What is Medicare, Really?

Excerpts from an article entitled, “The Economics of US Healthcare ” by Gilbert G. Berdine, M.D.

Unlike the tornado, not all healthcare costs are insurable events. There is a current recommendation for people aged 50 years or more to have a screening colonoscopy every ten years. This leads to earlier detection of colon cancer and greater likelihood of curative therapy. While a screening colonoscopy might be a very good idea, the age of 50 is not an insurable event. There is no risk to share. If one desires a colonoscopy at age 50, one must save the required funds before the 50th birthday. Any attempts to cover screening procedures by insurance are schemes to socialize cost.

The promotion of Medicare as health insurance for the elderly has led many Americans to expect that health insurance should cover all their healthcare costs including costs that are not insurable. The only way existing beneficiaries profit by inclusion of noninsurable costs is to force people with lower risks to join their insurance pool. The end result of this process is the demand for universal coverage that covers everything related to healthcare.

Medicare is called the third rail of politics. It is a very popular program with its beneficiaries. An examination of the costs and benefits to beneficiaries makes it clear why it is so popular. The Medicare tax is 1.45 percent of all income. The employer pays the same amount as an additional tax (the self-employed pay 2.9 percent to cover both employee and employer portions). A Medicare beneficiary would have to earn over $358,000 as an employee for the Medicare payroll tax to cover his or her average Part A benefit of $5,205.

According to the Census Bureau, in 2009 the mean income for persons 65 years or older was $29,718. The median income for this group was $19,167. As a group, the elderly pay $430.91 in premium for their Part A benefit of $5,205. Half of this elderly group paid $277.92 or less. The socialization of healthcare costs for the elderly via Ponzi finance has led to a national mythology of health insurance: Americans expect to pay less than $300 in “premium” for over $5,000 of healthcare.

Medicare has three major components. Part A pays for hospital and other inpatient services. Part B pays doctors’ fees and other fees for outpatient tests and procedures. Part D is the prescription-drug benefit. Part A is paid for largely by the Medicare payroll tax.

There is a common misconception that Medicare taxes pay for all Medicare services. Some Medicare beneficiaries pay an optional Part B premium to receive Part B benefits. This premium is only 25 percent of Part B income and only 27 percent of Part B expenditures. Medicare Parts B and D are both financed largely through general revenue. General revenue was the source of $211.7 billion of Medicare’s total income and expenditures. That is a lot of money even by the standards of the US Congress in 2011.

The Medicare trustees gave a warning about the coming bankruptcy of Medicare. This warning was based on the negative $0.7 billion in the Medicare trust fund. The trustees make projections about when the trust fund will be depleted. Some of the assumptions made for this projection seem wildly optimistic. One example is the trustees’ projection that the growth in expenditures will average 2.98 percent to 2019. The historical data show growth in expenditures of 12.81 percent since 1970 and 8.46 percent since 2000.

A number of people, including the former US comptroller General David Walker, have warned about Medicare’s unfunded liability. This liability is due to the demographics of the baby boom. As the baby boomers retire, they will be expecting payments. Income into Medicare will be insufficient to make these payments. The unfunded liability is the amount of money that is necessary to add to the current trust fund to ensure these payments can be made. The size of the unfunded liability depends on economic assumptions, and estimates range from $50 trillion to over $100 trillion. Regardless of which assumptions are used, it is clear that the money will not be there.

Read the full article.

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