Direct Medicare's Dwindling Resources to Those Most in Need

Medicare's trustees released their annual report this week. It paints a bleak picture of the program's future.

Total spending on the healthcare entitlement for seniors exceeded $1 trillion last year, the trustees note — some $12 billion more than the program took in. If current trends continue, Medicare's Part A hospital insurance trust fund will run out of money in 2036.

Remarkably, these projections represent a considerable improvement over last year's report, which put the date of trust-fund depletion at 2031. And yet, even this progress doesn't change the fact that Medicare is on a short road to fiscal catastrophe.

What kinds of reforms could put Medicare back on the path to solvency? A new study by the Paragon Health Institute's Joe Albanese offers one worthwhile answer: means-testing. It's long been nonsensical that wealthier Americans receive the same taxpayer-funded Medicare benefits as less well-off patients.

Aside from being financially prudent, asking patients of greater means to shoulder more of their own healthcare costs is only fair.

Since its inception, Medicare has been a universal entitlement. All Americans 65 and older, as well as those living with disabilities, can sign up for state-funded insurance coverage through the program.

Defenders of this arrangement — and the seniors who benefit from it — argue that people pay dedicated taxes that fund the program during their working lives. The benefits they receive as retirees are a form of deferred compensation, so to speak.

But that's long been an accounting fiction. The government doesn't really hold people's taxes in trust and then pay for their health care when they retire. It uses those taxes to pay for Medicare for the current generation of retirees.

Medicare beneficiaries do have to pay modest premiums for coverage under Part B, which covers physician services, and Part D, which covers prescription drugs. The program is not free in retirement, as many Americans think.

In addition, people are living longer than they did when Medicare was established in 1965 as part of President Lyndon Johnson’s "Great Society" program. And the cost of health care has increased dramatically. So people are claiming much more in Medicare benefits than they ever paid in taxes to fund the program.

According to the Paragon paper, an individual with an average income who turned 65 in 2020 will receive $176,500 more in benefits from Medicare than they paid into the program over the course of their career. By 2030, that number will increase to $248,500.

There are some seniors who pay higher premiums for coverage under Parts B and D because they have high incomes. But they're not very numerous — they make up just 8% of Part B's beneficiaries this year.

Moreover, the income cut-off for these higher premiums is high — $103,000 for a single patient and $206,000 for a married couple.

At a time when Medicare is teetering, in other words, the program continues to devote massive amounts of public money to helping patients with six-figure incomes.

The Paragon paper suggests several practical strategies for addressing this glaring flaw in the program's structure.

The first would simply lower the existing income threshold for means-testing in Part B and Part D such that higher earners no longer enjoy the same degree of federal largesse as genuinely needy patients.

Another approach would reimagine the rubric by which Medicare decides which patients ought to pay higher premiums. Right now, what little means-testing exists in Medicare is based on annual income, a measure Albanese observes "is likely not the best way to determine a household’s ability to pay additional premiums."

Among other things, basing premiums on annual income discourages retirement savings, "as seniors face an implicit marginal tax on these savings if more retirement income leads to higher premiums." Using lifetime income instead of annual income, as Social Security does, would avoid this perverse incentive.

Finally, Albanese proposes extending means-testing to the program's Part A coverage for hospital insurance. This might take the form of higher premiums for higher-earning patients but could also apply to deductibles and copays.

Given Medicare's acute and worsening money troubles, as well as the toll it exacts on America's fiscal health, it's about time we focus the program's dwindling resources on patients who most need the help.