The 2013 Medicare trustees report reconfirms a basic fact: Seniors and taxpayers face a bleak future.

The trustees project that Medicare’s share of the economy will almost triple over the next 75 years, forcing higher taxes to pay for an ever growing program. The recent slowdown in health care spending is a passing phase and largely attributable to the American economy’s poorest performance since the 1970s. While there are claims that Obamacare has improved Medicare’s finances, these claims are easily discarded.

Important facts for the 2013report:

1. The status of the hospital insurance (HI) trust fund today says nothing about Medicare’s financial challenge tomorrow. Since 2008, HI expenditures have exceeded income and in 2012 the shortfall was $23.8 billion. There is no automatic drawdown on the Treasury for the hospitalization program, as there is with the Supplemental Medical Insurance (Part B) program. Congress would have to raise taxes—again—to pay for benefits.

The exhaustion date has changed from 2024 in the 2012 report to 2026 this year due to lower spending projections. But the problem is not the HI trust fund; it is the dramatic growth in Medicare spending. The Medicare actuary projects that long-term (75 year) debt is $35.2 trillion, slightly smaller than last year’s projected debt.

2. The President’s Medicare agenda is no solution and will likely make matters worse. The Affordable Care Act (Obamacare) solves nothing. On the one hand, it imposes record-breaking payment reductions on Medicare providers amounting to $716 billion in “savings” over the next 10 years. On the other hand, instead of being earmarked exclusively to the Medicare trust fund, the majority of these Medicare “savings” are to finance entitlement expansions outside of Medicare.

If the President is successful in pursuing these massive Medicare payment reductions, as the Medicare actuary has stated, 15 percent of Medicare providers would be in the red by 2019, 25 percent by 2030, and 40 percent by 2050. Under his newly created Independent Payment Advisory Board, the President would ratchet down Medicare payment to medical professionals even more. His proposed future: more Medicare patients and fewer doctors willing or able to take care of them.

The “good news” is that there is little likelihood of success. The trustees report, “The best available evidence indicates that most health care providers cannot improve their productivity to this degree for a prolonged period as a result of the labor-intensive nature of these services. Without unprecedented changes in health care delivery systems and payment mechanisms, the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services.” This scenario means that the Medicare shortfall is far higher than official estimates suggest.

3. Injecting real competition into Medicare program is the only rational choice. Given the magnitude of the Medicare challenge, Congress is running out of options. Congress could continue to raise taxes and further reduce payments to Medicare providers, but there is another option: Congress could inject intense market competition into the program to control cost and stimulate innovation and productivity in the delivery of medical services. With a system of defined-contribution financing, Congress could force health plans and providers to compete directly for seniors’ dollars, as they do today in Medicare’s prescription drug program. The Heritage Foundation has outlined exactly how that could be done in Saving the American Dream.

There are claims that Obamacare is the driving factor behind lower Medicare costs. These claims do not withstand scrutiny. In addition to the previously mentioned problems with the productivity adjustments, there are other reasons to doubt these claims:

  • Accounting gimmicks. The actuary has previously confirmed that the Medicare reductions in Obamacare “cannot be simultaneously used to finance other federal outlays and to extend the [Medicare] trust fund” solvency date—rendering dubious any potential claims that Obamacare will extend Medicare’s solvency. As House Minority Leader Nancy Pelosi admitted in October 2011, Congress “took a half a trillion dollars out of Medicare in [Obamacare], the health care bill.”
  • Massive tax increases. Today’s report confirms that Medicare’s finances are being affected by the health care law’s “high-income” tax—which is not indexed for inflation and not just for high-income wage earners. The report notes that “by the end of the long-range projection period, an estimated 80 percent of workers would pay the higher tax rate.” As previously reported, these tax increases are part of the $4 trillion in “revenue enhancements” over the next 25 years taking place thanks to Obamacare.
  • Seniors losing coverage. Table IV.B10 (page 154) of the report restated prior projections that enrollment in employer-sponsored retiree drug plans will fall from 6.8 million in 2010 to a mere 800,000 by 2016—a drop of nearly 90 percent. This rapid decrease in enrollment occurs thanks to provisions in Obamacare that raise taxes on employers who continue to offer retiree drug coverage.

Under the President’s agenda, the Medicare program is locked into a trajectory of unending cuts and periodic fiscal crises. Injecting competition and choice into Medicare is the best alternative, especially when compared to unsustainable cuts that endanger providers providing service to beneficiaries. Rather than making the case for why Congress should ignore entitlement reform, the trustees report actually makes a better case for why Obamacare should be repealed and why fundamental entitlement reform is necessary.