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New Forecast Has Medicare Going 'Broke' By 2019

  • March 23rd, 2004

Costs associated with the new Medicare law have helped push up the date that the Medicare trust fund will go broke to 2019 unless changes in the program are made, according to the Medicare Trustees' Annual Report. This is seven years sooner than what the trustees projected last year.

The trustees also warned that Medicare will have to begin dipping into its trust fund this year to keep pace with expenditures, nine years earlier than previously predicted.

The good news is that the projections for Social Security's solvency remained unchanged: the program is sustainable at least until 2042.

The Medicare trust fund supports Medicare Part A, which pays for hospital, nursing home, short-term home health, and hospice care. It does not pay for Medicare Part B (physician and other outpatient services) or the new Medicare drug benefit, which are funded by other revenue sources.

A major reason for the earlier insolvency date -- accounting for two of the seven years taken from the life of the fund -- are the massive payments to managed care companies contained in the new Medicare law. These payments, aimed at helping managed care plans increase their attractiveness to wary Medicare beneficiaries, will inflate Medicare's costs by about $46 billion over the next ten years. The government projects that private managed care plans will cost taxpayers more than traditional Medicare for the foreseeable future.

How concerned should you be about Medicare's day of reckoning in 2019? "Don't panic," advises economist Paul Krugman. Writing in The New York Times, Krugman says that Medicare is "not like a private health plan that will go belly up when it runs out of money; it's just a government program, albeit one supported by a dedicated tax. Nobody thinks America's highways will be doomed if the gasoline tax, which currently pays for highway maintenance, falls short of the system's needs '” if politicians want to sustain the system, they will. The same is true of Medicare. Rising medical costs are a very big budget issue, but 2019 isn't a drop-dead date."

The trustees' report, by the way, is based on the estimates by Medicare actuary Richard Foster '“ the same actuary who says he was forbidden by the Bush administration from revealing the true costs of the new Medicare law until after Congress had voted on it.

Infinite Projection

Rather than limit their projections to 75 years, the trustees took the unusual step of projecting the estimated shortfall for both Medicare and Social Security on an "infinite horizon." They found that the combined shortfall for both programs will be $72 trillion, which takes into account "not only people who are participating today, but all future generations who will pay taxes and draw benefits."

Several analysts and Democratic congressional aides said that by employing the longer time frame Republicans were trying to create a sense of crisis in an effort to reduce the government's role in Medicare and Social Security in favor of private investments.

Alluding to these alleged scare tactics, Robert M. Hayes, president of the Medicare Rights Center, a consumer group, said that, "Medicare is no closer to insolvency than the Department of Defense. Since its origin Medicare has been funded from the same tax revenue as the Army, Navy and Marines."

"The only thing to fear," Hayes added, "is the President or Congress breaking faith with our 40-year commitment to ensuring health care for older Americans."

The Center on Budget and Policy Priorities has two online papers discussing the trust fund solvency issues: "Understanding The Social Security and Medicare Projections," and "Misleading Claims about New Social Security and Medicare Projections."

For an article on the trustees' report in The New York Times, go to: http://www.nytimes.com/aponline/national/AP-Medicare-Social-Security.html?hp (Free registration required and article may no longer be available free of charge.)

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Last Modified: 03/23/2004

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