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Sorting Out Medicare Myths and Political Mystification – The Financial Preserve from Lonier Financial Advisory LLC
Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

Sorting Out Medicare Myths and Political Mystification

Sorting Out Medicare Myths and Political Mystification

The political season has jumped Medicare to the top of the sound bite list for the moment. Medicare is a subject only a policy wonk can love, and the politicians are putting more than a little rhetorical gloss on the facts.

While we wait for the rhetoric to die down and an actual policy discussion to break out (not holding my breath, the circus will likely move on to other topics before that has a chance of happening), here’s an opportunity, courtesy of a law journal article, The Top Ten Myths of Medicare, to brush up on the facts. In ten minutes you’ll probably become more expert than anyone you hear talking over someone else about the subject on the flat screen.

Spinning for votes, politicians intentionally skip over the details so they can avoid the substantive debate about either Medicare or the other (so far silent) elephant in the room, Social Security, they claim they should be having. Too risky. Meanwhile, the mind reels.

Here is a short summary of the ten myths Professor Kaplan covers in his paper, which is footnoted with references if you want to check sources.

I’m beginning with “Myth #10: Increased longevity will sink Medicare” because it is both counter-intuitive and of high concern to many. From there, we’ll work up from the basics to the more complex in the Professor’s order. Please look over the paper for the details.

Myth #10: Increased longevity will sink Medicare
The coming of the relatively healthier baby-boom retirement cohort, many fear, spells doom, as costs explode from sheer numbers and length of life. It turns out that yes, living longer, you will likely spend more, far more, on healthcare than you have probably anticipated. But those costs will probably not be covered by Medicare. The biggest item—long term care—rises dramatically as seniors age, even as Medicare costs, on average, level off at age 80 and begin to fall. After that, costly hospitalization and doctors’ fees taper off as aggressive interventional care subsides and is supplanted by non-covered nursing care. This effect is particularly dramatic in the last two years of life:

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So with that in mind, let’s start at the beginning:

Myth #1: Medicare is one program
Medicare is actually four programs, each financed separately. Part A is prepaid health insurance, financed via a 2.9% payroll tax. Parts B and D (Rx Drugs) are financed by enrollee premiums which increase with income (25% of the cost) and general federal tax revenues (75% of the cost). Part C (Advantage) is a variety of managed care options—about 25% of Medicare recipients participate in Part C programs. The government pays the Advantage provider the Medicare average cost of service per person, and enrollees pay the provider any fees for additional services.

Myth #2: Medicare is going bankrupt
Parts B and D are funded on a current-year basis with no pre-funding, and so can’t go bankrupt. The federal government might default, which is not the same as going bankrupt, which would be a harbinger of the end of times, but would probably just print more money instead. Yes, healthcare costs go up each year, and so the rising cost to tax payers each year is a serious concern, but bankruptcy is not a concern. There is a trust fund for Part A similar to the Social Security trust fund, but in all practical senses, these trust funds don’t exist—costs are paid from payroll tax revenues. Longer term, the issue isn’t bankruptcy but budgetary priorities, ie, healthcare vs homeland security, defense, and other agency expenses, like education, commerce, and justice. Federal prisons, for instance.

Myth #3: Medicare is government health care
The government pays for healthcare services, but the services are provided by private sector doctors and hospitals. Even the administration of claims and funds is handled by private entities. None are government employees—these are all private sector jobs. The VA hospital system, however, is a government-run healthcare system.

Myth #4: Medicare covers all medical costs for beneficiaries
Short answer: No, with particular weakness in Part A (hospital stay limits) and physician’s costs (you’re on the hook for 20%) in Part B. You’ll need a Medigap policy to fill in your coverage, or a serious illness might use up all of your savings.

Myth #5: Medicare pays for long-term care
Short answer: No, though some home health care costs are covered subject to five stringent rules, including a max of 28 hrs/week. Since LTC is a significant risk for many, you need to explore various insurance options beyond Medicare, or a long-term stay in a nursing home might use up all of your savings, leaving you in the poor house (Medicaid, if it survives the political disagreement about its future).

Myth #6: Medicare is politically immune to budgetary reduction
Both Republican and Democratic administrations have cut Medicare budgets in the past. Because of the political risk, this has usually occurred quietly and indirectly by reducing reimbursements to providers, though it comes back from the providers as higher fees to those in non-Medicare programs, provider limits on accepting new Medicare patients, or providers dropping Medicare patients entirely, putting more cost pressure on the remaining providers.

Myth #7: Medicare wastes money on futile care
Waste, fraud, and abuse aside, some 28% of Medicare’s budget is spent on care in the last year of life. But is it futile or pointless? The NEJM suggests there is no way to know in advance which patients will benefit and by how-much from intensive care near the end of life. Who among us knows all and can make that decision? There is a whole expert sub-topic on lifecycle care protocols, hospice, etc., well beyond the scope of most political discussion.

Myth #8: Medicare is less efficient than private health care
This follows the sad logic that government programs are categorically inefficient. Many are. But in this case the reality is that Medicare has lower administrative costs than private insurance—1.4% vrs 25% of premiums collected. Medicare spends no money on marketing and advertising. Sign up costs and premium collection are borne by employers and the IRS, SSA, and managed care organizations. Because Medicare does not charge different rates or qualify pre-existing conditions, it avoids testing and medical investigation costs. It’s cheaper than private insurance, hence the voucher debate.

Myth #9: Medicare is not means-tested
Why should lower-income earners pay higher taxes so higher income earners can get subsidized federally healthcare benefits? Fact is, the 2.9% employee + employer Medicare payroll tax is now a flat tax, which means higher income earners and their employers pay more for Part A based on their higher income than lower earners. The Affordable Care Act (Obamacare) raises that payroll tax in 2013 an additional .9% on incomes over $200,000 (married), and will also levy a 3.8% Medicare tax on investment income over $200,000, further tilting the burden to high earners. Unlike Social Security benefits, benefits from Medicare correlate with health not earnings—a less-healthy person will receive greater benefits from Medicare than someone who needs less healthcare, regardless of their income level.

The substantive debate we are futilely awaiting is essentially about insurance—health (Medicare) and longevity (Social Security) insurance. The issues are coverages, costs, and who pays.

Insurance pools the risk of high severity but low frequency events across a large group of premium payers. A few receive significant benefits (expensive organ transplants), while most do not recover their premiums. The insurance company keeps a profit for its trouble. How much one chooses and is able to self-insure affects the individual premium rate.

Healthcare has become so expensive that high severity events are becoming more frequent, and very few are able to self-insure to any significant level. Similarly, large numbers of people have little savings and the potential frequency of their running out of money during retirement has increased such that even those who attain only average life expectancy are at serious risk.

Politics, like money, changes everything. How involved should government be in providing tax-payer subsidies to these insurance pools? What about the increasing number of people who cannot afford premiums? What costs are passed along as consequences to the public or as markup for services to private payers as a result of uninsured and unpaid claims for healthcare and longevity? What is the moral hazard of providing health and longevity insurance for those who have earned much but saved little? What about those who have earned little and have little? What kind of society do we want to live in? What can we afford? How much will it cost? How do we make it happen? What do you think?

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