Solving Medicare Through Compromise

Update: an interactive web version of the model is available at http://www.treatmentreport.com/models/medicare-model

In order to come up with a solution to Medicare, three players need to compromise.

• Providers – hospitals, drug and medical equipment manufacturers, doctors, nurses, administrators, insurance companies – need to reduce healthcare inflation per person well below economic growth.  Medicare price inflation was quite low at 2.78% for 2010 (according to S&P) in comparison to last decade  as well as private healthcare spending, which is currently running at 5.77%.   Further inflation reduction can come from technological advances, wage freezes for unionized workers, scrutiny of administrator compensation, and tougher negotiations with drug manufacturers.   Focusing on conditions such as cardiovascular disease, cancer, diabetes and obesity would also reduce healthcare inflation substantially.

• Future Medicare recipients  -   need to agree that the age at which they receive Medicare will rise slowly to take into account that everyone lives longer now.

• Top 1% of taxpayers (those making over 380K) – need to agree to a higher effective tax rate as their low tax rates have caused a structural deficit in federal budgets.

This model of Medicare allows experimentation with assumptions about Medicare age and inflation.   It also calculates a shortfall of taxes (tax revenue) needed to keep Medicare spending at the 2010 level as percent of GDP and produces an effective tax rate increase on top 1% of income earners necessary to fill it.    Notice that Medicare taxes for part A do not include changes brought about by healthcare law in 2013 which would increase tax rate by 0.9% and would apply to about 50% of 3 trillion of income (approximately).  I decided not to include it as it was difficult to come up with a good formula to match government projections into 2020 which seem overly optimistic.

Below are the results for a scenario of slow increase in Medicare age (to 67 by 2020) and slower than 2010 (below 2.0%) Medicare inflation. Note: green numbers indicate assumptions that can change. Click on the image to see full resolution.

Medicare health inflation details:

Here is summary of the three scenarios that I’ve put into the model

Model Scenario	Medicare Age	Medicare inflation	GDP growth	Top 1% effective tax rate increase	Detailed Images
Scenario 1 – Download Excel	Slow increase (to 67 by 2020)	Slower than 2010 (below 2%)	Normal (2.8%)	3.02%	Results, Inflation Details
Scenario 2 – Download Excel	Slow increase (to 67 by 2020)	Same as 2010 (2.78%)	Normal (2.8%)	4.93%	Results, Inflation Details
Scenario 3 – Download Excel	No increase	Much slower than 2010 (0.5%)	Slow (1.5%)	3.15%	Results, Inflation Details

As you can see in most cases it would only take raising taxes to levels of early 2000’s in order to fund the Medicare shortfall.    (You can download Excel worksheets for any of the above scenarios and change the variables in order to decide for yourself which options for funding the Medicare deficit are most attractive.)

I will make some additional improvements to the model

• allow the tax increase assumption to affect anywhere from top 1% (>380K) to top 5% (>180K)
• allow decrease in Medicare age

If there other improvements you would like to see or  if you think there is a mistake in a formula, please email me or leave a comment.

Data sources used for this model:

Organization	Title and Link
Census	Personal Income and Its Disposition: 1990 to 2009
US Department of Health and Human Services	Fiscal Year 2010 Budget in BriefMedicare
IRS	Individual Statistical Tables by Tax Rate and Income Percentile
Standard and Poors	US Healthcare Costs Continue to Rise, But At Declining Rates According to the S&P Healthcare Economic Indices/td>
Tax Foundation	Summary of Latest Federal Individual Income Tax Data