The ugly math of Medicare





NEW YORK (CNNMoney) -- House Budget Chairman Paul Ryan's 2012 budget resolution turned the floodlights on Medicare, the health care program for seniors that is projected to take increasingly bigger bites out of the federal budget in the coming decades.

Ryan's proposals for overhauling the program are dramatic. Democrats claim they will dismantle it. Ryan claims they will save it.

Love or hate his ideas, though, they are sparking a necessary debate. The ugly math suggests Medicare is unsustainable in its current form.

Medicare is financed through a combination of payroll taxes, premiums and general revenue. The problem is that spending has been growing faster than the economy and is projected to do so indefinitely.

The reasons for that are simple: The number of people expected to enroll in the program will surge as the population ages and health care costs continue to grow far faster than inflation.

In just the next decade, the Congressional Budget Office estimates, enrollment in Medicare will grow by a third and spending per enrollee will jump by 50%.

Between 1975 and 2010, the number of enrollees doubled to 47 million, and the real cost per enrollee quadrupled, according to data from the Centers for Medicare and Medicaid Services, the agency that runs the program.

By 2040, Medicare will cover 88 million people and the cost will be nearly three times higher than in 2010.

Not surprisingly, payroll tax revenue and premiums aren't keeping pace with the program's increasing costs. And that means the draw on federal coffers will grow larger barring any policy changes.

To wit, in 1975, the program's income from revenue and premiums covered 69% of total Medicare disbursements. In 2010, they covered 40%. By 2040, they'll only cover 30%.

So how to fix it?

Figuring out how to make the program's finances sustainable over time while continuing to provide seniors with adequate coverage and quality care is difficult.

The House Republican budget resolution proposes converting Medicare from a fee-for-service program into a "premium-support" system for everyone under 55 today. When they become seniors, they would choose from a Medicare-approved list of private insurance plans and the cost of their chosen plan would be subsidized in part by the federal government.

The plan would also gradually raise the Medicare eligibility age from 65 to 67 by the 2030s.

The changes would reduce federal health spending commitments and make them more predictable, according to the CBO.

But the agency also said "most elderly people would pay more for their health care than they would under the current Medicare system." And they would assume greater financial risk if their health care needs turn out to be greater than expected.

Robert Reischauer, president of the nonpartisan Urban Institute and a trustee of the Social Security and Medicare Trust Funds, commends Ryan for coming up with an overall debt-reduction plan that he characterized as "significant" and "serious."

But the burden Ryan's Medicare proposals would shift to enrollees in the program concern him.

For one thing, Reischauer said, Medicare today "is not a particularly generous program. Most seniors buy or get supplemental coverage."

Currently, Medicare covers half of seniors' health costs, said Tricia Neuman, director of the Medicare Policy Project at the nonpartisan Kaiser Family Foundation.

She and Reischauer worry that proposals like Ryan's presume that seniors should "have more skin in the game."

"People in Medicare already have plenty of skin in the game," Neuman said. "They won't have a great capacity to absorb higher costs."

They contribute to the program first as workers through their payroll taxes, then as seniors through premiums. Neuman noted, too, that out-of-pocket spending on health expenses is already rising for people on Medicare, with one in four now spending at least 30% of their incomes on health expenses.

Neuman and Reischauer both note that making Medicare sustainable will require more than curbing federal payments to seniors and increasing cost-sharing. It will require figuring how to bring health care costs down generally.

Ryan's plan, however, calls for the repeal of the entire new health reform law, which includes a number of delivery system changes that potentially may reduce Medicare costs and improve care, such as reducing reimbursements for hospitals with high infection rates.

"These seeds haven't really been planted yet," Neuman said.

The deficit watchdog group Concord Coalition in a statement commended Ryan for putting out an overall plan that "fits the magnitude of the fiscal challenge we face."

But it, too, noted concern that his efforts to control Medicare costs are not paired with efforts to control health costs. Without both, seniors' ability to afford health care will go down over time.

"While setting spending targets for federal health care programs provides an incentive for efficiency, and increasing out-of-pocket costs for retirees provides an incentive for economizing, we will still need cost controls, delivery system reforms, and research on best practices to have any chance of reaching those targets," said Josh Gordon, Concord's policy director.