Medicare pays about half the medical expenses of the average beneficiary. But most people, especially those planning for retirement, have grave misunderstandings about the program and what it covers, according to a recent survey. For example, they don’t know if it covers long-term care and the amount of premiums they’re likely to pay for their coverage. A higher percentage of retirees report paying more for medical expenses than they thought they would. About a quarter of pre-retirement Americans admit to having little or no knowledge of Medicare and how much their retirement medical costs are likely to be.
For recent estimates of how much you’re likely to need, on average, for retirement medical care check here.
Retirees and employees of Kodak are likely to receive bad news in the near future. The firm filed for bankruptcy reorganization, and as part of that process it’s likely to decide eliminate their plans for retiree health care expenses. Companies don’t need to file for bankruptcy protection to do that, and many firms routinely reduced their support for retiree medical expenses over the years.
But when a firm files for bankruptcy, those hurt by elimination of retiree medical plans can take advantage of a special tax benefit. This helps them pay for new medical insurance, and some insurer offer plans geared to those who lost their retiree benefits and are using the tax benefit.
Still, retirees of companies in bankruptcy protection have an option unavailable to retirees of companies that are healthy but eliminate retiree health coverage anyway: the Health Coverage Tax Credit, or HCTC, a federally funded program administered by the Internal Revenue Service.
The credit pays a portion—currently 72.5%—of health-insurance premiums for retirees whose benefits have been reduced or eliminated in bankruptcy proceedings and whose pensions are taken over by the Pension Benefit Guaranty Corp., the federal insurer that assumes control of failed plans and pays the benefits.
The program will pay for comprehensive major medical coverage, including prescription drugs and dental and vision care, if they are included in that coverage.
Larger businesses have been doing well since the economy’s bottom in 2009 and have been hiring at a reasonable clip. But employment overall still is weak, and small businesses seem to be the reason. They aren’t hiring, and surveys by the NFIB indicate they don’t plan to hire anytime soon. It’s been assumed that this is partly an effect of the financial crisis and partly because small businesses are more dependent on housing.
But what if there’s another reason? What if small businesses aren’t hiring because their money is paying for higher employee medical care expenses for employees? That’s the argument here. Scott Shane of Case Western Reserve University says he’s looked at the data and that hiring by new businesses has been declining since 1999. He pins the cause on the cost of providing medical coverage to employees.
The slide in job creation appears linked to the rising cost of employee benefits. As the cost of providing for employees’ health care and retirement increases, hiring people becomes more expensive. The cost of employee benefits has been rising faster than businesses’ revenues since at least 2000. The BLS reports that from 2001 to 2010 the cost of employee benefits at private businesses rose faster than inflation, going up 13.6 percent in inflation-adjusted terms. The increase in benefit costs over the past decade suggests that benefit costs are eating into companies’ profits.
EQUIPMENT OVER LABOR
It is only natural that entrepreneurs try to reduce those costs. One way to do that is to hire fewer people. Equipment doesn’t need health insurance or retirement plans. So if a business can produce the same results by substituting investment in equipment for investment in labor, it can solve the rising benefit cost problem, albeit at the expense of employment. Therefore it’s not surprising that a smaller fraction of entrepreneurs hires employees, and those who do hire fewer people than they once did. The profit motive demands it.
He says the solution is to contain medical expenses. But the health care overhaul enacted in 2010 doesn’t do that, and some studies say it increases costs.
In case you haven’t seen this (the most-viewed item on The Wall Street Journal online on New Year’s Day) (subscription might be required), you’ll probably want to read it. It’s an excerpt from a new book by a surgeon providing unusually candid commentary on what surgeons think and do. It covers things such as why obese people are bad surgical patients, what a surgeon’s thinking during an operation at different times, and the economics of the profession.
Like poker players and their cards, surgeons are sometimes only as good as the patients they are dealt. Obesity, excessive scar tissue from a previous surgery in the same area, disease that is more advanced than anticipated—any one of these physiological conditions creates more work and a more difficult environment for the surgeon.
Even before the surgery begins, underlying or chronic conditions such as a history of hypertension, cardiac disease or lung disease put patients at risk for complications. Today, based on your medical history, surgeons can usually analyze, quite accurately, your risk of complications (or death) before setting foot in the operating room. All you have to do is ask.
It’s no secret that everyone in Washington feels a need to reduce the cost of Medicare. What they disagree about is how to do it. The appointees of the administration, however, seem to agree on their preference. They want to reduce the care that is covered under the program. You’ve seen evidence over the last couple of years with recommendations from government advisory panels that some testing and treatments no longer be routine. Most recently, a panel recommended discontinuation of the PSA test for prostate cancer. Expect this to continue as the administration favors rationing of medical care by government fiat.
Aaron says that “the survival and strengthening of the IPAB is of critical importance.” In a sense, this is unsurprising, given his earlier views, which were captured in a Washington Post story published during the Reagan administration (when Aaron was in his late 40s). The Post article reads,
“If Americans are serious about curbing medical costs, they’ll have to face up to a much tougher issue than merely cutting waste, says Brookings Institution economist Henry J. Aaron.
“They’ll have to do what the British have done: ration some types of costly medical care — which means turning away patients from proven treatments.
The cost of long-term care insurance rose again over the last year, but at a fairly moderate 4.4%, according to an annual MetLife survey. For a long time, the costs rose at 7% or more annually, well above the rate of inflation. In recent years the rate of increase has declined, but so has overall inflation. There’s still a large gap between LTC inflation and the Consumer Price Index. It’s also a faster increase than over the last two years and than core medical inflation.
The really bad news is the absolute cost of LTC.
Private nursing home care rose 4.4 percent to $239 daily or $87,235 a year in 2011, reports the MetLife Mature Market Institute, which produces the annual survey. Adult day services rose 4.5 percent to $70 a day. Hourly rates for LTC services provided by home health aides and companions remained unchanged at $21 and $19 an hour, respectively.
You could hedge against the cost of LTC by purchasing long-term care insurance. A relatively small part of the population, however, purchases the insurance. It’s fairly expensive, and insurers have a history of underpricing it and socking policyholders with substantial rate increases down the road.
In Retirement Watch and elsewhere I’ve directed attention to the CLASS program, enacted as part of the Affordable Health Care Act (the 2010 health care reform law). Government and private actuaries analyzed the proposed program, which was supposed to provide cash for Americans who need long-term care, and concluded it was not sustainable and eventually would become a giant budget hole. Today, the Obama Administration agreed and effectively ended the program before it was implemented.
HHS Secretary Kathleen Sebelius told Congress in a letter that she doesn’t see a viable path forward at this time. By law, implementation of the program was contingent on the HHS secretary ensuring the program was fiscally sustainable and doesn’t use taxpayer funding to pay out benefits.
Here’s a piece that simplifies the debate over Medicare reform. Geoff Colvin of Fortune takes the view that there are only two big picture ways to fix Medicare’s fiscal problems. He says one way’s been proven not to work, so we ought to try the other way.
Medicare has become the largest issue in America because it threatens the country’s economic future. Ten former chiefs of the Council of Economic Advisers, from both parties, warned in March that if we don’t get the national debt under control, the result will be “a crisis that could dwarf 2008.” The first worrying signs have since appeared; the cost of insuring against a once-unthinkable U.S. debt default rose by more than 50% in late May, and Moody’s and S&P have warned that the country’s debt rating is in peril. By far the largest element in America’s worsening debt outlook is the growth of Medicare. If we don’t fix it the right way, the country will become dramatically poorer and weaker.
At least we’re finally having a public discussion of alternatives to the current Medicare system, because the current system can’t survive. Unfortunately, some of those in the discussion are resorting to pejoratives instead of substantive arguments. One pejorative is to say that the reform proposals are voucher programs. One advocate of a reform proposal says he embraces the voucher system allegation, because that’s the only viable way for government to subsidize medical care for older Americans.
I, too, have used the V-word in my own reform proposal, which is a voucher system for the entire country. Five Nobel laureates, most quite liberal, signed on, but others said they were uncomfortable with the word. One famous economist told me his mother would disown him if he endorsed a plan containing it.
Lately, though, people have been asking more questions about the V-word. Yes, Ryan’s plan features vouchers, but isn’t our Medicare card effectively a voucher? His recommendation is to limit Medicare spending growth, but aren’t such limits inevitable? Aren’t the president’s new health exchanges for the uninsured really a voucher plan?
Here he analyzes many of the criticisms directed at his and other voucher plans
It’s no secret that Medicare is in trouble. The government will have to spend less on the beneficiaries at some point. It’s likely there will be some form of rationing or reduction in care. There are three ways that could be implemented. One way is to put the onus on the patient or consumer to decide which medical care is really essential or desirable. The Paul Ryan Medicare reform plan is one form of that. A second way is to put more of the choice on the Medicare provider. Medicare Advantage plans and their variations over the years are examples of that. The third way is for Medicare to decide it’s not going to pay for certain procedures and treatments. In a recent New York Times article a researcher listed several medicare procedures that are performed routinely and reimbursed by Medicare yet appear to have no real benefits.
This article goes into some detail about that article but also asserts that Medicare will have to go a step further and stop paying for procedures that might improve a person’s quality of life but have no affect on health or longevity.
We have approximately 47 million enrollees on Medicare and knee replacements are done at a rate of 8.6 per thousand, one of the most frequent hospital admissions for the federal insurance program. That works out to more than 400,000 knee replacements each year. At a rate of 17 median taxpayers for each procedure, that suggests we need the entire Medicare payroll contributions of 6.8 million Americans, or 5% of the total number of US taxpayers (138 million), just to fund knee replacements. As you can see we run out of taxpayers pretty quickly.
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