V I E W P O I N T

The Future of Medicare: Demographics vs the Cost of Health Care

During his 2006 State of the Union address, President Bush stated: “The retirement of the baby boom generation will put unprecedented strains on the federal government”. In this and other similar pronouncements, the President and others imply that the financial challenges faced by Social Security and Medicare are all caused by the demographics of an aging population.

The release of the 2007 Social Security and Medicare Trustees Report is likely to trigger similar analyses in the days and weeks ahead. Those who would like to undermine the current Social Security and Medicare programs can be expected to use the new report's data on solvency as a rationale for privatizing, or otherwise dismantling, these successful programs.]

The truth, according to the Administration's own data, is significantly more complicated than proponents of privatization typically admit, particularly in the case of Medicare. In this paper, the National Committee to Preserve Social Security and Medicare, as a steward of programs critical to the retirement security of all Americans, is attempting to set the record straight about the future challenges faced by our Nation's premier health care system for seniors.

Overview

Although the United States clearly faces demographic challenges that should be addressed, Social Security and Medicare are confronted by different financial pressures and must therefore be addressed individually.

Social Security's long-term challenges are mostly a function of future demographic and economic assumptions. Unfortunately, President Bush continues to press for the privatization of Social Security. Private accounts would do nothing to improve Social Security's solvency. Instead they would divert money away from Social Security, forcing large cuts in future benefits and increasing the national debt by trillions of dollars. Private accounts aside, restoring the program's long-term financial stability will not be easy. However, the menu of available policy changes is relatively well known and familiar.

The long-term costs of Medicare, on the other hand, are primarily driven by the same factors that have caused skyrocketing health care costs for workers and their employers, and which the nation has, to date, been unable to solve. This interrelationship means that attempting to limit future cost increases in Medicare without addressing the problems of our nation's healthcare system as a whole simply will not work. And a policy that relies primarily on shifting more costs onto seniors, who are mostly lower-income, is unfair and not sustainable over the long term. This is true whether the policy is achieved through “consumer driven” healthcare initiatives or through more increases in direct cost sharing.  

All entitlement programs are not the same

The President and other critics of mandatory programs have a history of combining Social Security and Medicare when calculating the impact on the federal budget and on the economy. This not only obscures the significant differences between them, but it also places the entire blame for both program's financial challenges on aging baby boomers – while virtually ignoring the critical role of skyrocketing health care costs, particularly on the future of the Medicare program.

Although aging baby boomers are a factor, they're not the whole story

According to the Trustees, Medicare's costs are projected to rise initially because the number of people receiving benefits increases rapidly as the large baby boom generation retires.

However, once society has absorbed the retirements of the baby boom generation, Medicare's costs continue to grow rapidly. This growth is fueled by expected increases in the use and cost of health care. In particular, the continued development of new technology is expected to cause per capita health care expenditures to continue to grow faster than the economy as a whole. So while long-term projections of Medicare's costs are subject to demographic and economic uncertainties, they are also subject to an additional layer of uncertainty caused by increases in general health care costs.

The Congressional Budget Office has attempted to quantify the impact of the various factors that affect growth in the entitlement programs.

Over the last 35 years, as the above chart shows, increases in health care spending have been the main factor driving Medicare's cost growth. During that period, costs per Medicare beneficiary have grown on average 2.9 percentage points faster than per capita GDP, after removing the effects of demographic changes.

Beginning in 1990, the "excess cost growth" rate leveled off to under 2 percent.  In their most recent intermediate assumptions, the Trustees estimate this growth rate will continue to moderate, and eventually reach a level equal to the rate of GDP growth over the next 75 years.  Even with such a moderation in the growth of health care expenses, the Trustees project Medicare spending will reach 11.0 percent of GDP by 2080.

Medicare's costs reflect skyrocketing health care costs generally

Total health care spending in the United States has been growing faster than the economy for many years, regardless of whether it is funded through government or private sources, and it is projected to continue doing so in the future.  According to CBO, between 1960 and 2003, national health expenditures (NHE) increased from 5.1 percent of GDP to 15.3 percent.   This was the result of an average annual growth rate for health care of 2.6 percentage points higher than that of the economy as a whole.  Medicare costs per enrollee rose 2.9 percentage points faster than per capita GDP over that same period, with growth related to demographic changes excluded.

Most experts believe that this growth rate is not sustainable into the future, as it would lead to an implausibly large fraction of national GDP being devoted to health care. The Trustees believe the nation's health care system will be brought under significant pressures that will force a reduction in the growth rate of health care generally and that Medicare's costs will not deviate significantly from the national experience.

The President and some of his supporters in Congress have strongly advocated in favor of a new model of ‘consumer driven' healthcare – arguing that making individuals responsible for their own health care expenses will lower health care costs. They argue this will result from a combination of patients using fewer healthcare services overall and comparison shopping for the least expensive health care bargains, as more of the costs are shifted to individuals. However, as shown below by the Centers for Medicare and Medicaid Services, changes in medical costs, not the overall utilization of services, have represented the most important factor impacting personal health care expenditure growth in the past.

Moreover, health care spending in the general population appears to mirror spending patterns in Medicare. Recent studies show only 4 percent of workers and their families covered by health insurance provided by a group of large employers accounted for almost one-half of employer costs. This is comparable to the 5 percent of Medicare's beneficiaries who are responsible for 43 percent of that program's costs. “Savings” programs – such as Health Savings Accounts – which reward those who are healthy, will not help this group of patients. Because high-cost individuals are responsible for a significant portion of the nation's health care expenditures, such programs are also unlikely to meaningfully constrain the rate of growth of health care costs.

Shifting Medicare's costs to individuals will hurt middle class seniors

Whether through Medicare Medical Savings Accounts (health savings accounts for Medicare beneficiaries), or through increased premiums, deductibles or other forms of co-payment, the President and many of his supporters in the Congress have attempted to reduce Medicare's expenditures by shifting additional costs onto seniors. Recently, the Medicare Modernization Act, which implemented the new Part D prescription drug benefit, also included a number of provisions that would accomplish this goal. Key examples are: an increase in the Part B deductible, which will now rise in future years with health care inflation; means-testing of the Part B premium for the first time in the program's history; an artificial “cap” on federal expenditures for Medicare that creates a fast-track process for future cost shifting; and an experiment in “premium support” that could transform Medicare into a form of voucher program in future years.

While these and other changes are often based on the argument that high-income retirees can afford to pay more for their medical care, in fact, there are few seniors in these income categories. As can be seen in the following chart, over 70 percent of Medicare's beneficiaries have annual incomes below $30,000.

Gaps in Medicare benefits mean beneficiaries must bear a large financial burden for medical and long-term care services. In 2002, the average beneficiary paid nearly 20 percent ($2,223) of their health care costs out of pocket. During that same year, 10 percent of beneficiaries paid $5,000 or more out-of-pocket. As seniors age or their health status declines, they find their out-of-pocket spending increases. Low-income seniors already devote a significant portion of their income to health care services and are least able keep pace with rising costs. While this is a vast improvement over the days before Medicare, when most seniors were unable to purchase health insurance at any price and more than one-half lived in poverty, it is simply not true that large numbers of seniors can absorb ever-increasing cost shifting from the Medicare program. ________________________________________________________________________  

Sources:

The Board of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. The 2006 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Washington , D.C. : May 1, 2006.

The Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, The 2006 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds . Washington , D.C. : May 1, 2006.

Congress of the United States , Congressional Budget Office. The Long-Term Budget Outlook . Washington , D.C. : December 2005.

Congress of the United States , Congressional Budget Office, High Cost Medicare Beneficiaries , Washington , D.C. : May 2005.

Department of Health and Human Services, Center for Medicare and Medicaid Services. Program Information on Medicare, Medicaid, SCHIP, and Other Programs of the Centers for Medicare and Medicaid Services . Baltimore, M.D.: June 2002.

Henry J. Kaiser Family Foundation, Medicare Chartbook, Third Edition , Summer 2005.

Government Relations and Policy, February 2007