In the greater context of the health care debate, Medicare — the government’s health insurance provider program for the elderly — often is mentioned in passing as a program to make cuts and save billions, so that Congress can spend more than $1 trillion to overhaul the health care system.

But, what’s often overlooked is the program’s colossal unfunded promises, which are on track to choke the nation’s budget in less than a decade. “There are four things that no one in Washington is arguing about Medicare,” said J.D. Foster, a senior fellow with Heritage:

  • Medicare is unsustainable, with a projected 85.6 trillion in unfunded obligations as of 2007.
  • Higher taxes will not be the solution to make Medicare financially sustainable.
  • You cannot resolve Medicare’s unfunded obligations by “tinkering around the edges” of the program. While saving money by ridding the system of fraud and waste is a laudable goal, doing so does not solve the larger problem.
  • Medicare needs a lot of reform. But lawmakers need to achieve the “must-does” before the move on to the “should-be-done” reforms.

Eliminating Medicare’s total excess costs might be ideal, but to “really get this done, Congress needs a notion of what is sustainable for Medicare,” Foster told the audience of a recent Medicare discussion at Heritage.

One place to start is the amount of money needed to finance Medicare. In 2008, the program received general revenues equal to about 1.3 percent of the gross domestic product. This is a large number, but it was apparently manageable for the government, Foster said. So if Congress set the program’s support ceiling at 1.3 percent of GDP, it would have a sustainability target of cutting Medicare’s unfunded obligations by roughly $67.8 trillion.

That’s still a large number, but more attainable than the total $90 trillion that comes when you look at the unfunded obligations plus a $4.4 trillion cost of likely “doc fix” legislation. Current law requires specific cuts in payments to doctors who see Medicare patients, but year after year Congress has delayed these cuts and even raised reimbursement rates, raising Medicare’s costs. (Note: These additional costs aren’t in the Medicare Trustees’ estimates).

Since Medicare is unsustainable in its current form and all beneficiaries receive an average annual subsidy of more than $4,000, an obvious reform is to require upper-income seniors to forgo their subsidies. They would do this by paying higher premiums. This already occurs to some extent in Part B (which pays for seniors’ outpatient health care services like doctor visits).

“In Part B, you have phased-down subsidies,” Foster explained, “and the issue is that even though they are income-adjusted, you still have seniors making more than $500,000 who still receive a subsidy for the Part B program.”

Foster was quick to point out he’s not looking to add on more Medicare expenses to low-income seniors or deny seniors access to the Medicare program.

But if the government altered the subsidy phase-down so that it applied to the whole program and extended it so that older Americans making more than $660,000 would stop receiving subsidies, the program’s unfunded obligations would fall by $44 trillion.

William Gale, vice president and director of economic studies at The Brookings Institution, called the idea “a real solution.” “People have been talking about reforming Medicare but they offer not details. This is a huge step in filling that space,” he told the crowd.

“Obviously, you need to give it the ‘ole Samsonite luggage test, but the idea that there could be real measures in Medicare is a big step forward.”