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Challenges in the Financing of Medicare

            Medicare funds health insurance for over 60 million people aged between 65 and above. Also, it pays for the post-acute and acute care, prescription drugs, physician and hospital visits for younger people with long-term disabilities. Medicare is inextricably linked to the social and financial welfare of retires, which can be overlooked in financial planning. With increases in the budget deficit, there is an urgent need to consider the extent to which the current financial status of the U.S. could influence Medicare funding. Besides, increases in the number of people eligible for Medicare requires mitigating measures to ensure there is adequate funding to handle the rising healthcare expenditure. The current Medicare structure cannot handle the projected rising healthcare costs and social security payments. Therefore, there should be structural changes to ensure that the federal debt does not continue to increase. Traditional solutions have been cutting payments, benefits and raising taxes, which cannot continue to work indefinitely. While the federal budget deficit is narrowing albeit by a small margin, unforeseen downturns in the economy could reverse the advancements made in reducing the deficit. The analysis proposes that the federal government should consider cost-cutting in other sectors of the economy, such as defense, or reduce spending on unnecessary expenditures in targeted areas within Medicare.

           Medicare is facing projected increases in spending despite reported decreases in provider community payments during the adoption of the Patient Protection and Affordable Care Act or Obamacare. According to Wilensky, President Trump said that there would be no changes in Social Security and Medicare (250). Consequently, Medicare spending could significantly increase the federal budget deficit without sufficient changes to Medicare to increase payments to beneficiaries. Statistics show projected increases in Medicare spending to about 18 percent in 2029 from the 15 percent increase in 2018. Recent 2019 projections show the depletion of the Medical Hospital Insurance trust fund by 2026, which is similar to 2018 projections (Figure 2). This demonstrates that the projections are relatively stable. Furthermore, Medicare benefit payments to “Medicare Advantage plans for Part A and Part B benefits” increased by almost 50 percent from 2008 to 2018 (Cubanski, Neuman and Freed 1; Figure 1). Wilensky adds that there are expected changes to Medicare physician reimbursement as proposed in the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). MACRA slowly came into effect in 2017 and further changes could be introduced in the next several years because of unanticipated outcomes because of MACRA. The researcher adds that despite the changes to projections expected over the next one or two decades, Medicare challenges remain undisputed in the literature (Wilensky 250). Based on the data, significant changes should occur to Medicare over the next few years to accommodate the projected spending increases despite Trump administration’s reluctance to change Medicare.

Figure 1: Part, A, B, and D Medicare Payments 2008 and 2018

(Source: Cubanski, Neuman and Freed 1)

Figure 2: Net Medicare Spending 2010 to 2029

(Source: Cubanski, Neuman and Freed 1)

The rising federal debt will soon force Congress to make significant reforms to Medicare and other federal entitlements. The Budget Control Act created in 2011 raised the debt ceiling, increasing the amount the federal government can borrow to deliver its services. In addition, the Act created the bipartisan “super committee” and the Joint Select Committee on Deficit Reduction to “identify $1.5 trillion in savings over 10 years” (Moffit 1). Since 2011, the suggested savings have been generally negative. Jeffrey, Gottlieb, and Shapiro report that the economic recovery improvements since 2008 have resulted from significant cost reductions in healthcare. During the economic recovery, cuts in healthcare payments have resulted in a slow inflation rate. The healthcare sector has significantly contributed “to the core personal consumption expenditures price index, or PCEPI” (Jeffrey, Gottlieb and Shapiro 1). Figure 3 shows that Medicare and Social Security account for the highest share of federal budget spending. The beneficiaries covered by the two expenditures are the ones expected to rise in the future, suggesting that reducing expenditure in these areas could lead to extreme negative socioeconomic measures (Cubanski, Neuman and Freed 1; Moffit 1). Jeffrey, Gottlieb, and Shapiro add that current legislation has proposed low Medicare payment growth to continue over the next several years. This recommendation could face significant changes in future legislation to increase Medicate payments to beneficiaries (Jeffrey, Gottlieb and Shapiro 1). Furthermore, there is projected increases in healthcare spending because of increases in the number of people eligible for healthcare payments (Cubanski, Neuman and Freed 1; Wilensky 250). Jeffrey, Gottlieb, and Shapiro point out that regardless of the direction Medicare policy takes, inflation increases will occur in the future. Additional data shows that current laws are insufficient in the long-term.

Figure 3: Medicare as a Share of the Federal Budget (2018)

(Source: Cubanski, Neuman and Freed 1)

There is little contestation in the literature about the urgency of reform. Moffit states that in 2011, the baby-boom generation became beneficiaries. In 2010, the number of beneficiaries was 47.4 million but in 2030, they will have reached 81 million (Moffit 1). In 2019, the number of beneficiaries has already reached 60 million, showing that the projected growth trends are already happening (Cubanski, Neuman and Freed 1; Moffit 1). Other factors necessitating reform include fewer workers to support Medicare funding and increasing longevity of retirees. In such a context, traditional solutions to healthcare funding cannot work. Tax increases would financially cripple the fewer workers supporting the system. In addition to keeping healthcare payments low to manage the federal budget, additional recommendations to healthcare reform might be insufficient in the long-term.

           Policy alternatives target diverse aspects of the healthcare system to manage the federal budget but they could hold a low long-term viability. Engaging with the private sector to manage costs is one of the most prominent recommendations in the literature. For example, Moffit reports that fixing drug prices through negotiating with drug companies is a leading policy alternative. The regulatory environment could give the Secretary of Health and Human Services the power to directly influence private companies drug prices to manage costs. Currently, Medicare sets prices for Part A and Part B because they are not part of the private healthcare system (Moffit 1). The proposed alternative will cover Part D, which involves private health insurance coverage for prescription drugs. The major problem with engaging with the private sector is that patients will not receive the current diversity of drugs available in the market. Moffit adds that the alternative is undesirable and unnecessary. The current competitive free-market environment has managed to keep insurance premiums prices low despite the increase in beneficiaries, such as baby boomers. In 2012, a competitive private sector stunningly reversed healthcare spending costs because of the reduction in the projected increase in insurance premium cost. The current program’s emphasis on competition in Part D has led to a 44 percent reduction in insurance premiums (Moffit 1). Moffit has demonstrated that price-fixing for Part D cannot lead to further improvements to healthcare spending because the current approach appears to be reducing costs. Additionally, it is not feasible to reduce further the per capita and total Medicare spending in the future, because it is already at its lowest levels compared to previous decades.

Statistical trends demonstrate that further reductions in Medicare spending are unnecessary and undesirable. According to Cubanski, Neuman and Freed, Medicare spending for beneficiaries and overall spending has notably reduced. Between 2010 and 2018, overall total Medicare spending grew annually by 4.4 percent from 2008 to 2018, which was a 9 percent reduction between 2000 and 2010. The reduction was despite the increase in the number of beneficiaries (Moffit 1; Cubanski, Neuman and Freed 1; Figure 4). Cubanski, Neuman and Freed add that between 2010 and 2018, average annual growth in per-beneficiary Medicare spending reduced by 1.7. In comparison, the growth rate between 2000 and 2010 was 7.3 percent (Cubanski, Neuman and Freed 1). For parts A, B, and D, Medicare spending has grown increasingly slowly in the past few decades, with part A experiencing the lowest growth between 2010 and 2018 (Cubanski, Neuman and Freed 1). Considering the universal reduction in Medicare expenditure, the evidence shows there would be negative outcomes for additional cost-cutting in Medicare. There could be unnecessary spending in Medicare that could be targeted to reduce spending, but they should not include coverage for individuals, which is the current cost reduction approach.

Figure 4: Overall Medicare and Private Health Insurance Spending 1990-2028

(Source: Cubanski, Neuman and Freed 1)

            The research has demonstrated that reducing community provider payments, fixing prices for particular Medicare sections such as part D, or maintaining a slow growth in healthcare spending is unsustainable. All the projections show continued increases in the number of beneficiaries, which should correspond with higher growth in healthcare spending. Consequently, the federal budget deficit will increase, thereby making traditional approaches such as increasing taxes inapplicable to augment the healthcare budget. Furthermore, the Medical Hospital Insurance trust fund will deplete by 2026, which is an unaccounted for variable in the statistics on increasing healthcare expenditure. Despite the data, Congress has remained unwilling to significantly change Medicare probably because very few changes if any could further reduce Medicare expenditure below current levels. Therefore, the analysis argued that the federal government should change other economic sectors. In Trump’s policy of looking inwards, there is little necessity to have bases in overseas countries. Currently, U.S. troops in foreign countries far outnumber any global superpower, including Russia and China. Furthermore, targeting defense would be consistent with Trump’s economic policies. The recommended cost-reduction measures for Medicare will not affect individual coverage, thereby ensuring that Medicare continues to accommodate effectively existing and future beneficiaries. For example, expanding bundled payments and promoting new payment methods could reduce costs without reducing service delivery quality. Reducing readmissions for unnecessary and preventable complications by increasing the current penalties to hospitals with high readmission rates would coerce them to provide better care. Other areas in Medicare the federal government could reduce expenditure include post-acute care delivery, payments to graduate medical education, and rebates.  

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