Retiring boomers, rising health costs are a frightening combination

By Jay Fitzgerald
Globe Correspondent / June 12, 2011

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Medicare is the smaller of the nation’s two most popular entitlement programs — but it has the larger and more immediate budget problems.

As tens of millions of baby boomers begin to retire, the strains of funding Medicare, the government’s health insurance program for the elderly, will only grow over the next decade. Combined with skyrocketing costs of health care in general, economists say Medicare spending, left unchecked, will become unsustainable.

“We have to get control of health care and Medicare costs or go the way of the Roman Empire,’’ warned Jonathan Gruber an economist at the Massachusetts Institute of Technology.

History: The founding of Medicare in 1965 partially fulfilled a long-held dream of former President Harry S. Truman, who pushed for national health insurance during his administration from 1945 through early 1953. At the Medi care signing ceremony 46 years ago, then-President Lyndon B. Johnson ceremonially enrolled Truman as Medicare’s first eligible beneficiary. The goal of Medicare: providing health insurance for those receiving Social Security payments, relieving elders of some of the financial burden of paying for medical care.

The most significant legislative change to Medicare since its founding was in 2003, when President George W. Bush signed into law the Medicare Modernization Act, adding outpatient prescription drug payments and other benefits covered under the program.

The problem: Medicare today serves about 47 million Americans 65 years and older. Spending in 2011 is expected to hit $568.6 billion, according to estimates by the Congressional Budget Office.

But enrollment in the program is projected to jump about 30 percent to more than 64 million participants over the next 10 year as more baby boomers become eligible for the program. Projected annual costs will nearly double to just shy of $1 trillion in 2021.

The 2.9 percent payroll tax that employers and workers share to pay for Medicare (or 1.45 percent each) doesn’t raise enough money to cover today’s costs, so Medicare is drawing down reserves and sucking funds from elsewhere in the federal budget. The system’s main trust fund held about $278 billion as of last year, according to the Congressional Budget Office.

By 2020, the Congressional Budget Office estimates, Medicare’s main trust fund will be effectively drained, requiring a strict “pay as you go’’ system financed by payroll taxes and money squeezed from other federal programs, assuming the current structure of Medicare is kept intact. Longer-term projections point to multitrillion-dollar deficits for Medicare stretching late into the century, economists said.

“It’s growing like gangbusters,’’ said Isabel Sawhill, a senior fellow and federal budget expert at the Brookings Institution, a Washington think tank. “and it’s growing at a faster pace than the economy and the per capita income of Americans.’’

Proposed Solutions: There’s no consensus in Washington on solving Medicare’s problems.

Many liberals would love a “single-payer,’’ or government-run health care system for all Americans, no matter what age. They argue only a central administrator can beat down costs and implement necessary reforms. But not even a Democratic-controlled Congress and White House could pass such a plan early in the Obama administration.

Many conservatives would love to implement a partially privatized Medicare system by issuing government vouchers for elderly Americans to buy private health insurance. They argue that approach would reduce costs by introducing more competition.

So, there’s deadlock in Washington — and many observers see no action on Medicare until after the 2012 elections.

Afterward, the most likely fix is some sort of hard-fought compromise that includes benefit cuts, such as increasing the age for eligibility, now 65; some private insurance options; and payroll tax increases. Any compromise would likely involve spending cuts, which would lower reimbursements for health care providers.

Even if Congress fashions such a compromise, fundamental changes in how health care is delivered and how providers are paid will be needed to bring Medicare spending under control, economists said. Health care costs for young and old are rising faster than inflation.

William Cheney, an economist at Boston’s John Hancock Financial Group, holds out hope that lawmakers will find a way to fix Medicare and broader financial problems.

“Who said it — Winston Churchill?’’ asked Cheney. “ ‘Americans can always be counted on to do the right thing, after they’ve tried everything else.’ I think we can get through this.’’