Medicare: Things May Be Worse Than You Think.

So far, no one’s talking about it, either.

Jim Lorenzen, CFP®, AIF®

Don’t look now, but there are major real problems ahead for Medicare.

And we’re not talking about the “down the road” distant future.

Medicare was signed into law fifty-five years ago and covers more than 62 million Americans.  The are four parts:   Part A (hospital insurance), Part B (outpatient services), and Part D (prescription drug coverage).   Medicare Advantage comes under Part C, which I wrote about earlier.

Parts B and D are funded through collected premiums and the government’s general revenue fund.  Part A is funded by the Hospital Insurance Trust Fund (HI) and covers in-patient care.  That trust fund is funded by payroll tax revenue and requires 10 years’ worth of qualified work credits.  Like any other budget, income has to exceed expenses for the program to survive.

But, it hasn’t worked out that way.  Income hasn’t kept up with the payouts.  The depletion has been going on for years and the HI trust is expected to be exhausted by 2026.  That’s only five years away.  If that happens – and it just might – the HI Trust will be able to pay out only about 90% of Part A expenses. 

What does that mean?  It means a lot of physicians may just quit accepting Medicare insurance.  

President Biden’s plan for Medicare changes

The President has talked about two changes he wants to make; unfortunately, neither addresses the HI Trust shortfall.

1. Allow the federal government to negotiate drug prices with the drug companies.

Part of the deal President George W. Bush made with the drug companies in passing the Medicare Modernization Act was that the federal government would not negotiate drug prices.  This has come back to haunt the U.S, as drug prices have escalated dramatically.   Higher drug prices have not only cost the Medicare program more—drug prices have increased to about $97 billion in 2019 from about $44 billion in 2006—they also cost Medicare beneficiaries thousands of dollars in out-of-pocket spending, especially for high-cost specialty drugs.

Allowing the federal government to negotiate directly with the pharmaceuticals on price would save the program an estimated $456 billion between 2023 and 2029, according to the Congressional Budget Office. The drug makers claim they need these revenues for research and clinical trials. Biden’s healthcare plan would also allow people to buy select prescription drugs from other countries. This would provide for a more competitive marketplace that should also effectively lower prescription drug pricing.

Biden’s Medicare plan would prohibit drug makers from raising the price of their prescription drugs faster than the rate of inflation as a condition of Medicare participation.  Violators would face a tax penalty.

To succeed, however, the federal government needs negotiating clout – and that’s where the shell-game comes in.

2. Lower the Medicare eligibility age to 60.

This step would cover those between age 60 and 64, which would provide an additional 18- 25 million people the option of going on the program.  Not all would enroll, of course.  Of the 10-14 million who have employer coverage, some would likely keep it.

Why lower the age and add people to the program?   The more people enrolled in Medicare, the more clout the federal government has in negotiating drug prices, as well as negotiating prices with hospitals and many outpatient services.  Since those between ages 60-64 have less medical care costs than older patients, the average cost per patient would drop.

But, all that advantage comes with a cost:  about $200 billion over the next decade, depending on what other reforms are made. 

While the program is popular with many Americans, it will face an uphill battle.  Hospitals stand to lose billions of dollars in revenue due to Medicare’s lower fee structure.  Medicare reimbursement rates for hospital patients average about half what commercial or employer-sponsored insurance plans pay… and the American Hospital Association is one of the biggest lobbies in Congress.

Back to the HI Trust

There’s nothing about this in President Biden’s plan.   Campaign rhetoric is always hot from the firebrands, both on the right and left.  After all, it’s the base that goes out, rings the doorbells, and gets people to the polls.  While the Democrats hold a majority in both chambers (the V.P. has the tie-breaking vote in the Senate), neither chamber has a 2/3 supermajority – meaning any significant legislation will have to be bipartisan in order to pass.   They are also keenly aware of down-ballot results at the grass-roots level:  The Republicans picked up 10 seats in the House (Democrats lost 9 along with 1 independent).  In addition, Republicans picked up 1 state governorship bringing their total to 27, vs. 23 for Democrats.

After the political rhetoric dies down (yes, Virginia, I’m dreaming) the course may be more moderate than many on either side expect. 

With COVID-19 on the front burner, this may take time… though not much is left.

Jim

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.