Alarmist language frightens and misleads the public, say Theodore Marmor and Jonathan Oberlander, and opens the door to imprudent policy debates
Sunday, April 04, 2004
Talk of Medicare going bankrupt is once again dominating the news. The pattern is utterly familiar.
Program trustees issue a report forecasting that Medicare revenues are insufficient to keep pace with future spending obligations and that the trust fund for hospital insurance consequently will become insolvent (last month’s report moved up the projected date of insolvency to 2019). Media accounts warn in hyperbolic tones that Medicare is “going bankrupt.” And politicians declare that “hard choices” must be made if Medicare is to be saved.
Unfortunately, most Americans do not realize that a program like Medicare cannot, like a private trust, go bankrupt.
Medicare has survived four decades of such warnings without any disruption of services to its elderly and disabled enrollees. Despite repeated earlier forecasts of insolvency, Medicare has never gone bankrupt — and it’s not going bankrupt this time around either.
Intended as prudent warning, the forecasting of Medicare’s future finances — and the alarmist language accompanying media reports — instead frightens and misleads the public, and opens the door to imprudent policy debates.
The intermingling of the vocabularies of trust funds, solvency and fiscal prudence has been a central (and ambiguous) feature of social insurance politics in America since the New Deal. Clarifying the language is a precondition to understanding the fiscal realities of a program like Medicare.
In the first place, no precise analogue to private bankruptcy exists in public programs like Medicare. The program’s hospital “trust fund” refers to an accounting term, a conventional way to describe earmarked revenue and spending. The very notion of a public “trust fund” emphasizes the “trust” that earmarked financing (such as the Medicare and Social Security payroll taxes) was originally meant to symbolize.
Since the mid-1930s, the federal government has used the language of trust funds to underscore the solidity of commitment to finance promised benefits in social insurance programs. Other agencies of government came to use this same device to describe specially favored (and protected) objects of governmental support. By the late 20th century, Americans had grown so used to such accounting conventions that the fundamental differences in private and public trust funds have become indistinct.
In private firms or households, a trust fund without funds is literally insolvent, unable to finance any activity. Private trusts cannot tax and their other options are highly constrained. It makes sense to think of private “trustees” making sure the projected income from the trust fund’s “investments” are financially realistic; there is no place else to turn if the invested capital is lost or the income sharply reduced.
Congress, on the other hand, has a radically different relation to the financing and spending decisions affecting trust fund programs like Medicare. It can, for example, change the hospital payroll tax rate for Medicare and immediately eliminate any shortfall, if it has the political will to do so. Likewise, the Congress can alter the benefits and reimbursement provisions of the program’s hospital or medical coverage. Or it can do some of both, as it has in different proportions over Medicare’s operational history since 1966.
Thinking that the trust fund is the crucial fiscal variable is analogous to thinking that a thermometer’s reading constitutes a heat wave or a freeze. Fiscal strain and political stress — that language accurately describes Medicare’s budget circumstances at some times and not at others. News accounts sometimes treat Medicare’s bankruptcy as a predetermined fact. Nothing could be further from the truth; the notion of bankruptcy as destiny distracts from Medicare’s capacity to alter its own future.
The trustees’ reports always stress that the projected date of insolvency assumes no corrective federal action or policy changes. But history shows that Medicare always has taken action to solidify its finances. In the 1980s, Medicare reformed its payment system for hospital and physicians, slowing down growth in program spending and pushing back the estimated date of trust fund exhaustion. More recently, the 1997 Balanced Budget Act included a series of Medicare reforms that dramatically controlled spending.
The result: While in 1997, Medicare’s hospital insurance trust fund was projected to become insolvent by 2001, by 2000 the trust fund was not predicted to be insolvent until 2025, the most optimistic fiscal forecast for Medicare in a quarter-century.
The lesson here is straightforward. Forecasts are simply possible futures, not predicted ones. Understood that way, the story worth telling is that attention now should focus on the problems and disappointments the recent Medicare legislation has generated, not handwringing about 2019. There will be plenty of time to worry about then; now is what is at issue.
(Theodore Marmor, a professor at the Yale School of Management, is the author of “The Politics of Medicare” (theodore.marmor@yale.edu