Philadelphia Reflections

Medicare Re-Arrangement

Let's see what we have to work with, in Medicare. The first step is to set the boundaries. Aside from the add-on programs for disabilities and End-stage kidney programs, the public first encounters Medicare at around age twenty, when the working population begins to have 3% of its payroll check deducted. From that point to retirement at age 60-65, Medicare is invisibly taxing payroll checks and paying as it goes, but the beneficiaries hardly know they have it. At age 65, let's say for the sake of tradition, payroll deductions trickle off and Medicare payments trickle in. The serious illness starts to play an important role in life beginning at age 55, but half of Medicare expenditures take place in the last four years of life.

Of course, people who are healthy live longer than people who get deathly ill, so although the average age at death is about 73, medical progress is pushing the average death age steadily older. Some day it will approach 84, the average age of longevity at birth, which is itself predicted to be 90 in a relatively few decades. In short, people are dying older and seemingly can be predicted to die even older in the future.

The problem, however, is whether new treatments or even new diseases will fill in the gap between retirement and the last four years of life. Or, whether increasing longevity will just push the terminal four years older, like the cap on the end of a mushroom. My own personal observation is that diseases which were once thought unworthy of attention are now getting a lot more of it. Skin cancers would be an example. When the average seventy-five-year-old got skin cancer, it was possible to surmise some other life-threatening issue would interrupt the need to worry about skin cancer. Nowadays, there is an increasing tendency to treat skin cancer in the nineties. On the other hand, if we are talking about one of those people who never see a doctor except by looking up from an ambulance stretcher, the trend will be different. In all likelihood, both trends will continue, and it will eventually be possible to say half of the somewhat greater expenses will take place in the last five years of life, even though the average age at death is then approaching 90, Both the ages and the costs will have to be adjusted as we go. These are guesses of course, which should get more accurate as time goes by. From the financial point of view, compound interest will be working in our favor, while biology is probably going to increase costs. If more pessimistic biologic predictions prevail, we will be very lucky to have explored some revenue enhancement.

We have dug ourselves quite a deep financial hole. Suppose, by some combination of revenue enhancement, good luck in the market, and compound interest, the revenue is sufficient to pay for half of Medicare. Very likely what would then happen is the deficit would disappear, foreign borrowing would stop, and Medicare would become self-sustaining (between the payroll deductions and the Medicare premiums). The citizenry would hardly see any difference; the improvement would take the form of reduced foreign borrowing, avoiding catastrophes we didn't expect in the first place. After a few years, we would be back where we started.

Now suppose we doubled our success and paid out the bonus in extra retirement money. Since our present notions of a decent retirement are five times the healthcare benefit, we could expect nothing but complaints about a retirement system which approximately doubled the present Social Security benefits. Otto Bismarck, whose National Healthcare goal was to keep people quiet so he could conquer Europe, would never stand for such a failure. And yet the first of these two approaches would require payroll deductions of 6%, and the second would require 9%, even assuming the Affordable Care Act budget would prove to be revenue-neutral. The burden could be lightened by dipping into the contingency fund, but a much better approach would be to use the strategy of the Last Years of Life -- Reinsurance.

Originally published: Monday, July 18, 2016; most-recently modified: Thursday, May 23, 2019