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Medicare Heading for Financial Crisis

Health Program Deemed Worse Off Than Social Security

WebMD Health News

March 23, 2005 - A key government report released Wednesday paints a bleak picture of Medicare's long-term finances and warns that the program is likely to become insolvent more quickly than previously thought.

It also cautions that Medicare is in worse financial condition than Social Security. President Bush has made Social Security reform the marquee feature of his second term's domestic agenda.

Analysts have long predicted that Medicare's costs would begin to increase sharply as the baby boom generation begins to retire later this decade. But Wednesday's analysis concludes that the program's new prescription drug benefit and an increasing reliance on expensive new medical technologies will now drive spending far higher than projected five years ago.

Medicare Trust Fund Given Extension

The 2005 Annual Report of the Boards of Trustees for Social Security and Medicare warns that the Medicare trust fund used to pay for inpatient hospital treatment is already taking in less money than it spends and will become exhausted in 2020. The date is a slight improvement over last year's report, which predicted the fund's depletion one year earlier.

At the same time, Medicare's spending on prescriptions, known as Part D, and on doctors' visits and other outpatient care, known as Part B, is now projected to more than double as a share of the overall economy over the next 19 years. Parts B and D, predicted in 2000 to grow from 2.6% of gross domestic product today to 4% in 2024, are now projected to take up 5.7% of the gross domestic product by that time.

The report suggests that those figures put Medicare on substantially worse financial footing than Social Security, which it predicted Wednesday would begin to spend more than it takes in by 2041.

"In sharp contrast, Medicare's financial outlook has deteriorated dramatically over the past five years and is now much worse than Social Security's," trustees wrote in a statement accompanying the report.

The report further predicts rapidly expanding costs over the longer term that could see outpatient and drug spending approach 14% of the gross domestic product by 2079. The projection is nearly three times larger than what trustees forecast in 2000.

Bush administration officials acknowledge that the projections show that Medicare's finances are in need of reform. But those officials, who are now engaged an all-out campaign to convince the public and members of Congress of the need for immediate Social Security reforms, do not suggest that Medicare carried the same urgency.

Health and Human Services Secretary Michael O. Leavitt describes Social Security's financial outlook as "unsustainable." But Leavitt declined when asked by reporters to apply the same description to Medicare.

"It's very clear that changes need to be made," he says. Leavitt points to expanded preventive benefits designed to improve care of chronic diseases, as well as financial incentives for doctors who provide higher quality care, as ways that Medicare could eventually begin to slow spending.

"We have laid out a set of tools that will create at least a foundation of improvement," Leavitt says.

AARP Associate Executive Director Chris Hansen calls the one-year extension on Medicare's hospital fund solvency "good news" but also says inefficiencies and high costs continue to plague the U.S. health care system.

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