The “Medicare funding warning” is back in the news, but as we explained some time ago, the standard on which this warning is based is fundamentally misguided.
The 2003 Medicare drug law requires the program’s trustees to issue a warning if they project for two consecutive years that general revenues will exceed 45 percent of Medicare spending within the next six years. (General revenues comprise everything except specified “dedicated funding sources,” including payroll taxes and premiums that beneficiaries pay.) The funding warning, in turn, is supposed to trigger certain presidential and congressional actions.
The 45-percent level, however, is not a measure of Medicare’s solvency, as its proponents argue, but an arbitrary benchmark that’s unrelated to Medicare’s financial health. By design, general revenues finance three-quarters of Parts B and D of Medicare, which cover physician services and prescription drugs.
Moreover, restricting general revenues to 45 percent of Medicare spending would require raising dedicated taxes, such as the payroll tax, or cutting benefits irrespective of Medicare’s financial condition or the overall budgetary situation. The 45-percent limit forecloses strengthening Medicare’s finances through measures such as curbing tax breaks for corporations and high-income individuals, since these steps would make general revenues a larger share of Medicare financing.
In their 2012 report, the trustees projected that Medicare will exceed the 45 percent limit for 2012. Due to health reform, however, the ratio is projected to fall below 45 percent for 2013 through 2021.
That over 45 percent of Medicare will be financed with general revenues is no more a problem than that 100 percent of defense, education, or other federal programs is financed with general revenues. Medicare’s long-run financing challenges stem from the rate at which the aging of the population and rising health care costs are driving up spending — not from an increase in the share of its funding that will come from general tax revenues rather than payroll taxes and premiums.