Improving Medicare Financing: Are We Up to the Challenge?

Medicare is one of the most successful programs of the federal government. It has achieved nearly universal coverage of healthcare for the most difficult populations to serve-people ages 65 and older and those with permanent disabilities. It ranks well above private insurance in satisfaction ratings from enrollees (Davis et al., 2012). And while critics point to its rapid cost growth over time, its per capita rates of growth are lower than those attributable to private health insurance for comparable services (Medicare Payment Advisory Commission, 2013). Yet Medicare is nearly always a target of federal budget-cutting efforts.In an era of government distrust and opposition to any tax increases, Medicare has been a target because of its size and rate of growth since its inception fifty years ago. In the early 1970s, Medicare represented only 3.5 percent of the federal budget but, by 1990, accounted for 7.8 percent. The share has grown steadily such that Medicare took up 14.6 percent of the 2014 federal budget (Office of Management and Budget, 2015). That alone makes it a target when there is enormous reluctance to raise taxes. In terms of overall spending, Medicare has gone from $7.5 billion in expenditures in 1970 to $583 billion in 2014 (Centers for Medicare & Medicaid Services [CMS], 2014). By 2020, that figure is expected to reach $883 billion.This growth makes it easy for opponents to argue for "trimming" the program regardless of whether that growth has been appropriate and necessary to meet the needs of the older adult and disabled populations. This debate is coupled with claims that the trust fund for Part A will be insufficient in the future to pay all benefits. Together, these create the perfect conditions to argue for changes in Medicare.What often is missing from this discussion, however, is any serious consideration of increasing funding for the program. Ultimately, Medicare will need more financing unless the program is to face substantial and likely harmful cuts in benefits. We need a thoughtful debate about how to pay for healthcare for older adults and people with disabilities into the future. Who should be responsible for those costs?One way to think about who should pay over time is to consider whether we should retain the current distribution of burden. The Medicare program pays about 70 percent of the costs of services it covers, while individuals and their families are responsible for the remainder (Moon, 2006). Additional revenues would be required if the federal government continued with its current share of healthcare spending for this group. But keep in mind that beneficiaries' burdens also will rise as healthcare spending rises, even if shares remain constant. Both taxpayers and beneficiaries will have to pay more in the future. If one group is deemed better able to pay than another, we, as a society, might decide to change that share over time. However, opponents of adding revenue sources to Medicare are arguing implicitly that the burden should be shifted increasingly to beneficiaries. They have bypassed the discussion about who should pay.Past and Future Changes in MedicareWhile from the beginning it was recognized that Medicare would grow in the coming years, some factors affecting Medicare's costs have risen more quickly than anticipated. Some of this reflects improvements in treatments and their outcomes, but inflation in healthcare has been substantially higher than for other services. And, costs from inflation do not translate into a higher level of benefits; rather, it is simply ever more costly to pay for healthcare. Higher spending does not mean that each generation is getting greater and greater benefits, with the exception of the prescription drug benefit in 2006 and some modest improvements in protections for those with lower incomes.Even with the addition of a drug benefit, the federal government continues to pay about 70 percent of the costs of care. …