President Obama's Medicare Fantasies

Medicare is headed for fiscal ruin, and a new report shows that the administration's reforms aren't likely to help.

How bad is Medicare's fiscal picture? So bad that the program's Trustees are warning that the bad news they issued earlier this year about the program's finances is actually the upbeat scenario—and have once again created an "alternative" fiscal projection designed to show how dire the stakes actually are.

The federally run seniors' health insurance program will no doubt loom large in this year's presidential election. President Barack Obama is already running ads touting his administration's commitment to preserving and strengthening the program's finances. But what his ads don't mention is that the program's Trustees have made it abundantly clear that Obama's Medicare reforms are likely fantasies—and that the program is headed for fiscal ruin even if those fantasies miraculously come true.

The Trustees report predicted that the program's trust fund would hit insolvency by 2024. But that report necessarily assumes that various savings mechanisms and payment reductions called for by current law will actually occur—an assumption that the Trustees argue isn't all that likely. "In view of the very substantial uncertainty associated with possible changes to Medicare," the alternative scenario report notes, "readers should interpret the current-law Medicare projections cautiously". 

At best, the Trustees suggest, the savings in the 2010 health care law are aspirational: "The current-law projections should not be interpreted as the most likely expectation of actual Medicare financial operations in the future but rather as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved."

The Trustees summarize the new report's findings by noting that they are intended to "help to quantify and underscore the likely understatement of the current-law projections in the 2012 Trustees Report." Jason Schafrin, a Ph.D. health economist and consultant summarizes it more succinctly: "We're fucked."

The gap between the current law projection and the alternative is a result of wishful thinking: Current law is filled with savings that are implausible at best. The alternative scenario assumes that neither long scheduled physician payment reductions, productivity improvements assumed into ObamaCare's Medicare savings, nor spending caps imposed by the health care law's cost-control board will stick. The resulting outlook is bleak: "Medicare costs would rise to 6.5 percent of GDP in 2040 and 7.8 percent in 2085. Under the full scenario, in which adherence to the ACA cost-saving measures also erodes, costs would rise to 7.0 percent of GDP in 2040 and 10.3 percent in 2085."

Congress simply doesn't stick to scheduled health provider payment reductions, and that makes it harder to stay on budget. In 2011, for example, the Trustees' current-law prediction for Medicare part B expenditures in 2012 was $220 billion. The actual figure turned out to be about $247 billion. Congress once again passed a temporary override to a scheduled cut to Medicare's physician reimbursements, adding almost $27 billion to the annual bill. Meanwhile, the report notes that "measured productivity gains have generally been quite small," which suggests that the productivity improvements built into ObamaCare—and the savings they supposedly bring—may be overly hopeful.

Yet President Obama is trying to assure seniors that he's protecting the program by running ads touting his anti-fraud initiatives. "Medicare is personal," the ad says. "And to a president raised by his grandparents, it's personal too." By cracking down on fraud within the program, the Obama administration claims to have saved $4 billion.

With savings that small, the ad might as well have featured Obama searching his couch cushions for change to shore up the program's finances. Never mind that estimates suggest that health fraud in government programs exceeds $60 billion a year, or that the Government Accountability Office found that the program wastes $48 billion annually on "improper payments" to Medicare providers. Forget that the administration has already put on hold at least one component of its anti-fraud initiative after complaints from health providers. The scale of the program is so huge—within a decade Medicare spending is expected to cost over $1 trillion each year—that even the billion dollar savings Obama touts are essentially meaningless. This is like a field commander bragging about a new way to defend against mosquito bites while his troops are taking mortar fire.

Obama's new ad insists the president has a "personal commitment" to preserving the program. But the stark alternative scenario report from the program's Trustees reveals how hollow that commitment really is.

Peter Suderman is a senior editor at Reason magazine.