Facing Facts Alert 3

Number 3 July 5, 1995

Facing Facts Alert 3

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
FAX ALERT ( Number 3 July 5, 1995)


The benefit lobbies are busy mobilizing against the Medicare cuts* in
the congressional budget plan.  Here are the top five reasons that
will be given not to cut Medicare and why they're merely diversionary.

Diversion One: Medicare shouldn't be entangled in the budget debate
since it's a "self-financing" program.

Nonsense.  Only Medicare Part A, or Hospital Insurance (HI), is
self-financing, even in theory; doctor bills under Medicare Part B are
three-quarters paid out of general revenues. HI, moreover, will run an
operating deficit of $9 billion in 1995, a shortfall projected to rise
to $47 billion by 2002, $352 billion by 2020, and $1.9 trillion by
2040.  These sums are the annual HI savings Congress would have to
find in each of those years just to keep the federal deficit from

Diversion Two: The proposed cuts in Medicare are "extreme."

Actually, it's the problem that's extreme.  Between now and 2002,
annual Medicare outlays are projected to grow from $178 billion to
$345 billion, or by 94 percent. Although the congressional budget
would limit spending to $274 billion in 2002 (a 54 percent increase),
this savings would delay the "bankruptcy" of the Medicare Part A trust
fund by at most a decade and would still leave total Medicare outlays
on track to double as a share of GDP by 2025 (instead of 2015).

Diversion Three: The cuts would have a "devastating impact on the elderly."

What the critics really mean is that any cut in senior benefits is
unacceptable.  But, in truth, there are only three choices.  First, we
can push the burden of rising Medicare expenditures onto current
workers (by raising taxes or by "cost-shifting").  Second, we can
borrow and let our kids pay for it, as we're doing now.  Third, we can
pay for fewer health-care services.  This means that beneficiaries
would have to consume fewer services or else pay more out of pocket
for those services.

Greater out-of-pocket spending need not "devastate" the elderly,
particularly if the cost-cutting reforms are means-tested.  According
to the CBO, over one-third of Medicare benefits go to households with
incomes above the U.S. median.

Diversion Four: Cutting Medicare will simply result in
"cost-shifting" which means it's a zero-sum game.

Paradoxically, many of the same critics who fault cuts for denying
care to the elderly also criticize them for shifting costs to workers
and thus for generating no net health-care savings.  In fact, most
health economists believe that no more than 20 to 30 cents out of
every dollar in Medicare savings is shifted to private payers.  But
even if there were a 100-percent cost shift, the critics miss a
fundamental point.  Lower Medicare spending will result in lower
deficits and thus in higher net national economic savings.  Instead of
future generations paying for current federal outlays (through more
debt), someone would be paying for them today.

Diversion Five: We can painlessly control Medicare costs by enacting
"system-wide" health-care reform.

Although often repeated, this claim defies logic.  If, as opponents of
Medicare cuts say, reforms that simply result in cost-shifting must be
judged a failure, then only those reforms that result in less
health-care consumption by Medicare beneficiaries can be judged a
success.  But why should such cuts be any less painful if exacted
under the aegis of system-wide reform?  There is no reason unless you
believe that simply because reform is comprehensive it would somehow
purge the health system of vast amounts of waste, fraud, and abuse
that would otherwise be ineradicable.

The truth is that eliminating reimbursements for totally unnecessary
services cannot alone control costs. To keep costs from exploding,
someone will have to give something up. While certain system-wide
changes whether in malpractice law or insurance markets may be
desirable on their own merits, this does not justify holding Medicare
reform hostage to the dream of some global and painless panacea.

*All "cuts" mentioned here refer to changes relative to the current
baseline for Medicare, not to nominal or real dollars.


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