Medicare Election Season: Fact and Fiction

Program has become focus of debates over health reform, the scope of government, taxes, and deficits.

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Medicare, by nearly all accounts, has been a wildly successful healthcare program for older Americans. Begun in 1965, it has provided a steadily growing menu of health benefits at prices that consumers could not afford were it not for government subsidies and Medicare's market clout with insurers and healthcare providers to restrain their price increases.

But these rising expenses and the program's central role in health reform have brought it into the election-year crosshairs of both political parties. Democrats and Republicans often use the same numbers to support starkly different conclusions or, as likely, just misuse data to score points with voters. (We'll use President Barack Obama and Republican challenger Mitt Romney as the stand-ins for their parties here in future references.)

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It's not clear that all the attention being paid to Medicare is swaying voters. Many polls show that only a small percentage of the electorate is still undecided about their November vote. More likely, the focus on Medicare is aimed at boosting voter turnout by getting more of each party's solid base to polling booths.

As Medicare "facts" get batted back and forth over the political net in the coming weeks, it may help to keep in mind that future decisions for the program really hinge on a couple of big questions:

1. How much can we afford to spend on healthcare for Medicare beneficiaries and who will be spending the money?

2. Is the quality of healthcare delivered to seniors the best it should be or even the best we can afford?

Both campaigns have been tossing around the figure of $716 billion. That's the projected health reform cuts in certain Medicare programs that would occur over an 11-year period.

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Obama says the cuts will reduce waste and have already funded other improvements in Medicare, such as the expansion of free preventative healthcare services and big cuts in prescription drug prices. The savings also will support providing health insurance to more than 30 million Americans who don't have it. Romney says the cuts will hurt Medicare beneficiaries and will be restored when he wins the White House, overturns Obamacare, and reforms Medicare.

If you take a fuller look at Medicare, however, it becomes pretty clear that this $716 billion figure is both a small number and perhaps not even the right one to look at.

Medicare is really three big related healthcare programs: Part A for hospital coverage, Part B coverage for physician and other outpatient services, and Part D for prescription drugs (Part C, for Medicare Advantage insurance, is an alternative to Parts A and B.)

People frequently talk about the Medicare "trust fund." As with the Social Security trust fund, it has been funded with excess payroll tax collections over the years, and has built up a surplus that is being reduced due to rising healthcare spending and growing numbers of aging Americans receiving Medicare.

The Medicare trust fund, however, covers only Part A of the program. Parts B and D have no trust fund and are paid for largely from general revenues each year. This (along with Medicaid) is where healthcare's real impact on federal spending and deficits is taking place.

In its annual report, Medicare trustees provided this summary for 2011 program revenues and expenses:

Part A charges no premiums to Medicare beneficiaries. It had income of $228.9 billion, mostly from payroll taxes, and expenses of $256.7 billion. The trust fund made up the difference, thus further depleting its reserves. The fund is set to run out of money in 2024, the trustees project. Obama says, however, that without health-reform spending cuts (mostly in Medicare Advantage hospital spending), this fund would be exhausted in 2016.

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Part B received $57.5 billion in insurance premiums but spent $225.3 billion. The difference was paid for out of general revenues—$170.2 billion.

Part D received $7.7 billion in premiums but spent $67.1 billion. Again, nearly all of the difference—$52.6 billion—came from general revenues.

Total Medicare expenses last year thus were $550 billion, with the government footing nearly half that bill. Over the next 11 years, this deficit will dwarf the $716 billion figure. So whether these cuts are a good or bad thing, they don't begin to get us out of our spiraling entitlements deficits.

We have to reduce healthcare spending. We know this is possible. The United States spends way more on healthcare per person than other countries but does not get better results in terms of having a healthier society or one where people live longer. The challenge in cutting healthcare spending is akin to the old advertiser's lament: He knows half of his spending doesn't lead to more product sales—he's just not sure which half.

Making these larger and sustainable cuts is a long-term challenge. The more immediate decision that voters must confront in November is how much of our rising Medicare deficit should be paid for by Washington and how much should be shifted onto individuals. Fiscal experts in both parties agree that spending on defense and other government programs is being squeezed more and more each year by healthcare spending.

Obama's view of future fiscal policy is that health reform can restrain future healthcare cost increases and permit government to maintain important safety nets. Romney says the programs have caused the problem in the first place and that the best way to fix them is to reduce government's role and return responsibility and control (and a big piece of the price tag) back to individuals.