COVERED: Soaring Health Costs May Leave Future Taxpayers with Big Medicare Tab

Throughout 2015, the Academy is working with partners to create a platform for dialogue around the history and future of these two vital programs, including this weekly Covered blog series. Covered is written by Bob Rosenblatt, a Senior Fellow at the National Academy of Social Insurance and editor of the website HelpWithAging. Learn more about the Academy’s celebration of the 50^th anniversary of Medicare and Medicaid.

Soaring Health Costs May Leave Future Taxpayers with Big Medicare Tab

By Bob Rosenblatt, Special Correspondent

May 1, 1965

Washington, DC – Adding the cost of hospital care for people over 65 to the Social Security program may create a huge financial burden for future taxpayers, according to economic projections released last month by the House Ways and Means Committee.

With hospital costs increasing by seven percent a year and wages rising only four percent annually, the hospital benefit could face a huge financing gap. Hospital bills would be paid with Social Security taxes collected from workers and their employers.

A day in the hospital now costs $40, which is equal to 200% of the average daily wage. By the year 2015, assuming current trends continue, a day in the hospital would cost $1,178 – a staggering 829% of the projected daily wage, the report noted.

In the Democrats’ enthusiasm over the likelihood of being able to pass a long-awaited Medicare bill in the new Congress, there has been little discussion of future costs. “It seems impossible to predict what the trend of medical costs and what hospitalization and medical practice trends will be in the future,” according to the Ways and Means Committee report. But one thing is clear: the disparity between wage growth and hospital cost inflation can’t keep going indefinitely, warned the authors of the report.  With current trends, “eventually hospital costs would exceed 100 percent of the earnings of all workers in the country – let alone, of taxable earnings.” The Ways and Means report was issued in March, after the Medicare bill passed the House, to provide members with a detailed explanation of how it will work. The report has received little attention outside the discussions of actuaries and other technical experts.

While some are quick to dismiss the report, the country will not be spending 100 percent of everyone’s wages on hospital bills – it does raise the question of how much will be spent keeping the promise to pay for hospital care for the population over the age 65. There are 20 million people now in this age group, with millions more to be added as the U.S. population grows older, according to the Ways and Means report.

The Medicare bill calls for people over 65 to pay $40 for the first day of a maximum 60-day stay in the hospital during a period of illness. The taxpayers would pay most of the remaining costs. The insurance industry sought – unsuccessfully – for the legislation to create a $2,000 limit on what the government would cover. The Ways and Means Committee and the Administration rejected this idea.

Social Security Commissioner Robert Ball, chief actuary Robert J. Myers and other Social Security Administration experts have been preparing their financial projections for the program, despite the uncertainty of future health care costs. According to their calculations, as contained in the Medicare bill passed by the House and headed for the Senate, the hospital benefit would be financed through a payroll tax of 0.35 percent in 1966, increasing to 0.50 percent in 1967 and reaching a maximum of 0.80 percent in 1987 and thereafter. The tax would be levied on the first $5,600 of wages earned in 1966 and would increase to the first $6,600 starting in 1971. The maximum tax paid by a worker would be $52 a year to pay for hospital care for the over-65 population. The worker’s employer would pay an equal amount of tax.

According to the Ways and Means report, by 1990, it is anticipated that the payroll tax would collect $9 billion a year, which would cover hospital costs of $8.7 billion a year.

Another element of financial uncertainty comes from the voluntary insurance program needed to cover doctors’ bills. That new, added feature of Medicare would be financed by a $3 monthly payment from individuals over age 65 and another $3 from the government. According to the committee report, these premiums would be adjusted as costs increase.

The cost of insurance covering visits to a physician’s office is harder to forecast than the current Old Age, Survivors and Disability (OASDI) programs under Social Security. Part B of the new Medicare program will be voluntary and it is unclear how many people will enroll in the program. With OASDI, there is more accurate information on the number of people that are likely to claim benefits and the benefit formula is clear. With health care, there are also likely to be major changes in medical procedures and the development of new drugs available to treat the most common medical ailments faced by older people, making any estimates of future costs much more tentative. Estimates of innovations in medical care and projected spending on medical care are educated guesses, at best.

This uncertainty makes the new Medicare program – the largest increase in social insurance since the creation of Social Security – a likely source of scientific and political debate for years to come. What will American society be like 50 years from now in 2015, if the Ways and Means report is true, and a day in the hospital costs eight days of wages? The implications are staggering for the rest of the budget and for the allocation of resources for other critical government programs, such as national defense.

► Directory of COVERED posts
► Read the next post in the COVERED series, “Medicare May Not End Welfare for People with Long Hospital Stays​”
► Learn more about the Academy’s celebration of the 50th anniversary of the enactment of Medicare and Medicaid