Medicare's Financial Woes: Bigger Than Official Estimates

By J.D. Foster, Ph.D.

The Medicare Trustees' Annual Report released earlier this year projects Medicare's excess costs to be $85.6 trillion.[1] This amount is six times the U.S. econ­omy in 2007. Worse, as the Trustees' Report suggests repeatedly, by rule their analysis reflects a badly flawed assumption and so their calculations understate the magnitude of the problem.[2]

The flawed assumption is that the Trustees are pro­jecting unreasonably low rates for physician compen­sation under Medicare Part B. Fully acknowledging the problem, the Medicare Office of the Actuary has pro­vided a memorandum discussing the flawed assump­tion and describing two illustrative alternatives.[3] Using these alternatives, it is then possible to estimate the additional amount of Medicare's excess costs attribut­able to more realistic assumptions regarding physician compensation.[4] Under one assumption, Medicare's excess costs rise by about $3 trillion in present value; under the somewhat more generous assumption, Medicare's excess costs rise by about $5.9 trillion, to a total of $91.5 trillion.

There is now broad agreement that Medicare must be fundamentally reformed to preserve this vital program for seniors without bankrupting the country. These estimates suggest the full extent of Medicare's fiscal woes is even greater than previ­ously believed.

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