Solvency or Affordability? Ways to Measure Medicare's Financial Health

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

INTRODUCTION

The question of the financial health of the Medicare program is important to the debate over how the program should change in the future. Are dramatic measures to save costs necessary? Can resources be found to support a prescription drug benefit? These policy issues are intimately tied to how we view the program and its financial situation. But there are many possible ways of examining Medicare's financial issues, and the choice of which to use is often made on the basis of politics and spin that a particular measure can create.

This paper examines different ways to look at Medicare's financial status and the implications each may hold for the future. A measure can be created that, by definition, will demonstrate that a major problem exists or that we need not worry about the future. And while alternative views can emerge on the best or most appropriate measure, some approaches are misleading and do not contribute constructively to the debate. Moreover, even using the same measures can result in different characterizations of Medicare. In response to the release of the 2002 Trustees Reports (Board of Trustees, 2002), for example, Medicare was variously called "unsustainable" and at the same time referred to as a program in "strong financial health." The differences arise from attitudes that extend well beyond the choice of measure to what the role of government should be and to how resources should be shared across generations. Rather than identifying just one measure, this paper offers a number of alternatives, distinguishing between issues of "solvency" and "affordability," offering a broader perspective on the issue of Medicare's future.

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