Medicare Path to Sustainability J.D. Foster Heritage Foundation July 23, 2009

Stipulations Medicare is unsustainable -- $85.6 trillion in 2007 Medicare is unsustainable -- $85.6 trillion in 2007 Higher taxes are not a solution Higher taxes are not a solution Micro reforms are not a solution Micro reforms are not a solution Distinguishing “must” from “should” Distinguishing “must” from “should” $200,000 (inflation adjusted) is not poor in any age $200,000 (inflation adjusted) is not poor in any age

A Target for Reform What is sustainable? What is sustainable? Not what is ideal, what is necessary? Not what is ideal, what is necessary? What’s “the number”? What’s “the number”?

Identifying the Target 2007 Unfunded Obligation -- $85.6 T 2007 Unfunded Obligation -- $85.6 T –Excess Costs vs. Unfunded Obligation –Assumes HI shortfall funded from general revenues –Ignores DocFix

“Doc Fix” Adjusting doctor’s payment rates Adjusting doctor’s payment rates Good intentions, bad results Good intentions, bad results Trustees exclude Docfix Trustees exclude Docfix Memo from Actuaries Memo from Actuaries Calculate Docfix effect using Trustee’s assumptions Calculate Docfix effect using Trustee’s assumptions Same methodology used in what follows Same methodology used in what follows

Identifying the Target 2007 Unfunded Obligations -- $85.6 T 2007 Unfunded Obligations -- $85.6 T DocFix adds $4.4 T DocFix adds $4.4 T Total of $90.0 T Total of $90.0 T

Identifying the Target 2008 general revenue: $185 billion 2008 general revenue: $185 billion 1.3 percent of gross domestic product 1.3 percent of gross domestic product Correct? No Correct? No Manageable? Yes Manageable? Yes Establishes target for Medicare of $22.2 trillion Establishes target for Medicare of $22.2 trillion

Identifying the Target Total unfunded obligation of $90.0T Total unfunded obligation of $90.0T Target for Medicare of $22.2 T Target for Medicare of $22.2 T Target for Medicare reform of $67.8T Target for Medicare reform of $67.8T

Medicare Fundamentals A health insurance company A health insurance company Customers, suppliers, income, expenses Customers, suppliers, income, expenses FY 2007 outlays $375 billion FY 2007 outlays $375 billion

Medicare Fundamentals Average beneficiary cost $11,018 Average beneficiary cost $11,018 Covered by premiums, payroll taxes, interest income, and Covered by premiums, payroll taxes, interest income, and General revenues General revenues –Average subsidy per beneficiary -- $4,190

Medicare Fundamentals The unfunded obligation is the present value of current and future Medicare subsidies The unfunded obligation is the present value of current and future Medicare subsidies Who gets these subsidies? Who gets these subsidies? –Every Medicare enrollee Who should get these subsidies? Who should get these subsidies?

Medicare Premiums Part A – Generally no premiums Part A – Generally no premiums Part B -- $1,257* for 2009 Part B -- $1,257* for 2009 Average Part D -- $448 for 2009 Average Part D -- $448 for 2009 –Kaiser Family Foundation projection

Income-Relating Medicare B IncomeAnnualSubsidy ($ 000)PremiumRate 170 or less$1,15775% 170 to 214$1,619 65% 214 to 320$2,31250% 320 to 426$3,00635% Over 426$3,70220%

Current Law Part B Subsidy Rate

Proposed Policy General policy General policy –Extend the phaseout to a zero subsidy –Apply to all of Medicare Part D now, Part A when it goes into deficit Part D now, Part A when it goes into deficit –Index to CPI inflation

Example of Policy Extend the current subsidy phase- down to all of Medicare Extend the current subsidy phase- down to all of Medicare

Generalized Income-Relating Patterned After Current Law

Example of Policy Extend the current subsidy phase- down to all of Medicare Extend the current subsidy phase- down to all of Medicare Medicare savings: $44 trillion Medicare savings: $44 trillion About 2/3 of way to target About 2/3 of way to target

Why so powerful? Extends subsidy phase-down to part B Extends subsidy phase-down to part B Applies fully to Part D now Applies fully to Part D now Begins to apply to Part A in 2018 Begins to apply to Part A in 2018 Part A unfunded obligation = $36.4 T in 2008 Part A unfunded obligation = $36.4 T in 2008

Why so powerful? Income grows with productivity and inflation Income grows with productivity and inflation Phase-out points are indexed to inflation Phase-out points are indexed to inflation Stipulation 5: $200,000 (inflation adjusted) is a substantial sum at any time Stipulation 5: $200,000 (inflation adjusted) is a substantial sum at any time Over time, the middle class earning over $200,000 Over time, the middle class earning over $200,000 –$60,000 today after 50 years is over $200,000 at 2.5% growth

Variations on a policy Change start or end point Change start or end point –Now at $170,000 and $660,000 Do we need to subsidize seniors with more than a quarter of a million annual income? Do we need to subsidize seniors with more than a quarter of a million annual income? What about $100,000 in income? What about $100,000 in income?

Medicare Fundamentals Average beneficiary cost $11,018 Average beneficiary cost $11,018 Covered by premiums, payroll taxes, interest expense, and Covered by premiums, payroll taxes, interest expense, and General revenues General revenues –Average subsidy per beneficiary -- $4,190

Variations on a Theme

What This Does Not Do Sustainability defined in terms of debt and deficits Sustainability defined in terms of debt and deficits Medicare spending still projected to go from 3.3% of GDP to 11.3% of GDP Medicare spending still projected to go from 3.3% of GDP to 11.3% of GDP

Conclusion Medicare reform must achieve sustainability Medicare reform must achieve sustainability Sustainability requires a target Sustainability requires a target Hold constant general revenue support as a share of GDP Hold constant general revenue support as a share of GDP Reform: Phase out subsidy for higher- income seniors Reform: Phase out subsidy for higher- income seniors Reasonable variations can achieve sustainability – and more Reasonable variations can achieve sustainability – and more

Medicare Path to Sustainability J.D. Foster Heritage Foundation July 23, 2009