From the Editor

Medicare and Medicaid are on the brink of insolvency, and you’re not just a bystander

Author and Disclosure Information

The federal government might resuscitate these two popular benefit programs by siphoning revenue from private medical practices



Medicare and Medicaid are two of the most popular government benefit programs. They secure the health of the poor, the disabled, and the retired by encouraging physicians to provide easy access to their practice for those who are covered.

Medicare and Medicaid are also two of the most expensive government programs ever devised, and they are drifting toward insolvency. That could trap your practice in a vortex of ever-decreasing practice revenue and ever-increasing practice costs. Here’s how such a scenario might unfold as 2011 draws to a close and powerful forces and events in politics, government, and business promise to intersect in the new year.

Method and math behind Medicare and Medicaid

Medicare. The widely held belief is that Medicare is supported by a trust fund built by contributions from payroll taxes. But that’s wrong: Medicare is part of what is known as the unified federal budget, and taxes collected for the program are not physically set aside in some sort of lock box. Rather, those tax receipts are used for the general expenses of the federal government. That’s correct: No real assets are tucked away that could be used to pay future Medicare obligations.

When the federal government borrows money from the stream of Medicare tax revenue, it issues an IOU to repay that loan. (Many economists consider it fuzzy accounting to borrow money from yourself, spend it, and cover the debt by issuing yourself an IOU.)

Until recently, Medicare taxes more than covered the costs of Medicare services. That allowed the government to use the surplus to pay for other expenses, such as defense and education. But (outgoing) Medicare costs now exceed (incoming) Medicare taxes, resulting in a net budget deficit and requiring either 1) contributions to the program from general tax revenues or 2) borrowing, which adds to the mounting federal deficit. Medicare administrators have estimated that the program’s Part B (See “Medicare comprises 4 related health programs—its ‘Parts’”), which pays for physician visits and is financed by both patient premiums and general tax revenues, has a $36.4 trillion unfunded liability (compare the total size of the US economy: approximately $15 trillion a year).

Medicaid. This program—the joint responsibility of federal and state governments—is funded by general tax revenues. As the finances of the federal and various state governments deteriorate, the stability of Medicaid is also in jeopardy. Many states are attempting to reduce their Medicaid expenses by restricting enrollment and using managed care programs to control the volume of services. Ominously, Medicaid programs are imposing across-the-board cuts in reimbursement to physicians and hospitals.

Precarious financial footing. As Medicare and Medicaid teeter, the two programs also prepare to add millions of new members over the next few years:

  • Medicare enrollment will increase significantly as more and more Baby Boomers reach 65 years of age. Enrollment has also grown because Americans are living longer.
  • Medicaid enrollment will increase by 10 to 20 million over the next few years because national healthcare legislation facilitates enrollment of uninsured adults into this program.

If both programs are on the brink of insolvency now, who is going to pay the expenses of millions of new enrollees?

One solution? Many government leaders believe that your practice revenue is a piggy bank that will help finance these two popular programs. So how might these leaders in Congress and the Administration tap into the revenue of your practice?

REFRESHER: Medicare comprises 4 related health
programs —its “Parts”

Part A

Pays for hospital services. Supported by the Medicare portion of the payroll tax—currently, 2.9% on all earned income. Employee and employer split the cost; self-employed persons pay the full 2.9%.

In 2013, the Medicare tax rate will rise 0.9% for persons earning more than $200,000 annually. In addition, a new Medicare tax of 3.8% will be assessed on all investment income of persons earning more than $200,000. Note that the Medicare tax has never been assessed on investment income.

If savings on the cost of hospital care that will be implemented as part of national health insurance are realized, this portion of the Medicare program is, financially, relatively stable.

Part B

Pays for physicians’ and other health-care professionals’ services. Financed by beneficiary premiums (25%) and general tax revenues (75%). Beneficiary premiums are, currently, based on income: Wealthier people pay premiums at higher rates.

The administration of home health services—a rapidly growing component of Medicare services—have been transferred from Part A to Part B, a move that has undermined the financial stability of Part B.

Part B is on the brink of financial insolvency, unless: benefits are reduced; long-planned cuts to physician payments are implemented; or enhanced revenue sources are identified—or any combination of these actions.

Part C

Refers to so-called Medicare Advantage plans, which combine Part A and Part B in a Medicare-approved private HMO or PPO product.

Part D

Pays for prescription drug coverage.


Next Article: