Is Now the Time to Expand Medicare?

President Biden’s proposal to add three new benefits ignores concerns over looming Medicare insolvency and our historically high national debt.

Can the federal government be socially responsible and fiscally responsible at the same time? Theoretically, yes. But is there any viable avenue in today’s Washington to simultaneously strengthen the social safety net and align federal expenses with federal revenue? No.

The seemingly complete disconnect between the two most important recent headlines about Medicare serves as the latest evidence. President Biden and the Democratic majority in Congress have been pushing this fall to add dental, vision, and hearing coverage to the government health insurance program for the elderly — adding tens of billions annually to the program’s expenses. But this drive comes at the same time as a fresh warning from Medicare itself: The trust fund it uses to pay for hospital stays will be insolvent in just five years.

That policymakers are seriously considering such an ambitious expansion, even as one of Medicare’s financial underpinnings fast approaches dire straits, underscores how little the notion of government financial responsibility resonates with either political party.

Policymakers from both sides share the view that sustaining economic growth is more important than ending the era of record annual deficits and the $29 trillion debt they have spawned. It’s the recipe for growth that completely divides the two parties, with Democrats favoring another infusion of government spending on social support programs while Republicans favor deregulation and lower taxes.

As a result, neither party is perceived as a champion of fiscal restraint. In July, an Associated Press-NORC poll found Democrats and Republicans were both judged by just 27% of voters as the more worthy of trust to address the “budget deficit”.

But policymakers are hardly being pushed by their bosses in the electorate to do more. Only 2% of Americans identified the budget as the nation’s most important problem when Gallup asked in August; as recently as eight years ago, one in five Americans did so.

Fiscal Impasse Persists as Interest Payments Shrink

All that polling, of course, came before the fall’s headline-making partisan drama over the requirement to raise the debt ceiling in time to forestall the first-ever United States government default. The new federal borrowing is needed to pay the government’s existing bills and does not authorize new spending, as Democrats correctly pointed out, while Republicans inaccurately sought to portray the vote as either permitting or preventing a fresh wave of fiscal extravagance.

So, the Treasury’s need to borrow more money on a regular basis will continue for the indefinite future even if this fall’s negotiations collapse and Biden’s “Build Back Better” agenda is abandoned in its entirety. That’s because the national debt will continue to grow so long as the government spends more than it takes in, and that practice shows no sign of ending given the current political dynamic. There is no willingness at all from the Democrats to support the deep cuts in spending, or from the Republicans to support the steep increases in taxes, required to mop up all the red ink on the federal books. And balancing the budget is a prerequisite for actually starting to shrink the debt.

Meanwhile, servicing all the Treasury’s loans remains a notable line item in the budget. Net interest payments on borrowed money are estimated to total $305 billion this fiscal year — 5% of all federal outlays and 1.3% the size of the American economy.

Those numbers are significant but not the worst in recent history. Debt service comprised  more than 15% of federal outlays in the late 1980s and early 1990s and more than 3% of the gross domestic product in that era. And it was the economic risk of sustaining that situation that helped spur a bipartisan deal leading to four straight years of balanced budgets that ended after the Sept. 11 attacks in 2001. It was the only time of budget surplus in the last half century.

Debt service as a share of federal outlays, and of the GDP, has fallen in recent years partly because lower rates have held down interest payments, but also because total federal spending has surged. And the reduced annual expense of running up debt, in the form of interest payments, has not helped the cause of those who view controlling the debt as fiscal responsibility Job No. 1.

Accepting – or Ignoring – Risk

The immediate focus of those worried about the debt is Biden’s ambitious plan to improve health care, child care, elderly care, and education, and to combat climate change. He originally called for $3.5 trillion in spending over the next decade but, in the face of opposition from a small but pivotal bloc of centrists in his own party, is now negotiating for a package a little more than half that size — which would still be the biggest single expansion of the federal government’s role since Lyndon B. Johnson’s Great Society in the 1960s.

Biden says the cost should be wholly paid for with his proposals for raising taxes on rich people, their heirs, and big corporations. Only once the details are hashed out can independent analysts, starting with the Congressional Budget Office, predict whether the new revenue will wholly offset the new spending.

If it does, it would suggest some fresh interest by policymakers in budgetary responsibility, at least in the short-term, although fully paying for something new would not in any way address the decades of past decisions to use the federal credit card.

Furthermore, if Congress and the president decide to stitch new pieces onto the social safety net without repairing the significant frays to its existing fabric — which seems highly likely — they would signal a continued choice to accept more risk over the long-term.

One way to limit risk, for governments as for families and businesses, is to protect existing investments before new obligations are undertaken. A home’s foundation cracks ought to be addressed before the basement floods – and before an eye-popping addition is added.

Washington policymakers tend to ignore this commonsense budgeting practice. In recent years, they have splurged on the military’s F35 fighter, a cutting edge jet that will cost close to $2 trillion over its 60-year lifetime, for example, while deferring more than $2 trillion in maintenance on deteriorating roads, bridges, and tunnels. (To be sure, these repairs would be significantly addressed by the other half of Biden’s domestic program, the $1 trillion infrastructure bill that is very unlikely to pass without a deal on the social programs measure.)

Putting Medicare Expansion and Insolvency Together

Prioritizing creation of something new over strengthening the old is what now seems to be happening with Medicare.

Adding dental, vision, and hearing coverage for 63 million people would be the biggest expansion of Medicare coverage since 2003, when coverage for most self-administered prescription drugs was included. The cost of Biden’s proposal has not been officially estimated, but in 2019 the Congressional Budget Office said a similar proposal would have cost $358 billion over 10 years.

At the same time, the latest annual report from Medicare, published in August,  projected that the hospital trust fund would be unable to pay all its bills beginning in 2026. The fund, which is filled almost entirely by a payroll tax on both workers and employers, covers beneficiaries’ inpatient hospital expenses, and bills for those services added up to two-fifths of Medicare’s annual outlays of $776 billion last year.

Expanding Medicare while its partial insolvency is just five years away looks like a relatively urgent problem.

“Democrats are ramming through a reckless new expansion of Medicare – just as it’s a few years from bankruptcy”,  Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, said as the panel opened debate on Biden’s package. (Technically, the program faces insolvency, not bankruptcy. Absent action, Medicare says it will be able to pay only 91% of hospital claims beginning in 2026.)

At first blush, the two matters are not formally interconnected. The proposed new benefits would not become part of Part A, which pays hospital bills from the trust fund. They would be part of Part B, which relies on the Treasury to pay the share of outpatient doctors’ bills not covered by the beneficiary’s monthly premiums.

But, as a practical matter, there is a connection: Even as general tax revenue (and new borrowing) may be tapped to cover billions in fresh expenses for elderly Americns’ eye, ear, and tooth care, by the middle of the decade the Treasury may also be required to start footing much of the bill for the elderly’s hospital bills.

Congress and the president could meaningfully extend the life of the Part A trust fund in four ways.

They could move to cut benefits, but that would guarantee a revolt from elderly voters. They could propose reduced hospital reimbursement rates, but that would create a huge lobbying fight from the healthcare industry. They could seek to increase the 1.45% payroll taxes on both employers and  employees, but that would violate Biden’s promise that he would raise taxes only on the wealthy. (Those making more than $200,000 a year pay an extra 0.9% Medicare tax.)

The final option, which would be the easiest politically but hardly best for the nation’s fiscal future, is pouring tens of billions in general revenue into the hospital trust fund every year, assuring it can keep covering the bills but adding to a national debt that’s already bigger than the gross domestic product.

“It simply makes no sense to imagine that Congress and the administration, while in the middle of implementing a brand-new benefit funded wholly through general revenues, would feel any need to solve the … problem of an evaporating Medicare Part A trust fund”, writes the Forbes retirement columnist Elizabeth Bauer, who sees no important distinction between the fund and general Treasury revenue. “It’s nothing new for politicians to promise their constituents free lunches, but it is new territory to do so for Medicare.”

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