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The Medicare Philosophy

The Medicare program is a constant topic of discussion and debate in our current day and age. In 2012, there were just under 50 million Americans on Medicare. That translates to 1 out of 6 Americans relying on the government to direct their medical care.

Spending just under $500 billion annually, Medicare accounts for 14% of the federal budget. It is clearly an important issue both for individuals as well as the government itself. But focusing only on the here and now does not really fully explain the situation we are in. To really understand the Medicare system and how it started to we need to look back over its history.

Medicare was signed into law under President Lyndon Johnson in 1965. The original Medicare philosophy was to serve as a safety net for the elderly and reduce the amount spent by seniors on medical care. Reports indicate that half of the people over age 65 did not have health insurance in 1965. In 1965 the life expectancy was 67 years for men and 70 years for women. Today life expectancy is 76 and 79 for men and women. Interestingly, many are not aware that the “Medical Assistance for the Aged” program, commonly known as the Kerr-Mills law, was signed into law just 5 years earlier, providing financial assistance to 70% of America’s elderly before Medicare was enacted.

Medicare Part A is paid for with a payroll tax. Initially this was a 0.35% tax on earned wages up to $6,600, about the average family income in 1965. Currently the Part A tax is 2.9% (half paid by worker, half paid by employer) and has no upper limit. Those earning more than $250,000 a year pay an additional 0.9% tax, totaling 3.8% of income. That is more than 8 times the original tax rate; 10 times more for high wage earners.

The cost of the program quickly surpassed estimates and has continued to do so for the past 50 years. Estimates in 1965 projected annual spending of $9 billion by 1990. Actual cost in 1990 was $66 billion.

Medicare Part B is funded by a combination of individual premiums (25% of the total cost) and the general federal budget (75% of the cost). Most of the spending in Part B is taxpayer money. The average annual spending on Medicare beneficiaries is about $10,000. The average premiums paid by Medicare recipients is $104 per month, with a $147 deductible, totaling $1500 spent by the individual.

Medicare was never intended to be a pre-paid insurance program, even though that is how it is often described. The Medicare philosophy has always been to pay for then-current beneficiaries with the taxes paid by then-current workers. Between the payroll tax for Part A and the general tax for Part B, it is estimated that in 1965 there were 4.5 workers supporting each Medicare beneficiary. Currently there are closer to 3 workers per Medicare enrollee and that number is projected to drop to 2.3 in the next 15 years.

What difference does all this make?

From its very beginning Medicare has been a tax-payer supported system. It was never designed to be a self-sustaining program. It requires external funding because the benefits it promises to the elderly exceed the payments into the system over that individual’s life, even with compounded interest. We are approaching the point at which something has to give. Our federal spending overruns our tax income every year and our debt limit has been reached many times and simply pushed higher each time. The only solution is to cut back the benefits the program can provide at some point. It may be by further reducing the amount doctors or hospitals are paid for the services they provide. It may be shifting more of this cost to the beneficiary. It may be rationing care based on age or health status. It may be restricting access to costly treatments. Pretending that these changes are not in our near future is denying that this problem exists. Failing to come up with an alternative, a solution, is irresponsible and invites greater damage to those relying on this program when it eventually fails.

What is Wrong with It?

Fundamentally, what is wrong with Medicare? Is it simply underfunded? Yes, there is not enough money in the program to satisfy demand. Is our demographic shift, with the Baby Boomers now entering the program to blame? Absolutely, the shift in tax-paying workers to benefit-receiving retirees is straining the system. Is fraud and abuse costing the program billions of dollars? Perhaps, but previous efforts to extinguish fraud have not produced the promised savings under any administration. Is the cost of medical care simply too high? Yes, but that answer is not as simple as it may sound.

While all of these factors influence the program, I do not think any of these single issues is at the heart of what is wrong with Medicare. Ultimately, the problem with Medicare is that the people using Medicare to get the medical care they need are spending someone else’s money. It is always easier to spend someone else’s money. If you are not paying for the meal, you tend to order differently off the menu. If you are not paying for the gas, you tend to drive a little differently. If you are not paying for the air conditioner, you tend to pay less attention to open doors and windows. Not paying directly for something tends to alter our perception of its value. It becomes easy to over-consume and be downright wasteful when you don’t feel each additional cost in the process.

What is the Solution?

Simply put, we need to return to the days of individuals spending their own money. I know this sounds extraordinarily simple but I really believe it is that simple. I don’t expect this to be an overnight solution, nor do I expect that it will handle every possible difficulty. But fundamentally, when people are spending their own money, they will make decisions about how to spend their money based on what they value most. Some will spend it on food, others clothing, some vacations or an automobile. Some will want medical care while others want to travel to visit family. Whatever the individual wants or needs, allowing expecting people to spend their own money will result in less waste and a return to individual freedom and responsibility. Charity will return as a means of caring for the needy and it will come directly from those providing the care, instead of through a government mandate or covert redistribution policy.