May 21, 2013
Written by Andrew Szabo
Thursday, 12 May 2011 00:00
In this third installment of our series on government entitlement programs, let’s turn to Medicare.
The way Medicare is financed is a hodgepodge. Part A is funded by employee payroll contributions, which in turn are funneled to the Medicare Hospital Insurance Trust Fund (“HI”). Part B is funded by general revenues and by participant premium payments, which are directed to the Medicare Supplementary Insurance Trust Fund. As to Part C, Medicare pays a fixed amount per covered individual into such Advantage plans. Contributions are made from both trust funds to the private company providing the plan, which also receives money from its participants’ contributions. Part D is funded by a combination of general revenues, state contributions and participant premiums. Lower income people may qualify federally for Extra Help, or at the state level, for Medicare Savings Plans.
Medicare does not contain protection against catastrophic uncovered expenses or put a limit on out-of-pocket costs, so many individuals further purchase private supplementary insurance, nicknamed “Medigap.”
A recent Gallup poll asked if participants believe Medicare and Social Security costs are creating a “crisis” for the federal government. Thirty-four percent responded “already creating crisis,” another 10% foresee a crisis within 10 years, 19% within 10 to 20 years, 4% more than 20 years, and only 7% “not for the foreseeable future.”
The HI Trust Fund has faced problems with solvency almost since inception. The Patient Protection and Affordable Care Act (“ACA”) of 2010 extended the officially projected date of HI insolvency from 2017 to 2029. However, examined more carefully, this improvement is based primarily on projections of greatly increased health care productivity, which may never be realized.
As chairman of the Budget Committee of the House of Representatives, Paul Ryan has proposed that everyone now 55 or older should get the existing Medicare plan, while those younger would receive vouchers toward the purchase of private insurance. This proposal created uproar, and many of his Republican colleagues have backed away from it.
For those eligible for Medicare, several features could become less attractive over time. Required contributions are likely to increase, deductible amounts may increase, and allowable expenses for medical procedures may decrease, which could lead more doctors to decline participation in the program and to a decline in quality of care. Perhaps, too, the age of eligibility will need to increase (on a gradual basis).
Andrew Szabo CFA is managing director of NewOak Financial Solutions LLC. Questions, please contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
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