Tuesday, January 31, 2012

The Gordian Knot of Medicare

We saw an interesting article asking what would happen if a person wanted to leave Medicare and got to wondering:

'Is it 'constitutional' to force everyone who is aged 65 or older into and then stay on Medicare even if they don't want to or can afford their own non-government-run and paid-for health care coverage?'

(You can choose to dis-enroll from Medicare Part B whenever you want to but you are automatically enrolled in Medicare Part A and B when you turn 65. You can not dis-enroll from Part A, and for reasons cited below, you may never want to either)

We think any time you can get 50%+1 of both the House and the Senate to agree on a package that the President doesn't veto is pretty much as 'constitutional' as you will ever get.

If you really want to get picky about it, add in the 27 Amendments to the US Constitution we have passed over these last 223 years that all passed Congress by 2/3rd's majority and were sent to the states where 3/4's of them had to ratify it as well in their state legislatures (except for the 21st Amendment that was ratified by 3/4's of the state conventions)

Those are the two 'constitutional ways' to change things in America.  It is a slow, very deliberate and difficult process.  Just like Mr. Madison and Mr. Jefferson wanted it to be.

The 'constitutional' way to overturn Obama Care is through the same process:  Congress and the White House. Elect enough new people to overturn Obama Care if you don't like it, that is the way to do it.  It requires gutsy candidates and lots of money but that is the way to do it, not wait on the decision of 9 people on the high court.

For that reason, we don't put too much stock in the argument that the Supreme Court will overturn Obama Care because of the individual mandate issue.  It passed Congress with the requisite number of votes and was signed into law by the President.

What can be more 'constitutional' than that?

But getting back to the question at hand: Should a senior be able to leave Medicare if he/she wanted to and had their own private health insurance or were 'self-insured', in effect, because they were super-duper wealthy like Warren Buffett, let's say, or Bill Gates?

Take a very close look at the chart below:

Medicare (A+B) Sources of Income as Percentage of Total Income
                                                                 Part B
Year   Payroll Taxes    Tax on Benefits    Premiums      State Transfers     General Revenue
2010      38.9%                  2.9%                 13.2%               0.9 %                     44%

What this chart is screaming out to the American public, even though most people don't want to see it, hear it or believe it, is this:  'Medicare is one of the largest 'welfare' programs now run in America'.

(Merriam-Webster dictionary definition of 'welfare':
  • aid in the form of money or necessities for those 'in need' 
  • an agency or program through which such aid is distributed 
If you have a problem with the definition of 'welfare', take it up with the intellectual descendants of Noah Webster who developed this line of dictionaries in America. But Medicare qualifies on every word in this definition except for these two: 'in need')

Medicare is not targeted towards just to those 'in need'; the poverty-stricken; the poor or even the-close-to-being-near-poor! There are millions and millions of upper-income and very wealthy people now on Medicare simply because they know they have one of the best deals in the history of mankind!

Having Warren Buffett and Bill Gates on any sort of federal subsidy program is just plain wrong, wouldn't you have to agree?

Let's think on this for a second:

Out of all of the $520 billion spent by the federal government on all Medicare services in 2010, all but $68 billion or so of the funds to pay for it all came from other people than the senior retirees.  Seniors on Medicare Part B pay roughly $320+/month through premiums for physician services but virtually zero for the Part A hospital costs which account for about 50% of Medicare expenditures annually.

13.2% of the total was paid by roughly 44 million seniors currently on Medicare.  13.2%.

Who pays for the 'rest' of Medicare?

You do, silly.

In the form of FICA payroll taxes from your work (38.9% of the total).  Or in the form of general revenue taxes you pay (or what the government obligates your children to pay through more debt to the Chinese, that is, or 44%)

Taxes on wealthy seniors accounts for 2.9% of the total and .9% is a transfer from the states for some reason which hardly seems worth the effort, does it?

So, where does that leave us?

Since Medicare is almost all paid for (84%) by the general taxpayer anyways today, why don't we just go ahead and make it all 'free' to every senior citizen?

That is right. FREE.  As in a 'Free Ben & Jerry's Ice Cream Cone' or 'Free Lunch at the Snappy Lunch in Mayberry, NC!'

With the following compromise, that is. (There is always a deal to be made in Washington if you listen closely enough)

In return for making Medicare 'free' for eligible seniors, the following changes/reforms will be made to Medicare this year:
1. The Medicare eligibility age will start to rise at the end of 2012 in annual 4-month increments from age 65 to age 70 over the next 15 years. After all, if you reach age 65 in the year 2020, you can expect to live another 15 years if you are a man and perhaps 18 if you are a woman.
In many ways (besides eating too many Twinkies), we are the 'healthiest' generation of Americans who have ever lived. And unless you have been doing manual labor all your life instead of flying a desk or driving a computer mouse all day, you are probably in pretty good health relative to our parents and grandparents who worked and sweated their way through the Great Depression AND then were 'rewarded' with the 'booby prize' behind Door #3, World War II.
2. Every senior citizen who is either very wealthy or ridiculously wealthy will no longer be eligible for Medicare (or SS for that matter).
They have done exceptionally well in life and the payroll taxes they did pay over their lifetimes went to the retirees who were living then, not into a trust fund or ERISA-protected benefits plan where those contributions could have then built wealth over time.

And they don't 'need' or even 'want' 'welfare' from the other American people. Do they?

Some estimates run as high as $70 billion per year that could be saved (or debt averted) annually from here on out if entitlement programs were truly 'means-tested'.  That would be over $1 trillion between today and 2022 alone.

It would 'cost' the taxpayer 'only' the $68 billion or so per year in lost Part B premium payments, probably starting in the year 2020, adjusting for inflation and phasing up as the current senior generation expires.

But the 'means-testing' (it is not a bad word in this deal, is it?) would yield close to $70 billion in savings from both Medicare and Social Security. PLUS the structural budget trend-lines in future Medicare costs would start to crumble somewhat as the age eligibility component is factored into projections.

People who are currently on Medicare would continue in the current system until they die which would keep the $68 billion+/year coming in for at least a little while as the age cohort ages.

On a very simple marginal cost/benefit analysis, we would save multiples of whatever amount of revenues we would lose in the 'lost' Part B premiums that would no longer be paid once the current senior generation expires. Maybe on the order of 10-1 over the long-term.

The people who need federal help the most would be protected and then we could focus on the other factors that are still driving up health care costs such as defensive medicine, liability insurance, tort law, third-party payors and the granddaddy of them all...getting people to take care of themselves and stop eating so many Twinkies, smoking and drinking excessively and generally being a couch potato the size of the couch.

What do you think? Would you take this 'deal' if you thought it would help get us out of this budget and economic ditch in which we seem mired?

Maybe you should talk with your kids or grandkids about it as well before you answer that question.

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  1. I can't agree with you, philosophically, although I can see the merit in your proposition. The whole idea of "means tested" societal benefits is just another form of wealth redistribution, though, and is only a little "numbers fiddling" away from being a class-warfare debacle (eg: AMT).

    Moreover, anything which might require "means testing" is a red flag to me: it suggests that there is some benefit or handout that the government is providing which is beyond the minimum required for a social "safety net". After all, "rich" people don't usually need/use the minimum benefits anyway, so there should be zero cost to the government if the program is really providing only the base level of care. I don't know a lot about what Medicare covers, or how much of one's taxes paid during their working career cover the fair-market premiums to afford it... but I'll hazard a guess that the government is highly subsidizing a standard of care I would consider well above the bare minimum.

    How to fix Medicare in a "no additional wealth-redistribution" sort of way:
    - Make standard of care "baseline". Yes, this may mean less prolonging of people's lives with expensive new drugs; so be it.
    - Adjust the benefits so that the plan cost is in line with the taxes collected per-person on average.
    - Take steps to reduce the actual cost of health care, instead of just enriching the insurance companies.

    And, as you noted, the most important factor:
    - Figure out how to tie lifestyle health choices to premiums, so you pay more (above and beyond the federal subsidy) if you made unhealthy choices.

    All of these are not easy fixes, but I don't think there are easy ways to fix this program, at least in a "good" way.

  2. you lost me on the means-testing argument....i am not clear what you are saying

    i am saying that rich people do not need or deserve any federal subsidized help from anyone to pay for their health coverage. (Medicare is not insurance; it is simply a payor plan) They certainly don't need to be getting payroll tax money taken out of the pockets of manual laborers, that is for sure, to pay 38% of their Medicare costs.


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