The Collapse of Medicare… and What You Can Do About It
Most Nestmann clients are around my age – I just turned 62.
Some are older and some are younger. Our oldest client is a youthful 87. The youngest is 23. But the average age is mid-50s to mid-60s.
This is relevant because my generation – the “Boomers,” born from 1945 to 1965 – will soon come face-to-face with the collapse of Medicare. And it will happen sooner than you think.
Medicare provides health insurance for senior citizens and people with permanent disabilities. Today, 57 million people aged 65 or older are enrolled in Medicare. The federal funding for the program is one of the largest line items in the federal budget. It accounts for $710 billion (15%) in government spending in the 2016 fiscal year. About $590 billion of this money came from taxpayers; the remainder came from premiums paid by Medicare recipients. The Congressional Budget Office estimates that the taxpayer portion of Medicare spending will increase to $1.2 trillion by 2027.
Last year, House of Representatives Speaker Paul Ryan caught a lot of flak for saying “Medicare is going broke.” But Ryan was fundamentally correct, although you won’t see this in official statistics.
Medicare is made up of four parts. The “original” Medicare, which came into effect in 1965, covers payments to hospitals (Part A) and physicians (Part B). Other parts of Medicare came later: private insurance for expenses that Parts A and B don’t cover (Part C, or Medicare Advantage) and prescription drug coverage (Part D).
Medicare Supplement Plans are also available in most states. These plans, referred to collectively as “Medigap” plans, pay various expenses and deductibles not covered by Medicare Parts A and B.
Since Medicare Advantage and Medicare Supplement Plans are funded by individual recipients, they will not go bankrupt. However, companies offering this coverage may have to sharply increase premiums for reasons I’ll explore in a moment.
Part A of Medicare is primarily funded by a payroll tax that goes into a trust fund. Parts B and D are mainly funded by general tax revenue. Thus, analysis of Medicare’s financial condition requires separate consideration of each of these funding sources.
Parts B and D of Medicare can’t go bankrupt, because of the way they’re financed. Each year, premiums for Parts B and D are set so they will cover 25% of costs. The remainder of the funding comes from general tax revenue.
Each year, the board of trustees for Medicare publishes a report summarizing the financial status of the program. The most recent report, states that the Part A trust fund will be depleted by 2029. Payroll taxes are projected to pay 88% of Medicare hospital insurance costs. That percentage will slowly decline to 81% by 2041, and then it will gradually grow as boomers die off in increasing numbers.
So, at first glance, the worst-case scenario for Medicare is that by 2029, payroll tax revenue will only cover 88% of expenses for Part A.
Paul Ryan, and many actuaries, are concerned about the assumptions behind these projections. The most obvious weakness in the projections is that there are no adjustments for the near certainty that tens of millions of working Americans will lose their jobs in the next few decades. These individuals will no longer be paying into the system, which will increase premiums for everyone else.
Blame new technologies – robotics, driverless vehicles, and the like – for this development. Indeed, researchers at Oxford University estimate that technology will eliminate a stunning 47% of US jobs in the next two decades.
My conclusion is that the Part A shortfall will be a lot more severe than the Board of Medicare Trustees projects.
And it gets worse. In 2015, Congress enacted legislation designed to contain Medicare spending by limiting payments to physicians. Physician payments can only increase 0.5% annually from 2017 to 2019. Payments are frozen between 2020 and 2025. It’s very likely that more physicians simply won’t accept Medicare patients. At the same time, demand for medical services from aging boomers will skyrocket. That will mean long delays for many types of non-emergency care.
The options for dealing with this mess are all politically unpopular. For instance, Congress could mandate an increase in the age at which you receive Medicare benefits. It could also increase Medicare payroll taxes, which are currently set at 1.45% for employees and 1.45% for employers. It could continue to increase Medicare premiums, especially for beneficiaries with relatively high incomes. And it could increase the co-pays Medicare recipients must pay.
As for Parts B and D, to avoid funding shortfalls, premiums will need to increase sharply.
It’s not a pretty picture, and there’s no politically expedient way out of it. Medicare is a train wreck waiting to happen. Premiums will skyrocket, and faced with cost freezes, an increasing number of physicians simply won’t accept Medicare patients.
In other words, you need a Plan B not only for your investments, but for your medical care, especially if you’re over the age of 50.
My personal Plan B for medical care is a legal residency in a country – Panama – that has first-class medical care available at a much lower cost than the US. Panama has a network of private hospitals staffed by physicians trained in the US, Canada, and the EU. So if I’m told I need to wait eight months for a knee replacement or other non-emergency procedure, I can fly to Panama and have the surgery done in a matter of days. And since I have a residency permit, I can stay as long as I want.
Of course, I’ll need to pay for the surgery out-of-pocket, but the costs might be only a little higher than the co-pay I’d need to shell out under Medicare.
Panama isn’t the only country competing for your health care dollars. Costa Rica, India, Malaysia, Mexico, Thailand, and numerous other countries have developed robust “medical tourism” industries. Most of these countries also have publicly funded healthcare programs you can sign up for once you become a legal resident. Premiums are very inexpensive, typically under $100/month.
One thing is for certain: the crisis in Medicare funding isn’t going away. If you don’t already have a Plan B for medical care, now is a great time to develop one.
Protecting your assets (and yourself) against any threat - from the government, the IRS or a frivolous lawsuit - is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.
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