Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Buying Out Your Medicare?

The public is vaguely aware there is a problem with Medicare indebtedness, but for the most part this issue is swept aside, for fear agitation might injure the chances of funding healthcare for those of working age. The size of this debt is not well known, but can be guessed at by realizing Medicare costs are 50% borrowed. The current CMS data show a line for contributions from the general fund, equalling 50% of the total. Because cost accounting for government accounts has its special features, inter-agency transfers are referred to as assets. It's a debt, all right, and a large part of it is owed to the Chinese. For whatever reason, Treasury debt is entirely "general obligation", so it is not usually possible to tell from Treasury debt, how much is assigned to particular debts. They would have to be totalled from Medicare annual reports, which are not generally available for much of the past. So we don't -- right now -- know how much we owe foreigners for Medicare debts; but it is considerable, very likely going back to the days when deficits began to appear. That gives me a choice: I can keep quiet about the subject, or I can conjecture. I choose to conjecture.

Some, maybe all, of the transfer from general taxes in the latest year to Medicare, was borrowed. Medicare started in 1965, but during the early years the receipts from payroll deductions were larger than the expenses of the Medicare program. But when the program was fully underway, it ran a deficit. For how many years, and for what amounts, is only a guess. But I assume guessing the debt to be equal to a full year of Medicare expense, is large enough to make the point I wish to make, but may well be larger. For present purposes, let us assume the existing debt is equal to a full year's cost of Medicare, which we do know is 549.1 billion dollars. This guess is selected for illustration because it is large enough to cause alarm, but is probably on the small side. I hope it will provoke some official figure to be released, and sincerely hope my own proves to be too large..

Because, if it proves close to the guess, it presents a future problem for paying off the debt, which would actually be worse than the healthcare cost now under such heavy debate. The past indebtedness is currently not under debate, and is still getting worse. The public, including my colleagues in the medical profession, often point to Medicare with admiration. Since everybody likes a dollar for fifty cents, that's perfectly natural. And so it is also perfectly natural for elected officials to treat the matter of replacing Medicare as if it were the "third rail of politics." Just touch it and you'll be dead. That's also fair play, until it is proposed the whole medical system of the country be covered with a "Single Payer System", which is a fancy way of proposing everything should be funded like Medicare; and that's just too much.

So I propose, discomfiting friend and foe alike, that we buy our way out of this problem by allowing the public to buy its way out of Medicare. One by one, as they approach the 65th birthday, they should have the opportunity to relinquish Medicare, by depositing $80,000 in a Health Savings Account. Assuming 10% compound income return (see Chapter Four), $40,000 should generate $433,000 by the age of 91, which I assume to be the average longevity in a few years. By taking a guess at the size of the debt, the remaining $40,000 would throw off an additional $433,000 for paying it off. With 25 million Medicare recipients paying that much, let's hope it is more than adequate right now, although it will clearly become inadequate if we delay. These numbers ought to seem like a bargain to the public, and they certainly would seem like a bargain to the government. If there is any other proposal for managing this debt, we have yet to hear it. That's probably because of "third rail" concern, but unfortunately it may also reflect there is no other solution to talk about.

Issues and Problems In the first place, $40,000 at 10% will only yield $202,000 by age 83, the present average longevity. It will slowly grow, as will the medical expenses from 83 to 91. The debt is already too conjectural to justify more precision, but a decade or so is not unusual for oriental negotiations. Sooner or later, we must expect this progressive longevity to flatten out, and make the problem harder to solve.

In the second place for a long time to come, people arriving at their 65th birthday will have a history of payroll deductions when they were young. This will eventually dwindle down, but it begins as a quarter of Medicare costs, and must be returned as part of the buy-out. Meanwhile, persons older than 65 will have fulfilled their payroll deduction, and are paying annual premiums, which also equal a quarter of Medicare costs. This seems to be approximately prorated, so only the payroll deduction is owed these people during the transition.

And to go on, there will surely be medical developments. Some of them may raise costs, some lower them, and all of them summarized by a hoped-for cure for cancer, which may raise costs or lower them, more likely raising them before eliminating them. Once the discovery is made and announced, its price will be known, and appropriate adjustments demanded. For this and a host of similar issues, only a scientific body with the power to adjust prices can be expected to make the appropriate response with mid-course corrections. Given the present affection of the public for subsidized Medicare, it appears likely, voluntary buy-outs will be a slow and protracted process. They should provide ample time for basing reasonable adjustments to what would be mainly favorable developments.


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