Sunday, September 6, 2015

A Medicare Primer from Ed Lotterman

It's been a while since I've mentioned Ed Lotterman and his Real World Economics columns that run in the St. Paul Pioneer Press. Today's topic is Medicare, and it doesn't appear to have been posted to their website yet, so here goes.

Lotterman reports that he just turned 65 and got to sign up for a government welfare program, despite the fact that he is in the top 15 percent of income earners and the top 5 percent in terms of net worth. Yes, that welfare program is Medicare.

He knows he'll get outraged messages saying Medicare is not welfare, since its recipients paid FICA taxes to pay for it. But this is only partially correct. Medicare is a huge income-redistribution program, and the direction the money flows is, on average, not from the rich to the poor, but the other way around. As he puts it, "the 15- to 30-somethings who pay FICA for Medicare on virtually every of income they have and for whom payroll taxes in general constitute the largest component of all taxes they pay" are less likely to vote than Medicare-recipients. This results in a transfer of wealth on the order of $400 billion a year.

Yes, yes, you paid into Medicare. So did I. But the amount we paid comes nowhere close to covering our costs. As Lotterman says, "the average person gets back three times as much in benefits as the actuarial value of the taxes they and their employer paid in over their working lives."

He also reminds us that Social Security and later Medicare were "conceived as a conservative alternative to more redistributive socialism" -- and, I would add, in contexts when there was global pressure for the U.S. to look better than the Soviet Union (the Great Depression not long after the Bolshevik Revolution and, later, the Cold War).

Lotterman gives a couple of concrete examples of people who worked during the early years of the program, which started in 1966:

...if someone paid [in] on the maximum earnings...over the first 25 years of the program, the total paid by them and their employers by 1991 would have totaled only $15,087. Impute compounded interest at 6 percent and it goes up to about $24,000. For someone earning the median household income, the sums would be $10,333 and about $17,000. Yet those amounts gave one, or often two, people the right to Medicare benefits lasting 15 or 20 years or more.
Meanwhile, as we all know, medical costs have been increasing well above inflation, and treatments now exist for conditions that would have killed us quickly in the past. Private health insurance rates have skyrocketed, but "the tax rate for Medicare has been frozen for 29 years. Yes, the incomes this rate applies to have risen, and thus revenues with them, but not nearly as fast as health costs."

Despite the fact that recipients' out-of-pocket costs have risen with these higher health costs and more treatments, Medicare "outlays on their behalf have risen faster."

And that's where the column stops. This is only part one: Next week, Lotterman promises to continue examining the problem and possible responses.


dennis byron said...

Because you say the article has not been published yet I will take your word for what it says. Mr. Lotterman is wrong.

It is true that for Mr. Lotterman's parents and especially for his grandparents if they were in alive in 1965, Medicare was a “welfare” program. Providing that amazing financial benefit for people born before 1940 (especially for those born before 1900—everyone initially on Medicare) was a conscious bipartisan decision of the 1965 Congress. They did it that way rather than structuring Medicare the way FDR structured Social Security in 1935 (no payouts until 1940 when the fund had been built up) because they felt that in a few short years everyone in the country of all ages would be on Medicare. Of course that did not happen and because of subsequent legislative and bureaucratic changes to Medicare (higher tax rates, fewer benefits), Mr. Lotterman and anyone turning 65 now has paid on average for his or her Medicare benefits completely. (Of course no one actually wants to get any Medicare benefits but averaging costs is how insurance works.)

Not sure if they are Lotterman errors or illogical statements or yours but:

-- The “three times as much benefits” claim that you say Mr. Lotterman made does not count the income taxes he paid over 50 years into the Part B trust fund nor does it count the pooling effect of any insurance plan (sadly many people die before using any benefits)

-- The employer did not pay anything into the Part A trust fund. The way you paid was simply bifurcated

-- Yes, the Part A pre-paid premium rate has been frozen for 25 years but payroll incomes have skyrocketed and the amount of payroll income subject to that tax has not risen as you or Mr. Lotterman say; it is and has been unlimited over that time period

Not mentioned, the cost of services paid for with Part A fund money has moderated substantially compared to the cost of services paid for with Part B trust fund money

Gina said...

I think Mr. Lotterman's comments are a strong argument for Medicare to exercise its power and influence in the healthcare marketplace and lead the way to reducing healthcare costs. It's done a lot already by negotiating pay rates with hospitals and other medical providers (doctors, clinics, radiologists, etc.), as well as with the pharmaceutical companies and pharmacies, but I think it can do more by making their pay rates standard for the industry. That is, their pay rates also apply to private insurance. It could be a first step in transitioning the country to a single-payer insurance system.