Still More Medicare Follies

Volume III, Number 2 January 28, 1997

In a proposal the Washington Post calls a "gimmick so transparent and crude as to give gimmickry a bad name," the White House would fend off Medicare's looming insolvency by shifting more than $50 billion in home health care outlays from its Hospital Insu rance (HI) trust fund, which by law must be in the black to pay benefits, to its Supplementary Medical Insurance (SMI) trust fund, where general revenues will automatically plug any funding shortfall, no matter how large.

This "reform" does nothing to help ensure Medicare's sustainability or to reduce the federal budget deficit. It simply makes the program look more solvent on paper, thereby allowing the administration to claim that its plan does as much to "save Medicare" as GOP proposals while cutting Medicare spending less.

Sheer Expediency

According to the latest Trustees' report, Medicare's HI trust fund will be exhausted in 2001 -- meaning that earmarked tax revenues plus accumulated trust-fund assets will no longer provide sufficient budget authority to cover projected benefit outlays. S ince HI is by law constituted as a "self-financing" trust fund, this fast-approaching bankruptcy date is forcing Congress and the White House to enact serious cost-saving reforms.

Or rather, it should be. The administration's proposed benefit swap would instead short-circuit HI's trust-fund discipline by shifting much of the cost of home health care, Medicare's fastest growing benefit category, to the SMI trust fund. Under SMI's tr ust-fund rules, bankruptcy is not an issue: The program's general revenue subsidy automatically rises to cover any difference between beneficiary premiums and program costs.

If this is a solution, one wonders why the White House stops there. Why not shift a lot more spending out of HI so that no actual cuts are necessary? While we're at it, we could, by the same logic, spare ourselves the trouble of reading the Social Securit y Advisory Council's report. Instead, we could make Social Security solvent by taking all retirees west of the Mississippi out of its trust fund and putting them in the general budget.

The administration maintains that its proposal is not as cynical as it sounds since home health benefits are more logically paid out of Medicare's physician trust fund than its hospital trust fund. But if sheer expediency were not the motive, why does thi s reform also short-circuit SMI's (weaker) trust-fund discipline? While beneficiary premiums are supposed to cover 25 percent of total SMI costs, home health benefits shifted into SMI would not be counted in setting premiums.

In truth, the only purpose of the proposal is to allow the White House to say that its Medicare plan would "put ten years on the trust fund." But as it turns out, the plan doesn't even do that. It would merely extend HI's solvency for six years from 2001 until 2007 -- a decade from today. That this could only be achieved by recourse to gimmickry is a measure of how far we still have to go in facing up to the needed reforms. After all, Medicare is a program that makes benefit promises spannin g a lifetime, and whose official definition of solvency is trust-fund balance over seventy-five years.

Beyond the Trust-Fund Charade

The administration's home health care proposal could have one positive -- if entirely unintended -- consequence. Such transparent finagling might one day unmask the whole charade of trust-fund accounting. It makes no difference to taxpayers or the economy whether an individual trust fund is technically solvent or not. The only fiscal bottom line is the net difference between total federal taxing and total federal spending.

For the time being, however, trust-fund accounting at least forces us to acknowledge some link, no matter how tenuous, between benefits paid and revenues raised. Until our political system adopts ironclad budget rules that guarantee a unified budget balan ce, now and in the future, we would do well not to flout the convention of trust-fund accounting. Yes, it may be artificial. But right now, it's the only thing we've got.


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