The economic and political Medicare mess

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Do the American people have the courage and clarity to do what’s needed to get government under control?

Let’s face facts. Every penny in a federal budget estimated to hit $3.8 trillion this year — along with a deficit of $1.6 trillion and federal debt held by the public reaching $10.9 trillion — has a special interest attached that wants to keep taxpayer dollars flowing its way.

That, of course, includes the projected $494 billion to be shelled out this year for Medicare. This health program for older Americans is a hot economic and political topic.

President Lyndon Johnson signed Medicare into law in 1965. Medicare Part A covers impatient hospital care, while Part B covers doctor and outpatient services. President George W. Bush signed Medicare Part D, covering prescription drugs, into law in 2003.

Medicare Part A is funded primarily through a payroll income tax. When first imposed, this Medicare payroll tax was levied on earned income at 0.7 percent — 0.35 percent paid by the employer and 0.35 percent paid by the employee. That has since risen to 2.9 percent — again, split between employer and employee. Under the ObamaCare legislation, for upper-income earners, the tax rate will hit 3.8% in 2013, and be extended beyond wages and salaries to include capital gains, dividends and interest earned.

As for spending, from 1969 to 2010, Medicare outlays increased by 7,823 percent, with inflation (as measured by the GDP price deflator) running at 379 percent over the same time. That’s nothing less than mind blowing. It’s certainly budget busting.

Not surprisingly, the outlook for the future of Medicare is grim in terms of spending continuing to careen out of control. According to the latest report from the Medicare Trustees, “Medicare costs … are projected to grow substantially from approximately 3.6 percent of GDP in 2010 to 5.5 percent of GDP by 2035, and to increase gradually thereafter to about 6.2 percent of GDP by 2085.”

However, those estimates are far too conservative, given the political and economic realities of Medicare spending. For example, a large cut in Medicare physician payments is assumed, and that simply will not happen. Indeed, the Medicare actuary acknowledged this as an “implausible expectation.”

What to do? House Budget Committee Chairman Paul Ryan (R-WI) has proposed shifting Medicare to give consumers more control and to bring the program’s costs under control. While those 55 and over would see no changes, for all others, the Ryan plan would offer each individual a voucher of $11,000 — adjusted for income and health care condition, and increased annually according to medical inflation — used to purchase a Medicare certified plan. That makes sense from an economics standpoint — in particular, by shifting control from politicians and government bureaucrats to consumers — and is a win-win for health care consumers and for taxpayers.

Naturally, though, opposition to the Ryan Medicare plan has used over-the-top scare tactics, declaring that this would be the end of Medicare. As widely reported, this Medicare debate played a part in a special congressional election in upstate New York on May 24, in which Democrat Kathy Hochul beat Republican Jane Corwin in a Republican-leaning district.

As TheHill.com reported, Corwin admitted that she should have addressed the Medicare charges quicker. She was quoted: “I have to admit, when she started making these comments, I thought, ‘This is so outrageous, no one would ever believe it.’ Apparently some people did.”

It’s important to note, though, that a Tea Party candidate clearly drained votes away from the Republican, and likely cost her the race. Still, though, Medicare was a serious factor.

The Medicare story in national polling is mixed. An AP-GfK May 5-11 poll found that 54 percent of American adults believe that the federal budget can be balanced without reducing spending on Medicare, while 44 percent said Medicare spending would have to be reduced.

But a May 21-22 Rasmussen Reports survey of likely voters found 47% of likely voters answered “yes” to the question: “To make truly significant, long-terms cuts in government spending, is it necessary to make major changes in defense, Social Security and Medicare?” Thirty-six percent said “no,” and 17 percent were not sure.

A big problem with these polls is how spending “cuts” is defined. In the real world, people view “cuts” as spending less than before. In the political world, “cuts” means spending more than today, but less than what was projected for the future. No one, including Ryan, is talking about real-world cuts.

The economics are clear. There’s no getting around the fact that if the U.S. is serious about getting federal spending under control, then reforming Medicare has to be in the mix. Unfortunately, the Medicare prescription drug program pushed and signed by President George W. Bush, and the health care plan pushed and signed by President Barack Obama last year have made and will continue to make matters worse — working to further accelerate government spending. The Ryan Medicare plan would turn things in a more positive and responsible direction.

Our elected officials will determine the ultimate outcome, in particular, which side convinces the American people. Will sound economics or irresponsible scare politics win in the end?

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, can be reached at rkeating@sbecouncil.org. His new book is titled Warrior Monk: A Pastor Stephen Grant Novel.