Welcome back to the Deep Dive. Today we are undertaking
a really intense exploration into what is arguably
the most complex politically charged And just
foundational program in the American social safety
net. We're talking about Medicare. It's this
massive federal health insurance program. Absolutely.
It covers over 65 million individuals. The majority,
of course, are seniors. But it also includes
younger people who are living with very specific,
very severe disabilities. It is, you know, the
bedrock of health care for the elderly in this
country. And when you look at the sheer scale
of it, you start to understand why every I mean,
every political debate eventually circles back
to it. The numbers are just staggering. They
really are. We're talking about an entity that
commanded, what, over $900 billion in total spending
in 2022. But like you said, it's anything but
simple. It operates across four distinct, sometimes
contradictory parts A, B, C, and D. And each
one has its own funding mechanisms, its own rules
for providers, and frankly, its own set of solvency
challenges. So our mission today is a very specific
one for you, the listener. We really want to
cut through all that alphabet soup and provide
a truly clear, structured understanding of Medicare.
We need to uncover its history, and it has some
surprising social impacts you might not know
about, and then break down exactly how this multi
-trillion dollar commitment is funded. And critically,
explore the major financial and policy challenges
that are being debated in Washington right now.
Exactly, because those challenges, they directly
affect everyone who pays into or lies on the
system. And I think we have to set the stage
with the financial reality right up front. This
is not like your private 401k or, you know, a
typical insurance premium you pay every month.
No. Medicare is, at its core, social insurance.
The connection between what an individual pays
in and what they get back is, well, it's non
-reciprocal. That's the key distinction, isn't
it? It's not just a retirement savings account
you're drawing from. It is not. Consider this
analysis from 2013. It studied households that
were retiring right around that period. And the
data showed that on average, those households
paid only between 13 % and 41 % of the total
dollar benefits they are expected to receive
from Medicare over their lifetime. Wait, hold
on. So even the most generous contributors, the
ones at that 41 % mark, they still only covered
less than half of their expected benefits. Correct.
Which means the majority, that substantial 59
% to 87 % gap, is being financed by the dedicated
payroll taxes of younger, currently working generations.
Wow. That generational commitment, the fact that
younger people are financing the benefits for
today's retirees, that is what makes the long
-term solvency of the Part O trust funds such
a high -stakes political and, you could say,
moral issue. That reframes the entire discussion
immediately. It's a massive wealth transfer from
the current workforce to current retirees, all
driven by a national commitment made decades
ago. OK, let's unpack that commitment, starting
with the historical context. So Medicare was
enacted in 1965, but the forces that drove its
creation had been building for years. What was
the state of health care for older Americans
in, say, the early 1960s? The situation was becoming
a... Economically untenable. Before 1965, if
you were over 65, your risk profile was high,
your income was often fixed and low, and the
private market was simply failing you. So insurance
was hard to get. Very hard. Only about 60 percent
of people over the age of 65 had any health insurance
coverage at all. That's significantly lower than
the nearly 75 percent coverage rate that the
younger population enjoyed at the time. And even
if they could get insurance, I imagine it was
prohibitively expensive. Absolutely. Older adults
were paying more than three times as much for
coverage compared to younger people. For so many,
a single major illness meant complete financial
ruin. The classic case of market failure, then.
It's the foundational justification for social
insurance. The private market could not efficiently
or equitably provide necessary coverage to this
large, vulnerable group. So when did the idea
really transition from just a policy concept
to a serious legislative goal? The concept had
been around for decades, really, but it gained
formal sort of modern traction during the 1961
White House Conference on Aging. Throughout the
early 1960s, attempts to pass a bill were repeatedly
stalled. Why was that? A lot of it was strong
opposition from the American Medical Association
and conservative members of Congress who were
very worried about socialized medicine. So it
was a battle over government involvement versus
private control of health care. Entirely. But
the political landscape shifted in 1963. A bill
that included the Medicare concept finally passed
the Senate. And that was a huge symbolic breakthrough.
Why so huge? Because it marked the very first
time one chamber of Congress had officially approved
the principle of federal responsibility for the
health coverage of the elderly. Once President
Johnson secured a big Democratic majority in
1964, the legislative path was finally cleared.
And on July 30th, 1965, the Social Security amendments
were signed into law. And that gives us that
iconic historical anecdote that really cements
the program's intended legacy. Indeed. President
Lyndon B. Johnson, he signs the legislation in
Independence, Missouri, which was the home of
former President Harry S. Truman, who had championed
this idea for years. And Truman and his wife,
Bess, were immediately enrolled as the first
official recipients of Medicare. It was this
powerful signal that this was about dignity and
honoring previous generations. But I found this
next point in the sources. particularly fascinating.
It shows the immediate, powerful, and you could
say unintended social leverage of the program.
Medicare became an instant driver of civil rights.
It's an incredible, often forgotten chapter in
Medicare's history. It was enacted in 1965, right?
By 1966, Medicare started making payments to
health care providers, hospitals, nursing homes,
physician practices. But those payments were
contingent upon those institutions desegregating.
Any health care provider receiving federal funds,
which Medicare provided, had to comply with the
1964 Civil Rights Act. So the government basically
used the financial muscle of this massive new
spending program to enforce racial equality in
medical settings nationwide. That's a staggering
example of policy leverage. Absolutely. It forced
immediate integration across the entire health
care landscape. That's something the Civil Rights
Act enforcement alone might have taken years
and years to achieve. It really proves that Medicare
wasn't just a health reform. It was a profound
social and economic lever. So the program was
born, but it didn't just say staff. What were
some of the early expansions that solidified
its role as this broad safety net? The evolution
began almost immediately, starting with specific
service coverage. By 1972, expansions included
physical therapy, speech pathology, and later
chiropractic services. Then hospice benefits
were introduced in 1982. And crucially, eligibility
expanded beyond just the age 65 threshold. Yes,
and this is where we see the program start to
address specific high -cost diseases, regardless
of the patient's age. Okay, so who else became
eligible? Individuals with permanent disabilities
receiving Social Security Disability Insurance
or SSDI, they become automatically eligible for
Parts A and B after a 24 -month waiting period.
And what about for really severe conditions?
Well, for those facing severe chronic conditions
like end -stage renal disease, ESRD, which requires
dialysis or a transplant, they gained early eligibility.
And for patients diagnosed with amyotrophic lateral
sclerosis, or ALS, they're granted immediate
eligibility. Enrollment begins the month their
disability benefits start, so it completely bypasses
that typical waiting period. That 24 -month waiting
period for standard SSDI beneficiaries is an
important detail. But the immediate enrollment
for conditions like ALS really underscores the
program's role in providing catastrophic coverage
quickly when it's most needed. So this program
is massive. It's complex. It's constantly evolving.
Who actually steers this trillion -dollar ship?
The main body is the Centers for Medicare and
Medicaid Services, or CMS. It's part of the Department
of Health and Human Services, HHS. And what's
their job? CMS sets the rules, manages the finances,
regulates the private plans. We'll talk about
Part C and D and monitors quality. They're the
architects. But they don't handle enrollment
or premiums for the most part, right? That falls
to a different agency. Correct. The Social Security
Administration, the SSA, plays a very distinct
and critical operational role. They determine
eligibility, particularly for those turning 65
or receiving SSDI. They also handle the collection
of most premiums and manage the payment subsidies
for low -income beneficiaries in Parts C and
D. It's a significant administrative separation
that, frankly, often confuses beneficiaries.
So it sounds like CMS is the architect and the
rulemaker. And the SSA is the gatekeeper and
the bill collector. And who's the final check
on the financial health of the system? That rests
with the Medicare Board of Trustees. Their job
is to report annually on the financial status
of the dedicated trust funds. And that report
is based on what? The backbone of that report
comes from the chief actuary of the CMS. This
actuary provides a crucial nonpolitical opinion
and projection regarding the expected revenues
and expenditures. And that is what gives us the
famous insolvency dates we hear debated every
single year. Let's quickly just confirm the eligibility
essentials, because this is where the rubber
meets the road for future enrollees. The fundamental
requirements are pretty simple. You must be a
U .S. citizen or a permanent resident who has
lived in the country for at least five continuous
years. Generally, you must be 65 or older. And
what about the work requirement? Crucially, if
you or your spouse worked and paid Medicare payroll
taxes for 40 or more quarters, that's 10 years,
you qualify for premium -free Part A. Ah, so
that's where the premium -free part comes from.
Exactly. If you meet that threshold and you're
receiving Social Security, enrollment in Parts
A and B is automatic when you turn 65. And the
distinction about Part B is that unlike Part
A, you can proactively opt out of it if you have
credible coverage elsewhere. through a large
employer. Yes, that is vital. Part B has a premium.
So if you have other comprehensive coverage,
you must decline Part B to avoid paying unnecessary
premiums. So the key takeaway from this foundational
history is that Medicare is not charity or simple
welfare. It's fundamentally social insurance.
Right. It's designed to ensure protection for
the elderly, regardless of their current income
or prior health history. And it's backed by decades
of mandatory lifetime contributions. collective
pooling of risk and resources designed to handle
a market problem that private insurance simply
could not solve efficiently. All right, let's
navigate the alphabet. We're going to start with
Original Medicare. Parts A and B. This is the
core government benefit. Part A, hospital insurance,
sounds straightforward, but its cost structure
is anything but. Not at all. What exactly does
Part A cover and how is this benefit period structured?
So Part A covers inpatient hospital care, necessary,
and I really want to stress the word necessary,
brief, stays in a skilled nursing facility or
SNF and hospice care. Okay. The structure is
based on the benefit period, which is very counterintuitive.
A benefit period begins the day you are admitted
as an inpatient and it ends only after you have
been out of the hospital and out of a skilled
nursing facility for 60 consecutive days. Okay.
So if I'm discharged from the hospital, I go
home for two weeks and then I get readmitted
for the same or a related condition. Am I still
in the same benefit period? Correct. You are.
And that means... you do not have to pay the
big part A deductible again. However, if you
are out of the system for 61 days or more, the
benefit period resets and you would be liable
for a brand new deductible upon readmission.
Let's talk about that liability. What are the
out -of -pocket costs for a beneficiary for a
single benefit period, let's say using 2024 numbers?
The costs are set up to protect against short
stays but really punish long ones. You face a
$1 ,632 deductible for days 1 through 60 of the
inpatient stay. So that one payment covers the
first two months. Right. Then the cost sharing
begins. It's a $408 copay per day for days 61
through 90. Per day. And if you exhaust those
90 days, you move to your lifetime reserve days,
which total 60 days across your entire life.
And those have an even higher copay, $816. per
day. That is a staggering liability if you face
a prolonged, complex hospitalization. And I assume
if you exhaust your lifetime reserve days, the
cost sharing hits 100 percent out of pocket for
any further inpatient care. It creates a major
financial vulnerability. And that's a key reason
why supplemental insurance is so popular. But
the real complexity of Part A is best demonstrated
by the infamous two midnight rule. OK, I've heard
of this. What is this rule and why does it cause
so much anxiety for hospitals and patients alike?
This is where the distinction between Part A
and Part B becomes so critical. The two midnight
rule, which was implemented by CMS, states that
Part A, so the inpatient payment, is generally
appropriate only if the attending physician expects
the patient's care will require them to cross
two midnights in the hospital. The physician
expects it to. Yes. If the physician expects
a stay of less than two midnights, the patient
should technically be classified as an outpatient,
even if they're in a hospital bed. So the court.
issue is that the payment determination is based
on the expectation of the physician at the time
of admission, not the actual duration of the
stay. Exactly. If the expectation is less than
two midnights, the hospital gets reimbursed under
Part B for outpatient services, even if the patient
is occupying a hospital bed and receiving intensive
care. Why does that matter so much to the patient?
Because their financial liability changes dramatically,
I assume, but also because it messes with a patient's
ability to qualify for follow -up care. You've
hit on the two key points. For the patient, being
an outpatient often means greater cost sharing
because they're paying co -pays for individual
services under Part B rather than that single
deductible under Part A. But the greater trauma
is the skilled nursing facility or SNF eligibility.
Part A coverage for an SNF stay requires a preceding
minimum three -day inpatient stay, meaning three
midnights. So walk me through this. If a patient
is admitted on a Friday, stays Saturday, but
is discharged Sunday afternoon, that's less than
three midnights, they might have been classified
as an outpatient the whole time. They might have
been. And if so, they lose the ability to qualify
for crucial subsidized rehabilitation in an SNF.
Even if they need it. Even if their doctor says
they absolutely need that rehab, Part A won't
pay for it because they never officially had
a qualifying inpatient stay. So a patient could
have been in the hospital for 48 hours, critically
ill. receiving the same care as someone deemed
impatient, but their admission status under this
rule denies them access to the subsequent SNF
benefit. Precisely. It's a very counterintuitive
bureaucratic mechanism. It's designed to limit
high -cost Part A short stays and ensure that
Part A is reserved for truly acute, lengthy hospital
care. But it has these major downstream consequences
for patients. That is an excellent breakdown
of a deeply complex issue. OK, let's shift gears
to Part B, medical insurance. This is the coverage
most people use most often. Doctors testing outpatient
procedures. Part B is your routine outpatient
coverage. It covers physician services, including
surgeons and specialists, diagnostic tests, durable
medical equipment or DME like oxygen tanks or
wheelchairs and ambulance services. Right. And
crucially, unlike Part A, which focuses on acute
care, Part B covers 100 percent of many preventive
services like annual wellness visits, flu shots
and mammograms. as long as you use an in -network
provider. Now, the cost structure here is simpler,
but it's what creates the biggest financial risk
for beneficiaries. It does. The standard monthly
premium for Part B is projected at about $185
for 2025, though wealthier beneficiaries pay
more, which we'll discuss later with IRMAA. After
you meet a relatively small annual deductible
estimated to be $257 in 2025, the critical 80
-20 split takes effect. Medicare covers 80 %
of the approved cost, and the patient is responsible
for the remaining 20%. And that 20 % co - Coinsurance
is the defining feature and the massive risk
because Original Medicare has no out -of -pocket
limit. None. So if you have a $500 ,000 cancer
treatment that's paid for under Part B, your
20 % liability is $100 ,000. That is the gaping
hole in Original Medicare. It's why virtually
no financially prudent beneficiary relies solely
on Parts A and B. They immediately seek supplemental
coverage, which leads us perfectly to Part C
and D. Let's move to Part C Medicare Advantage.
This is the private sector's alternative. How
exactly does Part C function? Part C is a form
of managed care. Private insurance companies,
which are approved and regulated by CMS, they
contract with the government to provide all the
benefits of Parts A and often Part D in one bundled
package. The MAPD plan. Exactly, an MAPD plan.
And they receive a fixed payment per enrollee
from the government to do this. So they are required
to meet or exceed the coverage standards of Original
Medicare, but they get to redesign the benefit
structure. Precisely. They might charge a $25
copay for a primary care visit instead of that
20 % coinsurance. They also typically offer extra
benefits that Original Medicare doesn't, like
routine dental, vision, hearing, or even gym
memberships. That's a dang sign. The downside
is network restrictions. About 75 % of these
plans are HMOs or PPOs, which require you to
use specific doctors and hospitals. But the most
crucial financial benefit, the one that really
drives enrollment, is the mandatory OOP limit.
Absolutely essential. Because Original Medicare
Parts A and B leaves that catastrophic risk wide
open, Part C plans So part C is a tradeoff. You
get a financial safety net and some extra benefits,
but you give up freedom of choice regarding your
providers and networks. That is the simplest
way to explain the fundamental difference. The
choice really hinges on whether you value unlimited
provider access, which is AB plus a Medigap plan,
or limited financial risk, which is Part C. Okay,
finally, Part D. The prescription drug benefit.
This was a huge addition and acted in 2003 and
went into effect in 2006. Part D covers self
-administered prescription drugs, both generic
and brand name. It's available to anyone enrolled
in Part A or B. And it's all run through private
companies. Entirely. Part D is administered entirely
through private insurance sponsors, which are
regulated by CMS. They contract with pharmacy
benefit managers, or PBMs, to manage their formularies
and negotiate prices with manufacturers. and
pharmacies. This decentralized private negotiation
structure is often touted as why Part D has been
financially more successful than initially projected,
right? Yes. The competitive model encourages
plans to negotiate aggressively, which is why
critics often point out that the cost of Part
D has run well under the original projections.
But this private system means that plans have
formularies lists of covered drugs that can vary
widely from plan to plan. And what rules govern
those formularies? What do they have to cover?
And we have to talk about the notorious donut
hole. What exactly was it and how is it closed?
The donut hole, or the coverage gap, it existed
between the initial coverage limit and the catastrophic
threshold. Once a beneficiary and their plan
had spent a certain amount on drugs, the beneficiary
would suddenly be responsible for a much higher
percentage of costs, sometimes 100%. Then they'd
stay there until they hit the catastrophic threshold,
after which the plan paid almost everything.
It was designed as a cost control measure, but
it created immense hardship. And the Affordable
Care Act stepped in to mitigate this sharply.
It did. The ACA gradually phased out the donut
hole by 2020. The mechanism was subtle. It lowered
the beneficiaries required copay within the gap
to 25%. Ah, so it made the cost sharing in the
gap. equal to the cost sharing in the initial
coverage phase. Exactly. It effectively smoothed
the transition, providing immense relief to the
roughly 5 % of beneficiaries who have very high
drug costs. Okay. So part two summarized. A and
B is the core government coverage, but with major
cost sharing gaps. C is private managed care
that provides a mandatory OOP limit. D is private
regulated prescription drug coverage. That's
a great summary. Let's transition now to the
financing puzzle. This is where the demographic
pressures and the political battles truly converge.
We established that Part A, the hospital insurance,
is funded fundamentally differently than B and
D. Let's delve into the mechanics of that Part
A payroll tax. So Part A is primarily funded
by the hospital insurance, or HI, trust fund.
Its revenue comes from a dedicated 2 .9 % payroll
tax on all earned income. And that's split between
the employer and employee. It is, split evenly,
1 .45 % each. A crucial point is that since 1994,
there has been no compensation limit on this
tax. Unlike Social Security taxes, you pay 2
.9 % on every single dollar you earn. And there's
an additional surcharge for high earners, right?
Yes. Since 2013, the rate increases to 3 .8 %
for earned income, exceeding $200 ,000 for an
individual or $250 ,000 for a married couple
filing jointly. But that additional revenue doesn't
go to Medicare. Where does it go? It goes toward
funding Affordable Care Act subsidies. Interesting.
So Part A relies on dedicated tax revenue, which
is great for predictability, but it is... acutely
sensitive to that ratio of workers to beneficiaries.
Where do parts B and D get their money? They're
much more susceptible to general economic fluctuation
and congressional appropriation. So they're funded
primarily by general fund revenue from the U
.S. Treasury, think income taxes and corporate
taxes, and then supplemented heavily by beneficiary
premiums. And this brings us right back to the
demographics that are crushing the H .I. Trust
Fund. Yeah. The baby boomers are retiring en
masse. They are, and the numbers are just unforgiving.
By 2030, the entire baby boomer generation will
be 65 or older. Enrollment is projected to exceed
80 million people. And the crunch comes from
the worker -to -enrollee ratio. That's the key
metric. It's the number of people paying into
the system versus those receiving benefits. And
that ratio is projected to drop from 3 .7 workers
per enrollee to just 2 .4. That is a staggering
35 % decline in the support ratio in a single
decade. It means the burden on those remaining
2 .4 workers to support current beneficiaries
is just immense. That's why the solvency clock
is constantly ticking. It explains the political
urgency perfectly. And speaking of burden, we
have to discuss IRMAA, the mechanism by which
the cost -sharing burden falls disproportionately
on wealthier beneficiaries. The income -related
monthly adjustment amount. Exactly. IRMAA is
essentially a premium surcharge that's applied
to both Part B and Part D. It kicks in when a
beneficiary's income exceeds $85 ,000 for an
individual or $170 ,000 for a couple. And what
does it do? Depending on how far above those
thresholds they are. These beneficiaries are
forced to pay a Part B premium that can be 30
% to 70 % higher than the standard rate. And
it's important for listeners to know this calculation
isn't based on your current income. It's based
on the tax returns you filed two years prior.
It's a lagging indicator. It is. A recent retiree
who had a high income two years ago but has a
low income today might still be subject to IRMAA
until their current tax status catches up in
the system. Okay, now for the part that I find
most fascinating and technical. The provider
payment systems. Yeah. How does Medicare, as
this massive single payer, decide what a hospital
or a doctor gets paid? Let's start with Part
A, hospital reimbursement, and the DRG system.
Part A uses what are called diagnosis -related
groups, or DRGs. This is a form of prospective
payment. Instead of reimbursing the hospital
for every single itemized cost, every pill, every
bandage, every hour of nursing, Medicare pays
a single fixed amount based on the patient's
diagnosis and severity. So if a patient has a
severe case of pneumonia, which is a specific
DRG, the hospital gets X dollars, regardless
of whether the care cost them X minus 10 or X
plus 10. That's the core incentive structure.
It forces hospitals to be efficient. If they
can treat the patient safely for less than the
DRG payment, they get to pocket the difference.
If they're inefficient, they lose money. It shifts
the financial risk from the government to the
provider. But risk shifting creates incentives
for manipulation, most notably upcoding. Indeed.
Upcoding is the practice where hospitals might
inflate the severity of a patient's diagnosis
just to qualify for a higher -paying DRG. It's
a constant regulatory battle for CMS to ensure
that hospitals are paid accurately based on true
patient need, not based on attempts to maximize
reimbursement. Okay, now let's move to Part B,
physician payment. This system, the Resource
-Based Relative Value Scale, or RBRVS, is where
the story gets really interesting because the
rates are set, in part, by a non -governmental
entity. RBRVS is the mechanism that determines
the price for the roughly 7 ,000 services that
physicians perform. It attempts to price services
based on the resources required. So physician
work, practice expense, and malpractice insurance.
These are all converted into relative value units,
or RVUs. The core controversy isn't the formula
itself, but who dictates the value of those RVUs?
Precisely. The initial values and the regular
updates to these RVUs are largely determined
by the Specialty Society Relative Value Scale
Update Committee, the RUC. The RUC. And this
is not a federal committee. It is a private advisory
panel composed of 29 physicians. So you're saying
a private panel of doctors who are often specialists
is advising the government on how much money
doctors nationwide should be paid under the largest
single health insurance program in the world.
That's exactly what I'm saying. Why does CMS
rely so heavily on this private body? It's a
stunning governance arrangement. The data shows
that CMS adopts the RUC's recommendations about
87 % of the time. The reason is, well, it's multifaceted.
Firstly, the RUC provides detailed clinical expertise
and cost data that CMS just does not have the
internal resources to compile for 7 ,000 different
services. Okay, that makes some sense. But secondly,
and perhaps more importantly, reforming physician
payment is politically explosive. By relying
on a body that's made up of physicians, CMS gains
a degree of clinical legitimacy and political
cover. It helps them avoid a direct confrontation
with the entire medical community. So we have
a system where payment rates are being heavily
influenced by the very industry being regulated.
And that influence tends to favor specialists
who sit on the panel over, say, primary care
physicians, whose services are generally valued
lower by the RUC methodology. That is the longstanding
criticism of the RUC, that its structure inherently
institutionalizes higher reimbursement for specialty
procedures over routine primary care. And this
impacts the entire supply and distribution of
the physician workforce in the U .S., since Medicare
rates often set the benchmark for private insurance
as well. This structure leads us directly to
the legacy of the Sustainable Growth Rate, or
SGR. Tell us about that formula and the political
chaos it created. The SGR was a disastrous mechanism.
It was intended to control Part B spending growth
by linking it to economic growth. If actual spending
exceeded the SGR target, which it always did,
the formula mandated steep, sometimes catastrophic,
cuts to the RBRVS conversion factor. Meaning
a huge pay cut for every doctor accepting Medicare.
A huge pay cut, which of course would have caused
a mass exodus of doctors from the Medicare system.
The cuts were often projected to be 20%, 30%,
or even higher. This led to what became known
as the annual doc fix. Every single year, sometimes
multiple times a year, Congress was forced to
pass emergency temporary legislation to override
the mandated cuts just to keep the system functional.
It created massive unpredictability and turned
physician payment into a yearly high stakes political
drama. It was a perfect encapsulation of political
instability. The system was legislated to be
fiscally conservative, but politically it was
completely unsustainable. Finally, in 2015, Congress
repealed the SGR and replaced it with MACA -ARI,
which shifted payment toward quality metrics,
attempting to stabilize physician pay. But the
SGR story perfectly illustrates the challenge
of controlling costs when those controls conflict
with the political need to maintain provider
access. We must now address the immediate future.
The solvency of the part of trust fund and the
major policy reforms being debated right now.
Let's start with the big one. Let's confront
the $50 trillion number first because it's so
staggering it almost loses all meaning. It's
a number that requires a lot of context. The
total unfunded obligation for Medicare over an
infinite time frame is currently estimated at
over $50 trillion. This represents the gap between
projected tax revenues and the expected spending
required to pay full benefits under current law.
That is nearly twice the size of the entire US
national debt. It implies that paying the currently
promised benefits is mathematically unsustainable
without massive, massive changes. It does. And
the more immediate issue is the Part A HI Trust
Fund insolvency, which is currently projected
for around 2026. Now, insolvency does not mean
the program shuts down. Correct. It means that
the dedicated payroll tax revenue will only be
sufficient to cover about 85 percent of Part
A costs thereafter. So if Congress does absolutely
nothing, Part A payments to hospitals and SNFs
would immediately be cut by 15 percent. That
would be catastrophic for the health care system.
It would be. And this is the political reality.
The actuarial estimates assume that full benefits
will be paid, but they also acknowledge that
the long -term projections rely on the critical
assumption that Congress will repeatedly step
in to prevent the deep cuts mandated by current
law, like those scheduled physician payment freezes
after 2025. It's a system designed to require
political intervention just to remain stable.
That's a perfect way to put it. But before we
jump into the reform proposals, let's quickly
reassure the listener about Medicare's efficiency
relative to the private sector, because this
is important. This often surprises people who
only focus on the solvency crisis. Despite the
$50 trillion challenge, Medicare has been significantly
more successful at controlling per capita spending
growth than private insurance has. By how much?
Medicare's projected growth rate is around 2
.5 % annually, while private insurance is projected
at 4 .8 % annually. Medicare's massive size provides
substantial economies of scale and negotiating
power. So it's not inefficient. It's a high -cost
program challenged by demographics. Yeah. But
the system does face profound internal inefficiencies
when dealing with the most vulnerable, the dual
eligible. The dual eligible dilemma is perhaps
the largest administrative failure point in U
.S. health care. These are the nine million low
income individuals who qualify for both Medicare
because of age or disability and Medicaid because
of low income. OK. This population is tremendously
sick. Over half have five or more chronic conditions
and they account for a disproportionate 36 percent
of Medicare's total costs. And the core inefficiency
is that the two systems are administered separately
and often work against each other. Exactly. Since
Medicare covers the medical services and Medicaid
generally covers long -term care and supplemental
costs, both programs have financial incentives
to shift costs onto the other. Give me an example.
OK, Medicare might send a complex patient home
from the hospital early to save on Part A costs,
knowing that the patient will likely end up back
in the ER a week later, with Medicaid footing
the bill for home services that could have prevented
the readmission in the first place. The care
becomes uncoordinated and fragmented. The proposed
solution is radically improved coordination,
treating the person holistically. What are the
potential savings there? The potential savings
are huge. Experts project that coordinating care
for dual eligibles could eliminate $125 billion
to over $200 billion in unnecessary hospitalizations
and emergency visits. It's about connecting these
patients with proactive primary care, better
medication management, and necessary social services
like housing assistance. And this is one area
where both sides of the political aisle usually
agree on the necessity of reform. For the most
part, yes. Let's turn to some of the legislative
battles, starting with the long -running debate
over drug price negotiation. Why has Medicare
always been barred from negotiating drug prices
centrally, unlike, say, the VHA? Part D was designed
to use decentralized private negotiation. Each
of the hundreds of private Part D plans negotiates
its own prices through their PBMs. Proponents
argue that this competitive market model would
drive costs down effectively. And as we noted,
Part D has performed better than expected financially.
But the comparison to the Veterans Health Administration
is powerful. The VHA, which provides care directly,
has the power to negotiate centrally for its
entire patient population. And multiple studies
have shown that the VHA pays substantially less
for identical drugs than Part D plans do. And
this led to the Inflation Reduction Act of 2022.
It did. That act finally granted Medicare limited
negotiation power. How limited is it? Very. It's
not the VHA model. Medicare will start negotiating
prices only for a limited number of the highest
cost drugs, starting with just 10 drugs in 2026
and increasing over time. And it only applies
to drugs that have been on the market for a specified
long period without any generic competition.
It's a step, but it's not the centralized negotiation
system many advocates had sought. Moving to structural
reform, let's discuss premium support. This is
a fundamental philosophical shift. Premium support
proposes transforming Medicare from a defined
benefit program, where the government guarantees
specific services, to a defined contribution
program. Okay, what does that mean in practice?
The government would provide a fixed voucher
or premium support payment, and beneficiaries
would use that money to choose among competing
private health plans. It's similar to Part C,
but it would become the default model for everyone.
What's the major argument in favor of this? The
central idea is that robust competition between
private plans driven by the consumer selecting
the best value would drive down overall costs
and force greater efficiency across the entire
system. It injects market principles into Medicare.
And the major concern raised by critics. Risk
selection. Critics worry that insurers will innovate
ways to attract the healthiest, lowest cost patients,
a practice known as cherry picking, and avoid
or discourage the enrollment of sicker, more
costly beneficiaries. This would leave the most
vulnerable, high cost patients concentrated in
the remaining public fee for service option,
potentially making it fiscally unsustainable
and resulting in sicker patients receiving worse
care. Let's consider the debate over the eligibility
age. We see proposals to both raise it and lower
it. If we raise the age from 65 to 67, aligning
it with the full Social Security retirement age,
what are the financial tradeoffs? The immediate
appeal is federal savings. The Congressional
Budget Office projected that raising the age
would save the federal government about $113
billion over 10 years. That looks like a big
win for solvency. But the Kaiser Family Foundation
pointed out that this isn't free money. It's
just shifting costs. That's the critical insight.
Raising the age forces 65 and 66 year olds onto
the private market. This often results in higher
premiums for them, and it raises the overall
premium pool for younger people. Kaiser estimated
that the proposal would increase total social
costs, so the combined outlays for the government,
employers, states, and individuals, by more than
twice the savings gained by the federal government.
So you save the government money, but you burden
the overall economy and individuals more heavily.
Precisely. Now let's discuss Medigap restrictions,
a proposed solution to the moral hazard problem.
This proposal targets the idea that when a patient
is fully insulated from cost, which happens when
a Medigap plan covers that 20 % coinsurance,
they have no incentive to question or limit seeking
unnecessary costly treatments. It's called first
dollar coverage. So policy makers propose introducing
limits or surcharges to force patients to have
some skin in the game. Precisely. They want to
discourage moral hazard. The most aggressive
proposals suggested limiting Medigap from covering
the first several hundred dollars in coinsurance
and restricting coverage above that. This could
potentially save tens of billions of dollars
over a decade by reducing what's deemed frivolous
use. What is the significant policy risk of increasing
cost sharing for the elderly? The fear is that
increased cost sharing would disproportionately
affect patients with low health literacy or those
living on the margins. Instead of just discouraging
unnecessary care, it might cause patients to
delay or forego entirely necessary, potentially
life -saving care like cancer screenings or essential
diagnostic workups. Which would lead to far more
expensive hospitalizations later on. Exactly.
It's a constant dilemma. ensuring efficiency
without sacrificing access. Finally, the push
for expansion into non -acute care, specifically
vision, dental, and hearing services. This was
a major focus of recent legislative efforts.
The Build Back Better legislation successfully
added hearing services, which began to roll out
in 2023, subject to the Part B deductible and
that 20 % coinsurance. However, the comprehensive
dental and vision components were stripped out.
Yet the data on unmet needs, particularly for
vision, is overwhelming. It is. Data from the
Urban Institute showed that Medicare enrollees
spend more out of pocket on routine vision services,
$8 .4 billion, than they do even on routine hearing
services, which was $5 .7 billion. This is a
massive out of pocket expense that the system
fails to cover. And the inequality is stark.
Absolutely. The data clearly shows a severe income
gradient. Lower income beneficiaries, particularly
non -Hispanic Black and Hispanic enrollees, spend
dramatic less on vision services than high income
beneficiaries do. This suggests that the current
coverage gap results in severe unmet needs among
those who can least afford the care. This expansion
debate really summarizes the modern challenge
of Medicare, doesn't it? Is the program just
about covering acute, life -threatening crises
like in Parts A and B? Or should it encompass
the routine care necessary to maintain a high
quality of life, like dental and vision? That
question will define the political debate for
the next decade. Hashtag, hashtag, outro, pet.
This deep dive has confirmed that Medicare is
far more than just an insurance plan. It is a
powerful economic and social driver. It sets
benchmarks for U .S. health care delivery. And
notably, it manages its per capita cost growth
much more effectively than the private insurance
market does. And despite its relative efficiency,
it is perpetually caught between the inexorable
pressure of demographics leading to the part
a solvency crisis and the immense political pressure
to both maintain current benefits and expand
coverage. Right. All while relying on these highly
technical, often private sector. or influenced
payment mechanisms like DRGs and the RUC just
to keep providers engaged. For you, the learner,
the key takeaways must be cemented. First, understand
the fundamental huge difference between original
Medicare Parts A and B with its high coinsurance
and lack of an out -of -pocket limit versus Medicare
Advantage Part C, which trades network freedom
for a guaranteed financial cap. Second, remember
that original Medicare does not cover long term
custodial care, which is a crucial omission for
planning purposes. And third, recognize the extraordinary
influence that the private specialized RUC panel
holds over how doctors are compensated nationwide.
And let's end where we began with that fundamental
instability. We noted that the Medicare trustees
long term financial health projections are predicated
on a critical built in assumption, which is that
Congress will repeatedly. step in to prevent
the deep automatic benefit cuts and payment freezes
that are mandated by current law. So if the long
-term solvency of Medicare is only sustained
by this guaranteed mandatory political intervention
year after year, then what does that imply about
the stability and the, well, the political honesty
of the program as it's currently structured?
Right. It suggests the system is designed to
fail financially unless politicians prioritize
the doc fix over fiscal law, making the promise
to current taxpayers contingent on constant legislative
maneuvering. It's a challenge that future generations
must confront head on because that political
promise is... is precisely what they are paying
into today. Something to consider as you digest
this colossal, fascinating program. Until next
time.