Facing Facts Alert 11

Number 11, November 14, 1995

Facing Facts Alert 11

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
FAX ALERT ( Number 11, November 14, 1995)


The administration claims that its refusal to agree to Congress's
proposed hike in Medicare premiums marks a "defining difference"
between GOP and White House policy. Not so. The dispute is about
politics and timing -- not policy.  The truth is that both sides agree
Medicare premiums must eventually be raised.  What's more, both sides
would raise them by similar amounts.

Where's the Difference?

Let's start with some facts.  This year, the beneficiary premium for
Medicare Supplementary Medical Insurance (SMI) is $46.10 a
month. Congress would raise it to $53.50 in 1996, and then continue to
raise it until it reaches $87.60 in 2002. (These and subsequent
numbers refer to the House plan; the Senate plan differs only
slightly.)  Under current law, the premium would drop to $43.70 in
1996, then climb to $60.50 in 2002.

Although, under the President's budget plan, the premium would also
drop in 1996 -- his re-election year -- it would rise very sharply
beginning in 1999.  In fact, by 2002 it would be $82.80 a month, only
$4.80 less than in the GOP plan.  Looked at another way, the annual
premium in the GOP plan would be $498 higher in 2002 than in 1995;
under the administration plan, it would be $440 higher.  That's a
"defining difference"?

The rationale for higher premiums is simple -- and compelling.
Without the hikes, the share of SMI paid for by beneficiaries will
drop -- and the share paid for by general revenues will rise. This
year, SMI premiums will cover 31.5 percent of the cost of elderly
enrollees.  Under current law, premiums would cover 25 percent of
these costs from 1996 to 1998; thereafter, premiums would rise at the
same rate as Social Security checks -- i.e., with the CPI. Because
per-beneficiary SMI costs are projected to grow much faster than
inflation, the beneficiary-financed share of SMI would fall
precipitously -- to about 20 percent by 2002.  Both sides agree this
is bad policy. The difference is that Congress would keep premiums at
31.5 percent of elderly SMI costs. The White House would hold the line
at 25 percent.

The administration argues that the 31.5 percent share is an
accident. True enough. When today's $46.10 premium level was
legislated back in 1990, the intent was that it cover just 25 percent
of SMI costs.  What the administration neglects to say is that the 25
percent share was itself arbitrary -- and has nothing to do with
Medicare's design. Throughout Medicare's first ten years, SMI premiums
were required to cover 50 percent of costs.  Critics who say the GOP
is breaking a deal with seniors forget what the original deal was.

What about the Taxpayer?

And what about the other participant in the deal: the taxpayer? The
general revenue subsidy per SMI beneficiary will total $1,305 in FY
1995. Under current law, that subsidy will grow by $1,762 from FY 1995
to FY 2002 -- ten times more than the growth in the per-beneficiary
premium ($182). Congress would hold down the increase by raising
premiums (and by slowing the growth in SMI costs).  Still, even under
the GOP's "draconian" plan, the yearly per-beneficiary SMI subsidy
would climb by $1,181 over the next seven years -- two-and-a-half
times more than premiums.

SMI Premiums versus General Revenue Subsidy

                                  Baseline        House
                        FY 1995   FY2002          FY2002
Yearly Premium
per Beneficiary         $538      $720            $1,025

Change: 1995-2002                 $182            $487

Yearly Subsidy
per Beneficiary         $1,305    $3,067          $2,486

Change: 1995-2002                 $1,762          $1,181

Monthly Premium         $46.10    $60.50          $87.60

Note: Table figures are for fiscal years, except for monthly premiums,
which refer to calendar years.  Source: CBO and authors' calculations.

When Congress and the administration finally sit down to work out a
compromise, they would do well to focus on these numbers.  After all,
it's not the tooth fairy who pays for Medicare.  Each dollar of
premium revenue foregone is an extra dollar added to someone else's
taxes -- or, via deficits, to our children's taxes.


The Concord Coalition web pages were designed by Marla Parker and Krista Reymann. These pages are now maintained by Craig Cheslog. . Last updated: 24 Apr 1997