The idea that Medicare reform will gain traction by requiring that seniors have "more skin in the game" is taking a bruising.

Requiring higher out-of-pocket expenses or benefit cuts for all beneficiaries will hurt the elderly poor the hardest—perhaps more than previously thought—since new government statistics show more seniors are becoming impoverished.

According to a new study by the Kaiser Family Foundation (KFF), which analyzed the Census Bureau's "supplemental poverty measure," when health care costs are taken into account, some 15 percent of seniors fall below the government's poverty line. That compares to a senior poverty rate of 9 percent. The Census Bureau does not consider medical expenses in its official measure. (It should be noted that the supplemental rate is considered controversial since some health care expenses are discretionary.)

As with most medical expenses, there are regional differences. As might be expected, health care costs are higher in large metropolitan areas, such as San Francisco and New York, than in most rural locales. Kaiser found that under the supplemental measure, the poverty rate is twice as high in California, Colorado, Connecticut, Hawaii, Massachusetts, Maryland, Minnesota, New Hampshire, New Jersey, Nevada, Wisconsin and Wyoming as the rest of the country. In California and the District of Columbia, nearly one in five seniors dips below the poverty line when health care costs are tallied.

The report shoots an arrow into the idea that cost-sharing or cost-shifting is a workable idea for reform.

"Under the supplemental poverty measure, which deducts health spending from income, poverty rates could increase if beneficiaries were required to pay higher cost-sharing or premiums for Medicare.… The supplemental measure suggests that a greater share of seniors may already be struggling financially than is conveyed by the official measure."

This KFF report builds upon the foundation’s 2011 research report, "How 'Much Skin in the Game' is Enough?" The 2011 report examined the overall financial burden that health care places on the elderly, and Kaiser researchers showed that health care spending has been steadily rising for most of this century. Although the total has probably dipped in recent years, by 2006, beneficiaries were spending as much as 16 percent of their income on out-of-pocket health care expenses, and one in four seniors were spending as much as 30 percent.

What's not known is how much out-of-pocket spending is affecting the oldest Medicare beneficiaries, who are among the sickest patients. They are also frequently subject to long-term care costs, including for unskilled nursing or custodial care, which are not covered by Medicare.

Perception is Reality?

Much of the "skin in the game" argument is based on research conducted by Eugene Steuerle, PhD, at the Urban Institute. The economist (and his coauthor Caleb Quakenbush) wanted to know much taxpayers paid in Medicare (and Social Security) taxes relative to the lifetime benefits received. He first researched the question in 2011 and updated his study last year.

A summary shows the disparity between taxes paid and estimated benefits:

  • A one-earner couple earning average wages ($44,600 in 2012 dollars) and turning 65 in 2020 would have paid $77,000 in lifetime Medicare taxes, but receive about $500,000 in benefits.

  • A two-earner couple (each earning $44,600 in 2012 dollars) and retiring in 2020 would pay $153,000 but also receive about $500,000 in benefits.

  • A single female retiring in 2020 would pay $77,000 in taxes but receive $267,000 in benefits. A single male would also pay $77,000 but receive $232,00 in benefits.

In the investment world, that shakes out to a pretty healthy return on the taxes paid into the system, which is partially what fueled the "skin" debate. Overall, Medicare beneficiaries receive roughly $3 in benefits for every $1 they pay in taxes. That's turned policymakers' attention to the degree that taxpayers subsidize Medicare. How much should taxpayers (paying income tax) be covering Medicare expenses through general revenues as compared to those subject to payroll taxes? Is it fair to ask future beneficiaries to cover more of their care while they are working, or when they retire?

Other Expenses Considered

Although most of Part A is covered through payroll taxes, only 25 percent of Part B and Part D costs are covered through premiums. The rest comes from taxpayers and government borrowing. If health care costs explode for the retiring baby boomer generation, then that will require more borrowing, a cut in benefits, increases in out-of-pocket expenses or perhaps all three.

But with overall medical expenses climbing for the working population, will voters be likely to accept higher out-of-pocket costs when they retire? Working families are spending about $15,000 annually on unreimbursed expenses as compared to $8,000 a decade ago, according to the KFF as reported in Forbes. Retirement savings have also been depleted this century after two recessions. Wages haven't been keeping up with the cost of living or medical inflation. It's clear that tomorrow's retirees will be a facing their golden years with a diminished nest egg.

It's also worth questioning whether requiring higher copayments or premiums will actually reduce the overall consumption of services, which is one goal of hiking out-of-pocket costs. Those with chronic care needs or acute illnesses may base decisions on which mode of care entails the lowest out-of-pocket charges. If an emergency room visit is completely covered, they may overuse that service, even though it's probably the most expensive way to cover such health care needs.

It may be a weak argument to suggest that services that are completely covered by Medicare result in higher total expenses. A study released by the National Association of Insurance Commissioners (NAIC) released earlier this year found no evidence for "the underlying assumption that consumers use more services when the expenses are paid fully," according to Trudy Lieberman, writing in the Columbia Journalism Review.

"In the process they [the NAIC authors] took some of the wind out of the general argument from politicians and others who want to make consumers responsible for controlling costs by making them pay more of the cost," Lieberman added.

At this point, it's a nettlesome political question to ask who will make the bigger sacrifice in reforming Medicare spending. Will the burden largely fall upon providers, as the Obama administration has proposed? Or will the costs be passed along to beneficiaries, as conservatives have suggested in offering voucher-style plans? This debate is worth closely watching as few in Washington want to revert to life before Medicare, when old-age poverty was much more prevalent. 

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