Medicare is a federal government “social insurance” program. Medicare was created in 1965, under the administration of Lyndon Johnson, following proposals developed in a “White House Conference on Aging” in 1961, under the administration of Dwight D. Eisenhower. Medicare was originally administered within the Social Security Administration, and the original statute establishing the program arrived in legislation amending the Social Security Act.
Today, about 60 million people a year receive medical services under Medicare. A Wikipedia description of the program states, “Medicare provided health insurance for over 59.9 million people–more than 52 million people aged 65 and over and about 8 million younger people.” The Medicare Trustees’ report similarly includes a table reporting that 59.6 people were “enrolled” in Medicare in 2018. But this number includes people receiving benefits – it doesn’t count people whose paychecks have taxes withheld to fund the benefits for the “enrollees.”
Medicare is led by the Centers for Medicare and Medicaid Services (CMS) within the Department of Health and Human Services, in the executive branch of the federal government. There are four main parts of the program: Part A (inpatient hospital, hospice, and related medical services), Part B (outpatient services and professionally-administered drugs), Part C (“Managed Medicare,” melding parts of Part A and Part B), and Part D (self-administered prescription drugs). For people receiving Medicare-financed services, Medicare picks up roughly half the medical costs. While the CMS leads the program, Medicare’s daily administration is carried out by private insurance companies under contract with the government. These firms conduct claims and payment processing, oversight of medical services providers, and fraud investigations.
Medicare takes in a lot of money and pays out a lot of money. Under the law, the program is overseen by a Board of Trustees, who are required to issue an annual financial report. In recent years, the Trustees reports have shown expenditures running ahead of income, and deficits running north of $20 billion. Looking ahead, however, a surge in the 65+ population and a rising share of retirees in the general population are anticipated to lead to expenditure growth significantly greater than income growth, leading to a massively negative current net financial position. That position is accounted for in the Trustees’ report, and those calculations lead to the “Statements of Social Insurance” in the annual overall Financial Report of the U.S. Government.
The Statements of Social Insurance include both Social Security and Medicare. For each program, the government projects future income and expenditures for expected future demographic trends and then calculates a present value for a 75-year projection interval. They calculate the net present value (the present value of revenue less the present value of expenditures) for three different classes of participants – current participants who have reached eligibility age (retired people), current participants who haven’t reached eligibility age (working people), and “future participants” (the young and the unborn).
The federal government’s massive unfunded Medicare obligation is nowhere to be found on the federal government’s balance sheet. As is the case with the huge unfunded position for Social Security, the government’s reasoning is that the government controls the law, and can change it at any time.
The Trustees Reports are required by law to include a Statement of Actuarial Opinion from the chief actuary of the Medicare Program. Similar to an audit opinion, this statement delivers an opinion on whether the financial calculations are “based upon sound principles of actuarial practice” and are based on “reasonable assumptions.” But the report regularly stresses the uncertainty and challenges in projecting program income and expenditures, particularly related to issues associated with medical care productivity and cost trends. So the Trustees’ Report and the Financial Report of the U.S. Government also include an “illustrative alternative projection,” on the assumption that current law and policy will not hold in the face of cost pressures that have undermined expectations in the past.
Under the alternative scenario, the negative net present value for Medicare runs another one-fourth as high as the debt implied in current law and policy. We believe this alternative scenario is more realistic, and use it in our calculation of the “true” overall federal debt. And as with Social Security, we also exclude the (positive) impact from future participants in our calculation of the government’s net position for Medicare. In a sense, the term “future participants” is a contradiction in terms. Future participants – the young and the unborn – never had a chance to choose to participate, or to participate in the voting process leading to their future participation.