The Real Story In The Medicare Trustees' Report

Volume VII, Number 3 April 5, 2001

The latest annual report of the Medicare Trustees contains some good news and some bad news. The good news is that Medicare's solvency has been extended another four years until 2029. The bad news is that Medicare is projected to cost 60 percent more seventy-five years from now than it was a year ago.

The media have mostly focused on the good news. This is unfortunate, since the extension in solvency is economically meaningless. The real story is the stunning increase in Medicare's long-term cost rate.

A Bigger Stack of IOUs

Medicare's improved trust-fund outlook is mostly due to the near-term economy, which has been swelling payroll tax receipts and hence the program's Part A trust fund. But a bigger trust fund merely means a bigger stack of Treasury IOUs to redeem. As soon as Part A outlays exceed earmarked tax revenues-in 2015, according to the new Trustees' report-Medicare will become a net burden on the rest of the budget. And even this ignores Medicare Part B, whose open line to Treasury renders it eternally "solvent."

What matters is Medicare's annual cost, not its trust-fund balance-and here the news is anything but good. Until this year, the Trustees assumed that the growth in real per capita Medicare spending would eventually slow to the rate of growth in per capita GDP, or about 1 percent per year. The Concord Coalition has long argued that this assumption is indefensible.* It is therefore pleased that the Trustees, following the recommendation of an HHS-appointed Technical Review Panel, have now increased their projection for long-term cost growth to per capita GDP plus 1 percent.

While the change may seem small, the impact on the projections is large indeed. A year ago, the Trustees were projecting that Medicare would consume 5.3 percent of GDP by 2075. Now they project that it will consume 8.5 percent of GDP, quadruple what it does today.

It's worth noting that the new assumption, in the Panel's words, is still near "the lower end of the reasonable range." Even after this year's revision, the Trustees project that real per capita Medicare spending will never again grow at more than 2.3 percent per year. Yet over the thirty-five years since Medicare was founded, real per capita spending (adjusted for age) has grown at the rate of nearly 5.0 percent per year. Over no ten year period has it grown at less than 3.0 percent per year.

The Only Bottom Line

Some leaders are interpreting the Trustees' report as a green light for benefit expansions. Senator Edward Kennedy notes that the Trustees now expect "the longest period of solvency in Medicare's entire history"-and concludes that there's "no need to condition passage of a prescription drug benefit" on cost-saving reform.

No need? The revised projections indicate there's more need than ever. Unfortunately, the focus on trust-fund solvency obscures the magnitude of the challenge. It's time we moved beyond accounting games and focused on the only bottom line that counts-Medicare's annual cost and its impact on the budget and economy.

* See Facing Facts, III:5 (April 8, 1997); V:1 (January 21, 1999); VI: 6 (May 30, 2000); and VII.1 (January 29, 2001).