Payroll Taxes Cover About a Third of Medicare Costs

I get the impression that many Americans believe Medicare is financed like Social Security. They know that a portion of payroll taxes goes to Social Security and a portion goes to Medicare. So they conclude workers are paying for Medicare benefits the same way they are paying for Social Security benefits.

That isn’t remotely true, as new data from the Congressional Budget Office demonstrate.

In 2010, payroll taxes covered a little more than a third of Medicare’s costs. Beneficiary premiums (and some other earmarked receipts) covered about a seventh. General revenues (which include borrowing) covered the remainder, slightly more than half of total Medicare costs.

If you prefer to focus on just the government’s share of Medicare (i.e., after premiums and similar payments by or on behalf of beneficiaries), then payroll taxes covered about 40% of the program, and other revenues and borrowing covered about 60%.

In contrast, payroll taxes and other earmarked taxes covered more than 93% of Social Security’s costs in 2010, and that was after many years of surpluses.

The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don’t get payroll revenues; instead, they are covered by premiums and general revenues. But that distinction often gets lost in public discussion of Medicare financing.

As recently at 2000, general revenues covered only a quarter of Medicare’s costs. That share has increased because of the creation of the prescription drug benefit in 2003 and because population aging and rising health care costs have pushed Medicare spending up faster than worker wages. Over the next decade, CBO projects that premiums will cover a somewhat larger share of overall costs, while the general revenue share will slightly decline.

Note: For simplicity, I have focused on the annual flow of taxes and benefits. The same insight applies if you want to think of Social Security and Medicare as programs in which workers pay payroll taxes to earn future benefits. That’s approximately true for workers as a whole in Social Security (but with notable differences across individuals and age cohorts and uncertainty about what the future will bring). But it’s not true at all for Medicare.

The Fight over Medicare Double Counting

The recent double-counting dispute isn’t just about politics; it also reveals a flaw in budgeting for Medicare Part A.

Budget experts are waging a spirited battle over the Medicare changes that helped pay for 2010’s health reform. In April, Chuck Blahous, one of two public trustees of the program, released a study arguing that the Affordable Care Act (ACA) would increase the deficit by at least $340 billion by 2021, a sharp contrast from the $210 billion in deficit reduction estimated by the Congressional Budget Office (CBO).

Chuck bases his estimates on several factors, but the item that has garnered the most attention is his charge that the ACA’s spending cuts and revenue increases in Medicare Part A are being double counted: once to help pay for the ACA’s coverage expansion and a second time to improve the finances of the Part A trust fund, whose predicted exhaustion was delayed by several years.

Chuck notes that those resources can be used only once: They can either offset some costs of health reform or strengthen Medicare, but not both. He believes those resources will ultimately finance additional Medicare spending and thus can’t offset any health reform costs. For that reason, he concludes that the ACA would increase deficits, rather than reduce them.

That argument inspired a host of commentary from leading budget experts, ranging from denunciation to affirmation. See, for example, Jeffrey Brown, Howard Gleckman, Peter Orszag, Robert Reischauer (as quoted by Jonathan Chait), and Paul Van de Water, and a follow up by Chuck and Jim Capretta.

Why does this dispute exist? It can’t just be politics. If it were, we’d have double-counting disputes about every program. But we don’t. We thus need an explanation for why this debate has erupted around Medicare Part A, which provides hospital insurance, but not around other programs. Part A is not unique in controlling spending by a “belt and suspenders” combination of regular program rules (the “belt”) and an overall limit (the “suspenders”). Such budgeting also applies to Social Security, Medicare Parts B and D (which cover physician visits and prescription drugs), and the National Flood Insurance Program. The federal debt limit acts as “suspenders” for the entire budget. But none of those give rise to double-counting disputes.

That suggests that there is something unusual—perhaps flawed—about budgeting for Medicare Part A. To see what that is, it helps to boil the dispute down to two basic questions about programs subject to “belt and suspenders” budgeting.
First, can spending reductions or revenue increases in the program offset spending increases or revenue reductions in other programs? In short, can budget savings pay for other programs? Or must they stay within the program itself?

Second, would hitting the overall budget limit affect program operations? In other words, do budget savings extend the period during which the program can operate at full capacity? Or is the limit operationally toothless?

As shown above, policymakers have answered these questions differently for different programs (for further details, see the appendix).

This comparison reveals the unique feature of Medicare Part A: It is the only one of these programs that allows budget savings to pay for other programs and has a trust fund with real operational teeth. It alone answers Yes to both questions. That is why Medicare Part A is the only program that creates the possibility of double counting and suffers from the reality of a double-counting dispute.

Double counting isn’t possible in Social Security or the NFIP because budget rules require that savings stay in the program. It isn’t possible for the budget as a whole since there are, by definition, no other programs to fund. And double counting isn’t possible in Medicare Parts B and D because its trust fund does nothing to limit operations.

But double counting is possible in Medicare Part A. That happens whenever someone claims that the health reform legislation both reduces deficits and provides additional resources to Medicare Part A. I will leave it to others to adjudicate whether any health reform proponents committed that error. I will note, however, that every budget expert, including Chuck Blahous, agrees that CBO didn’t do so (its baseline ignores the trust fund, so savings reduce deficits and have no effect on program operations).

Bottom line: The peculiar budget rules for Medicare Part A make it possible for analysts, pundits, and policymakers—whether willfully or inadvertently—to double count budget savings in Medicare Part A. That needless confusion is a significant flaw. To correct it, Congress could adopt the budget practices it uses in Social Security, Medicare B & D, or the NFIP. In a follow-up post, I will examine the pros and cons of these alternatives.

 Appendix: How “Belt and Suspenders” Budgeting Works

Continue reading “The Fight over Medicare Double Counting”

Another Deficit Panel at the Milken Conference

A few hours after attending the “Attention Deficit” panel at the Milken Global Conference, I spoke on a panel about another deficit you may have heard about: “The Federal Deficit: What Options Are Really on the Table?”
My fellow panelists were:

Charles Blahous, Research Fellow, Hoover Institution

Peter Passell, Senior Fellow, Milken Institute; Editor, The Milken Institute Review (pinch-hitting for budget guru Alice Rivlin, whose flight from Washington didn’t cooperate)

Andy Stern, Senior Fellow, Georgetown Public Policy Institute; former President, SEIU

Moderator, Jim McCaughan, CEO, Principal Global Investors

Here’s a link to video of our panel; a bit more than an hour.

More on the Medicare Doctor “Fix”

 On Sunday, I expressed concern about Congress enacting a permanent Medicare doctor “fix” without paying for it. Yesterday, the Washington Post chimed in with similar concerns.

I have now written a longer version of my argument, which has been published by e21, a new think thank based in New York and Washington. My bottom line remains the same:

Thus, even as Congress struggles to enact one roughly $900 billion health bill, it also wants to hustle through a second $245 billion one. Moreover, Congressional leaders want to pass the permanent doctor fix without paying for it. All $245 billion would thus flow straight into our deficits.

For a nation running trillion-dollar deficits, such profligacy should no longer be acceptable.

When I say that e21 is new, I mean really new. e21 (short for Economic Policies for the 21st Century) opened its doors (well, its web site) yesterday. It’s mission statement is:

 We aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.  Drawing on the expertise of practitioners, policymakers, and academics, we will encourage a spirited debate about the way forward for democratic capitalism.  And we will do so in a manner that is accessible and engaging, in a way that appeals to both experts and non-experts.

I hope to contribute additional pieces to e21 in the future.

Why You Should Oppose the Medicare Doctor “Fix”

The Senate is preparing to take up a bill to implement a permanent “fix” to the rates that Medicare pays for physicians. That bill is a budget-buster, costing almost $250 billion over the next ten years. But Congress doesn’t want to pay for it. Everyone concerned about our budget situation should oppose this latest example of Washington profligacy.

The Senate is preparing to take up a bill to implement a permanent “fix” to the rates that Medicare pays for physicians. That bill is expensive, costing almost $250 billion over the next ten years. But Congress doesn’t want to pay for it. Everyone concerned about our budget situation should oppose this latest example of Washington profligacy.

The underlying mechanics of the issue are arcane, but the fundamental political and budget issues are simple:

  • Under current law, the rates that Medicare pays physicians are scheduled to decline by more than 20% at the end of the year. No one, least of all the doctors, wants this to happen. So Congress is looking for a “fix”.
  • This problem is not new. It began in 1997, when Congress decided to limit the amount spent on physician services in Medicare. The idea was that spending above the target would be offset by reductions in physician payment rates in the future. However, Congress has repeatedly flinched from implementing those reductions. Moreover, Congress often decided to avoid near-term reductions by promising to cut payment rates even more in the future. That’s why there’s an accumulated “debt” requiring a 20+% cut in rates now.
  • With encouragement from the President, many Congressional leaders want to eliminate this issue once and for all by enacting a bill that would provide payment increases to doctors, rather than dramatic cuts, at a cost of $245 billion over the next ten years (and unmeasured amounts in the years beyond).
  • And here’s the kicker: they want to spend that money without paying for it. So all $245 billion would flow straight into our deficits. For a nation running trillion-dollar deficits, that’s unconscionable.

Proponents of this profligacy will argue that (a) it’s essential to fix physician payments once and for all and (b) doing so now is no different from the doctor fixes Congress has enacted in previous years.

Both of those arguments are wrong.

Continue reading “Why You Should Oppose the Medicare Doctor “Fix””

A Grim Budget Outlook

As President Obama has said, the budget really is something to lose sleep over.

Current deficits are enormous due to the weak economy, fiscal stimulus, and the costs of fighting the financial crisis. But the long-run outlook is even scarier, with Medicare, Medicaid, and Social Security pushing spending up much faster than tax revenues.  The result is a tsunami of debt.

How much debt?

Well, the folks at the Congressional Budget Office have just released their latest projections of the long-run budget situation. Here is the key graph:

CBO Long Run

If current trends continue, CBO projects that the level of debt, relative to the size of our economy, will grow to unprecedented levels — and keep going. Within a few decades, the ratio of debt-to-GDP could surpass the peak of World War II.

That level of debt is not sustainable. Continue reading “A Grim Budget Outlook”