Speaking of Unfunded Liabilities: Medicare Part D

The Financial Report of the United States Government, 2009 was released last week. Perusing the tables, one encounters the gigantic new, unfunded entitlement enacted in 2003, namely Medicare Part D.

From page 50 of the report:
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Note the last line, “Present value of future expenditures in excess of future revenue” (over a 75 year period). The figure is $7.2 trillion.

The report also has some interesting information about contingent liabilities [1] [2]. See Notes 18 and 19 (pages 99-101).

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16 thoughts on “Speaking of Unfunded Liabilities: Medicare Part D

  1. Mogden

    Part D was fiscally a very horrible thing, right from the start. Typical political can-kicking.

  2. Steve Kopits

    You seem to be arguing for cutting Part D. It’s clear we’ll have to cut somewhere.
    At the same time, forecasts out to 75 years are worthless, and of course, you know that. At the end of the day, what will matter is the long-term budget constraint as dictated by financial market realities and voter preference.
    How much money will politicians spend? All of it. And for a period of time, perhaps somewhat more.

  3. kharris

    So, let me see if I have this right. We had a surplus which, by CBO estimates, would have lasted for a while, at a time when future liabilities seemed large for demographic reasons. All quite respectable. We then got a series of tax cuts aimed at eliminating the surplus, and tacked on an unfunded benefit for the wealthiest age group, structured so as to provide the greatest possible benefit to drug companies.
    Now, less than a decade later, with medical costs growing more rapidly than any other large part of household budgets, and access to medical insurance problematic, the same set of politicians can’t bring itself to pass (nominally) fully funded legislation affording health care coverage to all?
    What is the objection to assuring coverage for those who need it? We can’t afford it. So the people who, through their taxes, are paying for a benefit for the richest segment of the population which is also a benefit to drug companies, are told they cannot be assured of access to insurance because it’s too expensive? Pass the stinkin’ bill.

  4. Steve Roth

    It’s interesting that the projected liability has dropped by $1.2 trillion–14%–since 2007.
    I have nothing useful to say about that, but find it curious. Is it purely the result of different economic projections?

  5. RicardoZ

    Menzie,
    Thanks for this. It is a stark example of the failure of the Bush administration and is also a good case study on how bad government health related programs are for the federal debt and the economy.
    Am I right to assume that you believe this and other such programs are bad for our economy?

  6. Long Run

    Lipitor would be inexpensive if citizens could buy it OTC, like in select other countries.

  7. Jim Glass

    Note the last line, “Present value of future expenditures in excess of future revenue” (over a 75 year period). The figure is $7.2 trillion
    Of course, Medicare Part A and Part B are $31 trillion.
    And we might remember that the Democrats were pushing their own (unfunded) drug benefit through Congress as their big issue at the time, and that when co-opted by the Repubs their big argument against the Part D as actually enacted was that it wasn’t big enough. Such was the alternative.
    Still, it was a nauseating spectacle, watching as the Repubs, struggling to keep enough of their own House majority on board to pass the damn thing, produced gamed financial projections (that everyone knew would prove bogus in reality) to understate its cost, and resorted to massively bribing and bullying their own marginal-vote members to pass that bill.
    Nobody would want to see a process like that again.
    Well, OK, it wasn’t entirely that bad. It had bipartsan support in the Senate — with the Repubs having only 51 Senators, it passed there 76-21 (a majority of Democratic Senators voting “for”) and then the conferenced version passed the cloture vote 61-39.
    So the Democrats certainly signed on bipartisanly, and shared responsibility, to that extent.
    It’s not like the Repubs had to push the whole sordid mess through reconciliation — creating so many *more* situations where the reluctant marginal votes had to be bribed and/or bullied in such an unholy manner.
    The normal legislative processes, filibuster and all, with Democrats signing on in the Senate, worked fine.

  8. Patrick

    Steve Roth: I’m just guessing, but maybe the difference is due to downward revision of projected future inflation, thanks to the US economy tanking.

  9. kharris

    Ricardo,
    How on earth is anything here evidence that government health programs are bad for the economy? Seriously, man, just saying things that you like to believe doesn’t make them true. Doesn’t make them even half way to logical. “Bad for the economy” is so utterly unsupported by anything at all in this discussion as to be dishonest.
    Ricardo needs to write on the blackboard 100 times –
    “Just because I believe it doesn’t mean it’s true.”
    In fact, every advanced economy but that of the US has better access to health care at lower cost than does the US. And every one of them is an advanced economy. So on the face of it, universal access to health care is not bad for the economy. In many of those cases, health care is provided through the government, so government provided health care, on the face of it, isn’t bad for the economy.
    Poorly regulated oligopolies? Those might be bad for the economy.

  10. ohwilleke

    Medicare Part D was necessary because of a design problem in Medicare before then. Medicare was created when drugs were a far smaller share of the health care pie than they are now.
    Making drugs available to old people who can’t afford them, old people whom the U.S. government already has an obligation to provide otherwise comprehensive health care for on a single payer basis, is hardly an obviously bad idea.
    We funded Medicare pay as you go from general revenues, as a non-means tested welfare program, rather than with an ear marked trust fund revenue source. As a result, the problem in the original post number is really in the accounting and not the program.
    Reporting as an unfunded liability an entitlement program whose benefits are subject to change at any time, and whose future costs are wildly unpredictable (due to issues like demographic bubbles, the reduction of existing drugs prices as they become generic, and great uncertainty regarding new drug technologies and new drug prices) is silly.
    The Medicare Part D budget projections also fail to reflect the lack of independence of this line item from others. For example, a very expensive new cancer or diabetes drug could dramatically reduce total Medicare costs by reducing doctor and hospital care expenses in other parts of Medicare. Medicare Part D also has the potential, if exercised, to be used to give the U.S. the power to negotiate price reductions from pharma (in addition Congress can reduce their profits by changing patent laws if they want).
    Social Security and Medicare non-part D are actually overfunded. The general fund budget of the United States is underfunded. But, blaming that on Medicare Part D overstates the issue. Increased unfunded defense spending and failure to increase taxes to pay for our current spending are more at fault than the contribution of Medicare Part D.

  11. Brooks

    The “unfunded liabilities” figure is not really analytically sound as a measure of our long-term fiscal imbalance or even as a good indicator thereof or of changes in this imbalance, because it is a function of an arbitrary carve-out of a portion of revenues from total revenues and of a portion of spending from total spending. It’s no more a metric of our long-term fiscal imbalance than the present value of the gap between any other pairing of projections for any one type of revenue and one type of spending — say, between Defense spending and corporate income tax revenue, or any other chosen pair. What matters is the imbalance between TOTAL revenues and TOTAL spending, and if one wishes, the present value thereof, not some arbitrary breakout of components (plus the debt held by the public).
    There is a conceptual fiction that Social Security and Medicare are somehow truly islands apart from the overall fiscal picture, as if taxation to fund them comes from an entirely different source than the source that is taxed to fund all other federal spending. In reality, we could always supplement the dedicated tax revenues for those programs with tax revenues that go into the general fund or more directly, for a given level of revenues, just shift taxation in a revenue-neutral way (i.e., increase payroll taxation and offset it by reducing other tax rates). Similarly, even if Social Security or Medicare were fully “solvent” forever, we could still reduce our overall fiscal imbalance by spending less on them, reducing the dedicated taxation for those programs, and offsetting those tax cuts with increases in other taxes, resulting in in lower projected spending, no change in projected revenues, and thus lower projected deficits. It’s all ultimately fungible, so these break-outs are ultimately arbitrary and not particularly meaningful.
    What the term “unfunded liabilities” refers to is the amount of incremental dedicated tax revenues for the chosen programs that we would need to:
    (1) avoid reductions in projected spending on those programs,
    AND
    (2) avoid an increase in projected deficits between all other revenues and all other spending (while also avoiding higher tax revenues from other taxes and reductions in other spending).
    Well, how meaningful is that? Not very. It’s like saying:
    1. (A-B) + (C-D) = E
    2. A-B is huge.
    My concern is E, so what does it tell me for someone to point to A-B or to changes in A-B as an indicator of the magnitude of E? It’s only meaningful if they also tell me something about C-D, in which case, what’s the point of focusing only on A-B in the first place?
    Well, the A-B in the algebra above is this metric of “unfunded liabilities”. It’s the gap between projected dedicated tax revenues associated with those particular programs (plus the “balances” of “trust funds” for those programs, which are their own fiction and source of conceptual misunderstanding) less the projected spending on those programs. C-D represents the gap between all other revenues and all other spending. And E represents total deficits, which are what we care about, since again, everything is fungible going forward. Ultimately we can choose how much we want to spend on what and how much to tax via which taxes.
    To illustrate this point, suppose we did away with dedicated taxation altogether, and simply funded Medicare and Social Security from the general fund henceforth. Well, I suppose one who sees the “unfunded liabilities” metric as very analytically meaningful would have a dilemma on his hands. He could either now view our “unfunded liabilities” for those programs as much, much higher, since now there are zero dollars of dedicated taxation associated with those programs, so ALL projected spending on those programs would be considered “unfunded liabilities”, OR he could now see these programs the same way he sees other projected spending that is not on programs that have an associated dedicated tax, such as Defense, and say that our “unfunded liabilities” have disappeared completely! But regardless of which he chooses, has our projected overall long-term fiscal imbalance changed at all? Of course not. But one would sure think so if he considers the size of our “unfunded liabilities” a very useful and analytically sound metric for the the size of our long-term fiscal imbalance.
    We have an existing debt held by the public. And we have projected (total) deficits. If one wishes, one can take the present value of those deficits and add them to the current debt, which would make more sense than just slicing out the gap between particular pairs of taxes and spending on particular programs. But, since we really want to put this in the context of some measure of our ability to pay, it’s probably misleading to express such a figure relative to today’s GDP, and better to express the current debt relative to today’s GDP and to do the same for projections.
    As just a note, I think ultimately an even better measure would include the context of our public and private net worth as well as income (GDP), since both net worth and income measure a creditor’s ability to service debt.

  12. Troy

    The falling future costs are due to increased use of generics to avoid the donut gap in coverage.
    Which brings up the real point of the problem, Medicare Part D is simply price supports for big pharma.
    The last baby boomer was born in 1965 and will turn 65 in 2030. Every drug on the market now will be out of patent by then.
    Drugs should be cost+plus, not the trillion dollar giveaways they are now.

  13. RicardoZ

    kharris,
    We have been subsidizing the health care of the rest of the world for decades: we do the R&D, US consumers pay more for drugs subsidizing the rest of the world, and that is not to mention that they pay for not defense of themselves always looking to us to defend them.
    But that said, all I was doing is asking Menzie if he agreed that Medicare D was bad and if that meant all such government health care was bad.
    I can see that you love government bueaucracy making your health care decisions. That is fine for you. In a free society you can make your own choice. But most of us would like to make our health care decicions free of the government bureaucracy.

  14. Jeff

    RichardoZ: Is it better to have one’s health care decisions made by an insurance company bureaucracy instead of a government bureaucracy? If so, why? Is the illusion of choice seem more real if it’s made by an insurance company, because one at least theoretically has a choice between insurance carriers?

  15. Cassandra

    I would love to be the fly-on-the-wall as RicardoZ attempts to negotiate the price and terms for his emergency appendectomy from “retail to wholesale”, while screaming in agony and horizontal on his gurney. Good luck matey! Hope you brought your own supply of discount catheters and some of your leftover dilaudid from your lost hospital visit….

  16. Natassia

    Cassandra,
    We have laws requiring that hospitals provide life-saving treatment. An appendectomy would be performed if it was required to save someone from imminent death, regardless of payment. Think about it, what if you were unconscious?
    However, the service provided and products used still need to be paid for…but if health care were more privatized and less dependent on third-party-payers for every darn medical expense (like HMOs), then costs overall would be lowered, making it more feasible for someone to pay for their emergency medical care (AFTER THE FACT) rather than having to file for medical bankruptcy.

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