Medicare’s Costs and Funding Challenges

The costs of Medicare doubled every four years between 1966 and 1980.[47] According to the 2004 “Green Book” of the House Ways and Means Committee, Medicare expenditures from the American government were $256.8 billion in fiscal year 2002. Beneficiary premiums are highly subsidized, and net outlays for the program, accounting for the premiums paid by subscribers, were $230.9 billion.

Medicare and Medicaid Spending as % GDP

Medicare spending is growing steadily in both absolute terms and as a percentage of the federal budget. Total Medicare spending reached $440 billion for fiscal year 2007 or 16% of all federal spending and grew to $599 billion in 2008 which was 20% of federal spending.[48] The only larger categories of federal spending are Social Security and defense. Given the current pattern of spending growth, maintaining Medicare’s financing over the long-term may well require significant changes.[49]

According to the 2008 report by the board of trustees for Medicare and Social Security, Medicare will spend more than it brings in from taxes this year (2008). The Medicare hospital insurance trust fund will become insolvent by 2019.[49][50][51][52] Shortly after the release of the report, the Chief Actuary testified that the insolvency of the system could be pushed back by 18 months if Medicare Advantage plans that provide more health care services than traditional Medicare and pass savings onto beneficiaries were paid at the same rate as the traditional fee-for-service program. He also testified that the 10-year cost of Medicare drug benefit is 37% lower than originally projected in 2003, and 17% percent lower than last year’s projections.[53] The New York Times wrote in January 2009 that Social Securityand Medicare “have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run.”[54]

Spending on Medicare and Medicaid is projected to grow dramatically in coming decades. While the same demographic trends that affect Social Security also affect Medicare, rapidly rising medical prices appear a more important cause of projected spending increases. TheCongressional Budget Office (CBO) has indicated that: “Future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.” Further, the CBO also projects that “total federal Medicare and Medicaid outlays will rise from 4 percent of GDP in 2007 to 12 percent in 2050 and 19 percent in 2082—which, as a share of the economy, is roughly equivalent to the total amount that the federal government spends today. The bulk of that projected increase in health care spending reflects higher costs per beneficiary rather than an increase in the number of beneficiaries associated with an aging population.”[55]

[edit]Financial viability

Richard W. Fisher, President of the Federal Reserve Bank of Dallas has remarked that in order to “cover the unfunded liability” for the Medicare program today over an infinite time horizon,[clarification needed] “you would be stuck with an $85.6 trillion bill” which is “more than six times the annual output of the entire U.S. economy”, and noted that “Medicare was a pay-as-you-go program from the very beginning.”[56]

The present value of unfunded obligations under all parts of Medicare during FY 2009 over an infinite horizon is approximately $36 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall assuming the program continues indefinitely.[57]


I am in total agreement that Medicare and Social Security cost pose daunting obstacles to support of the elderly at a time when reducing those cost numbers would be the prudent thing to do.  However, to do so by the means proposed in the Ryan Paul Budget proposal is ludicrous!

I see the inclusion of all citizens under a Single Payer Health Care Plan as the ultimate solution.  The Single Payer Plan spreads the cost of health care over a larger group of subscribers, requires less in subsidies from the government, and with regulation of pharmaceuticals, fees, and test, could be the long term solution.

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