Rest in Peace, Medicare?

Does Medicare have one foot in the grave already? The Trustees of the Medicare program recently announced that the program will remain solvent through 2026. After that, there won't be any assets in the trust fund -- and Medicare will be officially bankrupt. However, reports of Medicare's coming death appear to be greatly exaggerated. 

It's complicated
For one thing, Medicare isn't really just one program. Medicare Part B, which covers physician and other outpatient services, and Part D, which covers prescription drugs, are financed through a separate trust fund. This trust fund receives money from the general treasury of the U.S. and enrollee premiums, which are reset each year. These parts of Medicare won't go bankrupt.

Medicare Part A, which covers hospital costs, does face insolvency. What this means is that the Medical Hospital Insurance Trust Fund will run out of money and no longer be able to pay for all the bills. However, enough money will still be coming in from taxes and other revenue sources that a large portion of those bills could still be paid even if nothing was done -- around 87% initially and drifting down to 71% by 2050. This isn't a good situation by any means, but seniors don't need to be worried that Medicare will cease to exist.

Don't trust the trustees?
Some might think things are actually turning the corner for Medicare. The insolvency date for Medicare was previously projected for 2024. The latest Trustee report, however, extended that date out two years through 2026. Don't put too much confidence in these revised projections, though.

The Trustees basically say to not trust their numbers in the recent report. Their projections assume that payment rates for physicians will be reduced by 25% beginning in 2014. However, the White House and Congress have overrode these physician cuts every year since 2003. As the Trustees say in their report, it's a "virtual certainty" that they will continue to do so.

A rosier outlook for Medicare in the latest Trustee report stems in part from lower-than-expected skilled nursing spending in 2012. The projections also count on an improved economic outlook over the next several years. The report correctly states that the primary cost driver for skilled nursing is labor. The weak economy has probably held those labor costs down. I suspect that if the economy improves considerably, skilled nursing costs will return to higher levels. If the economy doesn't improve, the projections will be off. Either way, the more positive outlook could be undermined.

Grim outlook
Medicare isn't in danger of dying anytime soon, but that doesn't diminish the magnitude of the overall danger. The program has spent more than it took in each year since 2008 and faces even more serious problems ahead.

Source: Centers for Medicare and Medicaid Services 

Medicare relies largely on taxes paid by current workers to fund medical expenses for senior citizens. As the U.S. population ages, the ratio of workers to beneficiaries is projected to decline tremendously. This doesn't bode well for the program's financial outlook over the next few decades.

Source: Centers for Medicare and Medicaid Services 

As a result, Medicare will consume an increasing share of the overall U.S. gross domestic product. This trend will crowd out available federal funds for other programs. Even worse, Medicare deficits will grow and require more additional federal spending to supplement the taxes paid by active workers and premiums paid by beneficiaries.

Surviving
What will it take for Medicare to survive well into the future? Some say that higher taxes are unavoidable. Of course, with fewer workers per beneficiary, that option could put a heavy burden on taxpayers. Others say the solution should come largely from trimming back benefits. But how to do this presents a challenge, to put it mildly.

Perhaps Americans' best hope lies in one of the characteristics that make the country great -- ingenuity. The Medicare Trustees themselves stated that scientific advances could "make possible new interventions, procedures, and therapies" with the result that "some conditions that are untreatable today will be handled routinely in the future." 

Genetic testing stands out as one current example of how scientific advances can help reduce medical costs. Genomic Health (NASDAQ: GHDX  ) makes genetic diagnostic tests for breast, colon, and prostate cancer. Half of the patients diagnosed with prostate cancer each year actually have a very low risk of the cancer progressing. However, 90% of these low-risk patients still undergo surgery or radiation -- at a cost of tens of thousands of dollars per patient. Genomic Health's genetic test helps identify which patients really need more extensive treatment and holds the potential to reduce overall costs.

Another solution lies in more effective drugs that could reduce hospital stays. Research shows that the hospital stay rate for Medicare patients with heart failure has fallen over the past 15 years. Drugs that help prevent heart problems have been a key factor in this improvement. And these drugs are continually getting better.

Merck (NYSE: MRK  ) , for example, received regulatory approval in May for a new cholesterol drug called Liptruzet. The drug combines another Merck medication, Zetia, with Lipitor. Clinical studies found that Liptruzet reduces "bad" cholesterol levels that can lead to heart problems by as much as 61% -- much better than either Zetia or Lipitor by themselves.

Telemedicine also holds promise for helping keep Medicare beneficiaries out of the hospital. Consulting firm Deloitte thinks that as much as $400 billion annually could be saved using telemedicine applications. Qualcomm (NASDAQ: QCOM  ) stands as one of the leaders in technology that enables medical information from patients at home to be sent easily and inexpensively to clinical professionals. The mobile telecommunications giant has formed partnerships with at least 18 medical application companies, 49 medical device makers, and 80 service providers to deliver telemedicine solutions.

Granted, it will take many more of these types of innovations to make a significant dent in the problems facing Medicare. But there are plenty of innovative companies trying to come up with the next great medical advance.

Rest in peace, Medicare? No. Instead, work like crazy, American free enterprise.

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