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An Unhealthy Tradition: Medicare Miscalculations

By Michael F. Cannon

March 26, 2004

Washington is abuzz over the allegation that former Medicare administrator Tom Scully threatened to fire chief Medicare actuary Richard S. Foster if Foster shared with Congress his cost estimate of the new Medicare prescription-drug plan. But even if the allegation proves true, that would not be the scandal.

The real scandal is that the government deliberately withheld important information from the people. Foster produced highly credible estimates that Medicare's most recent addition will cost taxpayers $534 billion over 10 years, not $400 billion as Congress had been told. Had the Bush administration not suppressed this estimate, the bill would have died. As it is, the federal government now will transfer additional trillions of dollars from workers to retirees in a fashion that will accelerate the growth in health-care costs. Scully's alleged enforcement of the administration's decision is not the scandal itself, merely its least subtle expression.

Ignoring, whitewashing, and covering up Medicare's true cost is a Washington tradition as old as the program itself. As Sue Blevins recounts in Medicare's Midlife Crisis, prior to its enactment, government officials assured Americans the program's cost would be manageable. Even then, many observers demurred.

One was Barkev Sanders, a statistician who served in a number of positions in government, including chief of the Social Security Administration's Division of Health and Disability Studies, and who was responsible for many of the original Social Security cost estimates. In 1959, Sanders criticized a report by the secretary of Health, Education and Welfare estimating the cost of providing government hospital care to the elderly. Sanders argued the estimate baselessly assumed helpful slowdowns in hospital cost growth. In 1962, he criticized a similar report for making such rosy assumptions it failed to support the claim that government assistance was even needed. In 1964, he again noted that Medicare-cost projections were "far too low" and that the administration "has been concealing the truth by means of its actuarial estimates." Though Sanders did not oppose government financing of health care, he concluded that "if a sound realistic health program cannot be accepted by the public on its merits it should not be imposed on them by the government."

Experience has vindicated Sanders and other critics. Despite official projections in 1965 that hospital insurance under Medicare would cost only $9 billion in 1990, actual spending in 1990 was $66 billion. Medicare payroll taxes are now nearly double what supporters promised would be necessary, having been raised most recently in 1994, and the program consumes a growing share of general revenue.

Medicare's trustees now report the program's already grim financial outlook has deteriorated. According to economists Jagadeesh Gokhale and Kent Smetters, in 2003 the federal government would have had to come up with $31.3 trillion to cover all of Medicare's future deficits. Because we let the problem slide and even added an expensive new benefit, the trustees tell us that in 2004 we would need to come up with $61.3 trillion dollars right now to cover all of Medicare's future deficits. That's a financial imbalance roughly six times that of Social Security.

Washington has paid scant attention to prior warnings from Medicare's trustees. Therefore, the trustees offer a new illustration of the problem. Without significant change, Medicare will consume one-fourth of federal income taxes by 2019, and over one-half by 2042. That is in addition to revenue from payroll taxes and premiums paid by seniors. The wake-up call to Washington's elite could not be clearer: Reform Medicare now or watch it devour your most cherished causes.

Yet the last bit of damage done by the Bush administration's gagging of Medicare's chief actuary may be this: that the ensuing flap will overshadow the trustees report and conceal the true cost of Medicare from the public just a little bit longer.

Michael F. Cannon is director of health-policy studies at the Cato Institute. This article was originally published online at Reprinted with permission.