For baby boomers the good times seem here. Soon Uncle Sam, under the urging of a baby boomer president, will be giving us back some of the money we coughed up. An efficient shrunken government doesn't need all our dough. Hooray for the tax cut!
Yet unless we boomers want to spend every last penny on doctors' visits and medications during our retirement, we will soon need to up our ante to Uncle Sam. Medicare, which costs a major chunk of the federal budget, will cost even more. In short, we will need to pay more, not less, taxes.
Last fall the National Academy of Social Insurance's study panel on Medicare -- an august committee of policy wonks from a range of ideologies -- met to prophesy the fiscal future of Medicare. The Commission predicted that if we hold benefits constant -- no drug coverage, no lowering of co-payments, no admission to retirees younger than age 65 -- we will spend 111% more on Medicare in 2030 than in 1998.
Nobody, though, expects to hold Medicare benefits constant. Everybody expects Medicare to add coverage for prescriptions -- the kind of coverage routinely included in policies for the working-age population. To date, most Medicare enrollees foot their prescription tab -- with some paying thousands of dollars a year. Baby-boomers on the cusp of retirement will want the government to pick up the tab for their medications, as their employers do now.
And the recent statistics on out-of-pocket expenses for Medicare enrollees are sobering. The Urban Institute predicts an average enrollee in 2025 will pay $5,248 annually on these "out-of-pocket" costs, up from $3,192 today. Maybe it's OK for our parents and grandparents to spend so much of their savings on health care. It won't be OK for us.
As for letting young retirees buy into Medicare, that idea continues to draw support, especially among baby-boomers eyeing early retirement.
Not surprisingly, expansions to Medicare will push the 111% prediction higher. For instance, generous prescription drug coverage (a $200 deductible, 20% co-payment, a $2,000 limit on out-of-pocket expenses) could push the increase to 171%.
The past decade's cost-savings schemes, moreover, have not worked. Medicare HMOs -- touted as money-saving solutions -- have not matched the rhetoric. Indeed, over the past few years, to save money, the government paid such low rates to HMOs that several major ones exited the market. The only way Congress can lure those HMOs back is through higher reimbursement -- which defeats the purpose of frugality.
Administrative costs cannot be pared, because they consume less than 4% of revenues -- far lower than administrative costs for non-Medicare plans.
Even Medicare Medical Savings Accounts -- championed by conservatives as a market panacea for rising costs -- have failed. With a Medicare MSA, an enrollee would choose a high-deductible catastrophic policy, but pay for routine medical expenses, drawing from money s/he had deposited into a special Account. Medicare would foot the bill only for major illnesses. Private-sector insurers, who understand demand far better than Congressional enthusiasts, judged it too weak to warrant the effort. Retirees did not rush to buy these policies, perhaps because healthy retirees know that their golden years may ultimately depend upon an expensive network of physicians, medications, and technology. With weak demand, no insurer marketed the Medicare MSAs.
The solution to the rising Medicare bill is distressingly simple: higher taxes. The study panel proposed a grab-bag of choices, from raising the employer-employee payroll tax to taxing the Medicare benefits of upper-income beneficiaries to adding a surcharge on personal income taxes. And the panel recommended that we raise taxes soon, without waiting for a fiscal crisis.
In 29 years President George W. Bush -- who is wooing baby boomers with a tax cut -- will be 83 years old. He will need a health insurance plan that is predicated on an inevitable tax increase. So will the rest of us.
Joan Retsinas is a sociologist who writes about health care in Providence, Rhode Island.