Solving Medicare Through Compromise

Short version:

With US GDP growth of % , Medicare inflation of %, Medicare age of , effective tax rate increase of % on top 1%, and tax increase of the bottom 50% the resulting Medicare budget shortfall over ten years is:

Detailed version:

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.
Taxpayers - 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, GDP growth, and effective tax rates. 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.

Choose from scenarios below or create your own by manipulating blue variables anywhere you see them
Model Scenario	Medicare Age	Medicare inflation	GDP growth	Effective Tax Rate Increase on top 1% (starting in 2013)	Effective Tax Rate Increase on bottom 50% (starting in 2013)
	Slow increase (to 67 by 2020)	Slower than 2010 (below 2%)	Normal (2.8%)	3.3%	0%
	Slow increase (to 67 by 2020)	Same as 2010 (2.78%)	Normal (2.8%)	5.4%	0%
	No increase	Much slower than 2010 (0.5%)	Slow (1.5%)	3.0%	0.8%

Medicare Budget Projections Based on Medicare Age, GDP Growth, Medicare Inflation, and New Tax Revenues
	2010
Medicare Age
Total Medicare Outlays at % inflation rate
GDP at % growth rate
Medicare as % of GDP
Shortfall of revenue(spending at the same % of GDP as in 2010)
Increase the effecitve tax rates on top 1% (over 380K): current 23% + % = % on bottom 50% (less than 33K ): current 1.8% + % = % (These increases will take place starting in 2013) Effective tax rate is on federal income tax (not SS or Medicare taxes)	Shortfall over ten years (accounting for gdp, inflation, and Medicare age): New tax revenue from top 1%: New tax revenue from bottom 50%: Shortfall after new tax revenue:

Medicare Spending adjusted for Medicare population
Medicare Part	Service	Inflation Rate	2010

Medicare Tax Revenues and Shortfall
Revenue Source	2010
Medicare Tax (for Part A)
General fund tax collected (for parts B, C, D) at 2010 % of GDP
Total taxes collected
Shortfall of tax
Income earned by top 1%
Income tax paid by top 1% at 23.2% effective tax rate
Rate Increase necessary for a given year for top 1% (from 2010 rate)
New tax revenue generated by increasing the effecitve tax rate of 23% by on top 1% (over 380K)
Income earned by bottom 50%
Income tax paid by bottom 50% at 1.84% effective tax rate
Rate Increase necessary for a given year for bottom 50% (from 2010 rate)
New tax revenue generated by increasing the effecitve tax rate of 1.8% by on bottom 50% (less than 33K)

Medicare population based on Census data and accounting for disabled and unenrolled
Age	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
Total number of people on Medicare
Total number of people at and above age
Disabled (at 2% growth)
Grandfathered in
Data below is from Census. Each cell show the number of people alive at that age
0	4354547	4393553	4427650	4457515	4483378	4506104	4526663	4546394	4566593	4587659	4609539
1	4320723	4363860	4402986	4437207	4467202	4493199	4516068	4536777	4556657	4577004	4598219
2	4285437	4330091	4373308	4412516	4446819	4476900	4502985	4525948	4546754	4566731	4587174
3	4249596	4293204	4337926	4381209	4420487	4454859	4484996	4511139	4534160	4555023	4575059
4	4215860	4256129	4299805	4344596	4387948	4427296	4461724	4491904	4518091	4541158	4562065
5	4184088	4222766	4263115	4306872	4351742	4395174	4434578	4469050	4499272	4525502	4548615
6	4155349	4191672	4230441	4270880	4314727	4359686	4403197	4442652	4477177	4507454	4533736
7	4132457	4163288	4199717	4238593	4279138	4323091	4368113	4411676	4451186	4485763	4516095
8	4114666	4140996	4171953	4208506	4247506	4288174	4332236	4377325	4420953	4460530	4495175
9	4119285	4123352	4149804	4180884	4217561	4256683	4297443	4341580	4386745	4430452	4470105
10	3961684	4129472	4133664	4160237	4191435	4228233	4267462	4308300	4352516	4397755	4441542
11	3921874	3973859	4141754	4146074	4172773	4204096	4241000	4280326	4321257	4365570	4410900
12	3908547	3935356	3987468	4155473	4159926	4186753	4218194	4255196	4294621	4335650	4380063
13	3941400	3923756	3950703	4002948	4171066	4175662	4202610	4234158	4271267	4310797	4351932
14	4033786	3958691	3941215	3968321	4020719	4188964	4193701	4220769	4252435	4289660	4329305
15	4099874	4052688	3977800	3960511	3987788	4040349	4208701	4213574	4240771	4272566	4309918
16	4164741	4120045	4073076	3998416	3981328	4008785	4061497	4229931	4234959	4262302	4294239
17	4267597	4186827	4142377	4095658	4021266	4004403	4032041	4084899	4253413	4258618	4286125
18	4355062	4291807	4211354	4167190	4120758	4046677	4030058	4057890	4110921	4279530	4284945
19	4449201	4375920	4312993	4232882	4189029	4142909	4069149	4052782	4080834	4134064	4302789
20	4484822	4466985	4394058	4331472	4251717	4208187	4162360	4088900	4072786	4101055	4154484
21	4371508	4499594	4482055	4409469	4347208	4267795	4224543	4178963	4105768	4089874	4118327
22	4304560	4384668	4512906	4495647	4423383	4361431	4282311	4239288	4193942	4120999	4105310
23	4248698	4320669	4400977	4529376	4512404	4440469	4378805	4299957	4257175	4212073	4139393
24	4266785	4267530	4339726	4420253	4548832	4532163	4460549	4399163	4320609	4278088	4233253
25	4257948	4289436	4290476	4362902	4443654	4572419	4556052	4484761	4423683	4345454	4303224
26	4222499	4282360	4314094	4315407	4388044	4469001	4597941	4581868	4510914	4450161	4372272
27	4266775	4245713	4305786	4337754	4339327	4412160	4493318	4622429	4606651	4536036	4475612
28	4286186	4287844	4267060	4327340	4359539	4361369	4434400	4515759	4645034	4629545	4559263
29	4341809	4305564	4307460	4286948	4347422	4379842	4381932	4455162	4536712	4666137	4650929
30	4302574	4361914	4325941	4328071	4307830	4368493	4401141	4403502	4476930	4558672	4688245
31	4130466	4321789	4381314	4345610	4347970	4327996	4388842	4421708	4424320	4497926	4579839
32	4020764	4145725	4337070	4396757	4361303	4363873	4344145	4405152	4438204	4441035	4514784
33	3934995	4034126	4159150	4350488	4410317	4375094	4377857	4358361	4419513	4452736	4455771
34	3882524	3946896	4046095	4171163	4362470	4422422	4387424	4390368	4371094	4432375	4465758
35	3937371	3892703	3957167	4056415	4181505	4372758	4432815	4398034	4401144	4382080	4443472
36	3852076	3946415	3901978	3966520	4065801	4190894	4382077	4442234	4407662	4410932	4392071
37	3929436	3860100	3954463	3910257	3974871	4074179	4199269	4390371	4450628	4416266	4419698
38	4098129	3935964	3866896	3961275	3917299	3981979	4081306	4206386	4397390	4457738	4423580
39	4319629	4103241	3941500	3872704	3967097	3923354	3988082	4087407	4212452	4403332	4463750
40	4401314	4323550	4107690	3946381	3877858	3972258	3928744	3993506	4092816	4217810	4408546
41	4186614	4403873	4326421	4111090	3950213	3881955	3976341	3933044	3997841	4097132	4222071
42	4091239	4188308	4405320	4328191	4113410	3952982	3884986	3979340	3936259	4001082	4100341
43	4096601	4092070	4189117	4405878	4329086	4114877	3954906	3887175	3981491	3938629	4003475
44	4208400	4095016	4090658	4187662	4404133	4327686	4114073	3954574	3887123	3981391	3938759
45	4473396	4205178	4092246	4088072	4185026	4401177	4325090	4112112	3953119	3885966	3980177
46	4537923	4468712	4201384	4088935	4084964	4181874	4397683	4321962	4109641	3951171	3884321
47	4527099	4531864	4463038	4196631	4084675	4080900	4177747	4393178	4317839	4106209	3948290
48	4541095	4519473	4524425	4455986	4190544	4079091	4075498	4172249	4387263	4312331	4101439
49	4574684	4531380	4510014	4515128	4447069	4182634	4071705	4068288	4164912	4379449	4304933
50	4646928	4563315	4520339	4499229	4504498	4436829	4173480	4063118	4059896	4156387	4370417
51	4475481	4633010	4549948	4507331	4486501	4491942	4424732	4162584	4052848	4049853	4146222
52	4458174	4459992	4617053	4534569	4492321	4471776	4477418	4410711	4149834	4040754	4037992
53	4357631	4441060	4443086	4599634	4517755	4475892	4455661	4461524	4395326	4135782	4027377
54	4234374	4338929	4422162	4424413	4580409	4499186	4457752	4437874	4443952	4378284	4120164
55	4215799	4213921	4318141	4401156	4403647	4559038	4478536	4437576	4418068	4424367	4359261
56	4020518	4193160	4191564	4295406	4378170	4380900	4535626	4455889	4415417	4396284	4402800
57	3892847	3996792	4168508	4167200	4270616	4353095	4356091	4510107	4431187	4391233	4372495
58	3759850	3867606	3971045	4141757	4140753	4243704	4325886	4329179	4482436	4404401	4365007
59	3617868	3733523	3840733	3943661	4113339	4112675	4215171	4297073	4300683	4453149	4376047
60	3601825	3589872	3704866	3811516	3913924	4082522	4082247	4184276	4265880	4269832	4421452
61	3455708	3570684	3559224	3673503	3779546	3881391	4048816	4048953	4150462	4231725	4236031
62	3451231	3422729	3536901	3525979	3639498	3744899	3846135	4012297	4012879	4113832	4194732
63	3395468	3414271	3386557	3499867	3489541	3602245	3706944	3807514	3972304	3973370	4073719
64	2774473	3354971	3373989	3347069	3459396	3449657	3561441	3665343	3765167	3928447	3930012
65	2603715	2737692	3310340	3329511	3303373	3414545	3405390	3516109	3619094	3718054	3879632
66	2574580	2565565	2697783	3261982	3281277	3255944	3365848	3357291	3466817	3568772	3666755
67	2559735	2533611	2525068	2655435	3210744	3230166	3205694	3314278	3306342	3414601	3515458
68	2318783	2515636	2490350	2482319	2610778	3156854	3176431	3152876	3260092	3252809	3359759
69	2115257	2275729	2469242	2444876	2437423	2563949	3100435	3120160	3097530	3203300	3196666
70	2013636	2071649	2229196	2419164	2395814	2389012	2513449	3039645	3059517	3037863	3142073
71	1907229	1968140	2025325	2179788	2366018	2343742	2337597	2459804	2975173	2995242	2974657
72	1823675	1860382	1920291	1976597	2127825	2310132	2288933	2283432	2403314	2907362	2927645
73	1708287	1774619	1810843	1869677	1925038	2072840	2250965	2230851	2226015	2343433	2835530
74	1644612	1658450	1723347	1759064	1816776	1871148	2015383	2189158	2170206	2166095	2280984
75	1602048	1592670	1606597	1669996	1705182	1761720	1815055	1955557	2124810	2107099	2103772
76	1465885	1546636	1538195	1552203	1614010	1648622	1703898	1756112	1892646	2057091	2040656
77	1418900	1410210	1488469	1480991	1495068	1555194	1589169	1643085	1694090	1826429	1985792
78	1368664	1360081	1352375	1428054	1421565	1435710	1494056	1527334	1579814	1629538	1757503
79	1330732	1306289	1298814	1292114	1365095	1359613	1373790	1430249	1462782	1513748	1562119
80	1285978	1264174	1241658	1235287	1229591	1299739	1295242	1309398	1363882	1395622	1444995
81	1196041	1216349	1196477	1175895	1170622	1165925	1233143	1229597	1243706	1296153	1327057
82	1138548	1126021	1145963	1128028	1109386	1105207	1101464	1165663	1163043	1177073	1227425
83	1061190	1065578	1054675	1074188	1058176	1041463	1038328	1035501	1096580	1094872	1108789
84	982760	987094	991990	982657	1001671	987536	972703	970550	968628	1026525	1025716
85	916930	908335	913132	918487	910672	929137	916818	903807	902598	901550	956223
86	826149	841382	834329	839535	845290	838930	856781	846214	834976	834659	834439
87	730490	752194	766937	761326	766864	772937	767949	785127	776245	766717	767235
88	663034	659446	679901	694084	689810	695607	701918	698199	714648	707360	699454
89	576339	593042	590666	609836	623403	620362	626339	632808	630241	645895	640080
90	490324	510454	526029	524710	542546	555420	553483	559555	566097	564563	579369
91	403858	429674	448012	462417	461997	478460	490576	489599	495688	502220	501599
92	334928	349815	372846	389426	402648	402987	418060	429366	429196	435208	441634
93	274491	286502	299832	320190	335047	347072	348023	361709	372162	372655	378507
94	223689	231716	242345	254154	271966	285145	295973	297387	309706	319285	320310
95	181599	186193	193301	202608	212959	228383	239953	249601	251334	262305	270984
96	141217	148902	153024	159238	167288	176252	189462	199510	208005	209927	219583
97	108326	113932	120426	124058	129410	136276	143949	155134	163763	171162	173175
98	79402	85876	90563	95976	99126	103671	109453	115941	125294	132611	138973
99	58343	61770	67004	70866	75314	78003	81814	86626	92029	99741	105858
100	114339	125245	136043	148188	160345	173024	184815	196875	209962	224328	241485

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

Solving Medicare Through Compromise

Short version:

Detailed version:

v3.0 - January 20th, 2012 - added short version

v2.0 - November 10th, 2011