Next on the repair list: medicare costs

If you think social security has troubles, wait until you see the problems facing medicare. While attention has focused on repairing the social security funding system, medicare - the second-largest nondefense government program - has become ''a forgotten stepchild,'' in the words of one health-care analyst.

Yet the trust fund which pays for medicare's hospital benefits, drained by fast-rising health care costs, is scheduled to run out of money around 1990. Unless benefits are cut ''drastically,'' says one economist, fresh money from higher medicare taxes or the Treasury's general revenue will have to be pumped into the system.

''The technical problems facing medicare are more difficult (than those facing social security), and the political problem is far more serious. Anything you do affects the income level of some large group - doctors, hospitals, medical equipment manufacturers, etc.,'' says Henry Aaron, a Brookings Institution scholar and a former assistant secretary of Health, Education, and Welfare.

Formed only 15 years ago, medicare is the second-largest US social program, and it's growing faster than No. 1: social security retirement benefits. Medicare's two parts - the Hospital Insurance Trust Fund (HI), financed by compulsory payroll taxes, and optional doctor bill insurance, paid for by general federal revenue and participants' contributions - paid health care costs for over 29 million elderly and disabled US citizens last year.

In fact, medicare now finances almost half the health care received by senior citizens. But the system faces trouble in the years ahead.

The problem is the Hospital Insurance trust fund. Unlike the social security retirement funds, HI, which paid $35 billion worth of hospital bills in 1982, has been running in the black, and will continue to do so through the middle of the '80s, according to the fund's annual trustees report.

But hospital costs, which increased an average of 15 percent annually between 1975 and 1980, have gone up much faster than anticipated. HI has been unable to build up a comfortable surplus. By 1990, as more and more US citizens reach age 65, HI's costs are predicted to more than double. Over the next 25 years, the trustees report estimates, HI will be asked to pay out 30 percent more than it receives in taxes.

Last November, says a Health and Human Services official, HHS actuaries were predicting HI would run dry in 1991. But that date has now been moved forward an undetermined amount of time, he says, because HI has in the past two months lent large sums to social security's acutely troubled retirement funds.

Medicare will start to go under just about the time social security is scheduled to sail past a short-term financing crisis and reach calm seas, points out Gene Kimmelman, staff attorney with the Ralph Nader group Congress Watch.

''All of a sudden people will be saying, 'Now we have to raise another tax,' '' says Mr. Kimmelman. ''I hate to see (Congress) focusing on social security without considering medicare.''

Over the last two years, the Reagan administration and Congress have taken some small steps toward reining in medicare's runaway costs. The 1981 budget saved $1.2 billion by forcing beneficiares to share more costs; in 1982 Congress voted to force federal employees to pay the 1.3 percent medicare payroll tax, and cut a further $2.8 billion from the program, mainly through new limits on hospital reimbursement rates.

But the real problem, says Dr. Aaron of Brookings, is the payment system embedded in the medical industry. Most health care is paid for by government or private insurance, on a cost-plus basis - whatever costs are incurred plus some profit. So doctors, hospitals, and patients have no real incentive to hold down costs.

''Until you come to terms with that, it will be difficult to come to terms with medicare,'' says Aaron.

Last fall, at the behest of Congress, the administration proposed changing medicare to a ''prospective payment'' system. Instead of reimbursing hospitals for treatment costs, medicare would pay rates set in advance, according to the patient's diagnosis.

''No longer will we pay virtually whatever the hospital asks,'' departing HHS Secretary Richard Schweiker said in a speech this week.

Critics of the approach claim it will be extremely difficult to set realistic rates in advance - and that hospitals will be tempted to turn away patients with unprofitable diagnoses.

The administration is also reportedly considering turning medicare into a plan intended to protect only the elderly from catastrophic health care costs, or making it voluntary and dispensing ''vouchers'' which can be used for medicare or private health insurance.

The medicare mess is also being addressed by (does this sound familiar?) a commission. Appointed by Secretary Schweiker, the 13 private citizens who make up the commission are supposed to issue recommendations by this July, though everyone involved says they won't be able to meet the deadline.

Solutions the commission is considering, according to an internal discussion draft:

Increasing taxes. The medicare portion of the payroll tax is scheduled to rise to 2.9 percent by 1990. This increase could be speeded up, made larger, or applied to more income.

Tapping the US Treasury. Unlike social security retirement benefits, medicare benefits aren't determined by the amount of money retirees contributed over their lifetimes. Many experts thus say it would be fairer to simply pay for part of hospital insurance out of general revenue, as doctor insurance is now paid. Many past commissions have made this suggestion.

But ''how much more can we sap general revenues?'' points out commission member James McKevitt, the legislative director for the National Federation of Independent Business.

Reforming the payment system. The commission is considering prospective payment, vouchers, or a system which focuses on hospitals that have low costs for specific services.

Changing eligibility rules. The age at which the elderly qualify for medicare might be gradually raised to 68. Medicare might be limited to those who don't continue working.

Raising the deductible amount. Beneficiaries could be forced to share more of the cost for their health care. Medicare patients now must contribute $260 toward the first 60 days of hospital care.