Medicare on Life Support?

While the strain on Social Security is daunting, Medicare makes up the biggest portion of the problem, accounting for an estimated 80% of the combined shortfall. If Medicare were a corporation, states Pauly, "it would be bankrupt many times over."

The trustees report shows that the Medicare hospital program could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134% increase in the payroll tax -- from a rate of 2.9% to 6.78% -- or an immediate 53% reduction in program outlays.

The current debate over health care reform in the United States has ignored the problems with Medicare and is focused on finding ways to cover the uninsured and on controlling costs for those under age 65 in the private market, Pauly says.

He has doubts about the effectiveness of a coalition formed by six trade groups, including the American Medical Association and organizations representing hospitals and drug manufacturers, to rein in health care costs. The group is pledging to reduce spending by $2 trillion over 10 years to help provide medical insurance for those without coverage. Critics contend the group is motivated by a desire to influence potential regulation and maintain a voice in health care reform. "They are just repackaging a set of ideas for lowering costs, like greater use of information technology, that have already been talked about a great deal although not generally proven to be effective," says Pauly. The pledge "is better than nothing, but not really noble and not, in any case, binding" on the trade groups.

Any cost reduction that works in the private insurance market will also benefit Medicare. However, Pauly cautions that the health program's trustees are already assuming a growth rate for Medicare spending in the long run that is lower than the 5.5% growth -- reduced from 7% -- promised by the coalition. "It would postpone the day of doom for Medicare but not avoid it," says Pauly. "This is a political statement, not a serious economic proposal."

In his book, Markets Without Magic: How Competition Might Save Medicare, Pauly lays out a solution to make Medicare sustainable over the long term that is based on a voucher system. The plan would rely on market competition to provide basic health coverage for the elderly, while also allowing individuals to make choices about what they are willing to pay for varying levels of additional care.

Pauly argues that elected officials do not currently have the political spine to rein in doctors and medical spending to make Medicare sustainable, which means they will wind up rationing medical care in a haphazard fashion when the system simply runs out of money. The United States, he says, is not likely to introduce the kind of policies that are part of the British system where, for example, a patient who is 80 may not receive expensive treatments for kidney failure because of his or her age. In the United States, he says, rationing will be less direct. "The budget will be constrained, and [health care consumers] will have to take what they can get for a set amount of money."