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Is the True Prognosis for Medicare Bleaker Than Previously Thought?


The results of Medicare’s annual check-up are available and the prognosis isn’t good.

According to the annual report Medicare’s trustees issued on May 13, the program will exhaust its hospital insurance trust fund in 2024—five years sooner than last year’s report projected.  What accounts for the deteriorating financial picture?  The program is likely to experience higher costs and lower revenues than previously expected.

“Medicare costs are projected to soar in the next decade, as more baby boomers retire and health-care costs rise faster than wages and economic growth,” says The Wall Street Journal’s article on the report.

But if you dig into the Medicare report, the news is even bleaker than much of the press coverage indicates. In the “Appendices,” Richard S. Foster, Medicare’s chief actuary, cautions that the current report underestimates future costs under Medicare Part B, which covers doctors’ visits and other forms of outpatient care. The report’s projections, he concludes, “are not reasonable as an indication of actual future costs.”

Why? The report assumes that Medicare will reduce physicians’ fees by 29.4% on Jan. 1, 2012, as is required under current law. However, because Congress has in the past repeatedly put off such cuts in doctors’ fees, it is “implausible” to expect lawmakers to approve them this time around, Mr. Foster says.

Moreover, Mr. Foster adds, due to cost-cutting required under the Affordable Care Act of 2010, Medicare’s prices for a range of services, from hospital stays to home health aides, are expected to fall over the next 75 years to “less than half of their level under the prior law.”  “Well before that point,” Mr. Foster predicts, “Congress would have to intervene” to prevent doctors from dropping out of Medicare.  This, he adds, would “lead to far higher costs for Medicare in the long range than those projected under” the report.

The news isn’t quite so dire for Social Security, which together with Medicare accounts for one-third of federal spending. While the program’s fund for the disabled is expected to run dry by 2018, the fund for retirees will last until 2038, says a report by the Social Security trustees. That’s only one year sooner than previously projected.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.