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Medicare’s Dirty Little Secret
It’s already insolvent.

President Lyndon B. Johnson (beside former president Harry S. Truman) signs Medicare into law, July 30, 1965.

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It’s something everyone knows, but no one wants to talk about: Medicare’s cash position makes Enron’s business model look downright reputable.

Medicare is bleeding cash — a fact disguised by creative accounting. According to Monday’s release of the 2012 Trustees Report, in 2011 Medicare took in $260.8 billion in payroll taxes and beneficiary premiums, but spent $549.1 billion in medical services. That means last year Medicare ran a $288.3 billion cash shortfall.

And 2011 wasn’t the exception; it was the norm. Since President Lyndon Baines Johnson secured passage of Medicare legislation in 1965, the program has run cash deficits every year except 1966 and 1974.

Advocates of the status quo argue that Medicare receives “general revenue transfers,” but that’s government-speak for raiding the Treasury to spend other tax revenues. It’s the dramatic use of general-revenue transfers that has hidden Medicare’s true insolvency from the public and masked Medicare’s contribution to the national debt.

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The annual release of the Medicare Trustees report offers a fleeting moment for adult conversations among policymakers about the program’s long-term trajectory. We must take advantage of this year’s moment and come to a bipartisan understanding that the Medicare program needs structural reform and not just nibbling around the edges.

To illustrate why structural reform is needed, consider what it would have taken to have had a positive Medicare cash-flow balance in 2011:

For Medicare Part A (hospitals), the cash deficit was $61 billion. To balance this deficit, payroll taxes on employers and workers would have to have been increased by 31 percent.

For Medicare Part B (physicians), the cash shortfall was $168 billion. To balance this deficit, seniors’ physician premiums would need to increase by 392 percent, meaning the annual physician premium cost to seniors would have risen from $1,198 to $4,687 — an increase of $3,499.

For Medicare Part D (drugs), the cash shortfall was over $59 billion. To balance this deficit, seniors’ premiums for prescription drugs would need to increase by 871 percent, meaning the annual drug-premium cost to seniors would rise from $372 to $3,250 — an increase of $2,878.



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