Tuesday, April 24, 2007

Stark warning about rising Medicare costs

Stark warning about rising Medicare costs
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: April 24 2007 01:18 | Last updated: April 24 2007 01:18


Medicare trustees issued the first ever statutory warning over the long-term finances of the government-backed health programme for senior citizens on Monday.

The warning, required by law, came as new projections showed the share of Medicare costs paid out of general taxation would exceed 45 per cent by 2013. More realistic assumptions suggest this threshold could be breached as early as 2010.

Under the 2003 Medicare modernisation act President George W. Bush will now be obliged to propose legislation that would reduce the burden on general taxation within 15 days of submitting his next budget proposal next February.

Congress will be required to consider the proposal but is under no obligation to endorse it or provide alternative ways of improving Medicare’s finances. The new Democratic Congress has shown no interest in Mr Bush’s latest proposals to curb costs, in part by introducing more means-testing.

“Today is a historic occasion and not a happy one,” Hank Paulson, the Treasury secretary, said. He said he was frustrated at the lack of response to his efforts to generate a bipartisan initiative to tackle the problem of financing Medicare and the other main entitlement programmes, Medicaid and Social Security.

“There was a time when I was a bit more optimistic than I was today,” he said. “I am getting a little bit tired of playing solitaire.”

Monday’s projections show Medicare’s hospital insurance trust fund will be exhausted in 2019. The trustees project that Medicare costs will rise from 3.1 per cent of gross domestic product last year to more than 11 per cent of GDP in 75 years.

The Social Security trustees, meanwhile, released projections showing the retirement programme also faces serious challenges, with dedicated revenues from payroll taxes continuing to exceed Social Security spending for another 10 years and cash flow turning negative from 2017.

Accumulated surplus revenues from the past – ascribed to notional trust funds – would in principle then cover Social Security spending until 2041.

The estimates show that, to fix the finances of Social Security for the next 75 years without changing benefits, the government would have to raise payroll taxes by a fraction under 2 percentage points.

Mike Leavitt, secretary of health and human services, said the one bright spot was the lower-than-anticipated cost of the new prescription drug benefit, which he said proved that competition worked to bring down costs.

However, Medicare actuaries still project that the cost of the prescription drug benefit will rise by 7.8 per cent a year over the next decade.

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