked with cutting the federal budget by $1.5 trillion. Allegedly, nothing -- from tax increases to slashes in entitlement spending -- is off the table in these negotiations.

Speculation has already begun about which parts of Medicare could be facing the scissors. On PBS NewsHour, Jason Kane surmised that Medicare's eligibility age could be increased, as could patients' co-pays and deductibles. Kane goes on to note that "Medigap" supplemental insurance could also be slashed, as well as benefits to wealthier participants.

Even if the super committee doesn't find $1.5 trillion that it can agree to cut, Medicare seems unlikely to escape unscathed. If the committee hasn't found the necessary cuts by Thanksgiving -- or, for that matter, if Congress fails to pass the cuts -- $1.2 trillion will automatically be clipped from the federal budget. Half will come from defense spending and the other half will come from entitlements. Given Medicare's outsized share of the budget and its dazzling array of critics, many of the entitlement cuts would likely come from its budget.

Ultimately, legislators are caught between a rock and a hard place...or, to put it more clearly, between financial insolvency and a furious electorate. This is because of yet another group that has a major say in Medicare: the voters. There is little doubt that the public widely prefers Medicare as it currently stands. A recent poll from The Washington Post and ABC found that 78% of respondents didn't want cuts to the program. Unfortunately, with costs rising and a flood of new enrollees waiting for their benefits to start, doing nothing seems to be the one option that's off the table.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.