V I E W P O I N T

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

The release of the past several Social Security and Medicare Trustees Reports has triggered analysis on claims that an aging population is the major cause of spending growth on Medicare and other social insurance programs. Those who would like to undermine the current Social Security and Medicare programs can be expected to use the Trustee's reports' data on solvency as a rationale for privatizing, or otherwise dismantling, these successful programs.

The truth is significantly more complicated than proponents of cutting these critical programs 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 related to low birth rates, an aging population, and longer life expectancy, Social Security and Medicare are confronted by different financial pressures and must therefore be addressed independent of each other.

Social Security's long-term challenges are mostly a function of future demographic and economic assumptions. Unfortunately, many policymakers continue 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 while increasing the volatility of retirement income security. 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. Policies that rely primarily on shifting more costs onto seniors, who are mostly lower-income, are unfair and not sustainable over the long term. The health care cost containment problem holds true whether a policy is achieved that utilizes "consumer driven" healthcare initiatives or additional increases in direct cost sharing.  

All entitlement programs are not the same

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 are projected to continue rapid growth. This growth is fueled by expected increases in the utilization 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.

Source: Congressional Budget Office

From 1975 to 2005, increases in overall health care costs were the major cause of rising Medicare spending. According to the chart above, that trend will continue over the next 75 years.

The combined percent of GDP consumed by the effects of an aging population and the interaction of an aging population and excess cost growth pale in comparison to the effect of excess cost growth alone. The major problem, therefore, is not the type or number of beneficiaries, but rather it is the increasing costs per beneficiary caused by growth in per capita health care costs in excess of per capita GDP.

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 CMS, between 1960 and 2006, national health expenditures (NHE) increased from 4.7 percent of GDP to 14.9 percent.   The CBO attributes this to an average annual growth rate for health care 2 percentage points higher than that of the economy as a whole between 1975 and 2005.  Over that same period, Medicare costs per enrollee rose 2.4 percentage points faster than per capita GDP 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.

Some economists 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 that as more of the costs are shifted to individuals, patients will use fewer healthcare services overall and comparison shopping for the least expensive health care bargain.

However, there is a growing body of work showing that patients do not behave in the health care market as they do in others; patients often forego important services when facing higher health care costs. As a very basic needs example, patients have been shown to reduce necessary prescription drugs for diabetes and cholesterol when faced with increases in copayments.

In addition, medical care is not only expensive, but it is complicated and highly scientific. There is no library of best practices and limited information is available to the public. How can policymakers expect average patients to be able to make decisions when medical studies are conflicting and when doctors, with years of medical study, often do not agree?

Furthermore, as shown below by the Centers for Medicare and Medicaid Services, changes in medical costs, not the overall utilization of services, represent the most important factor impacting personal health care expenditure growth

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, some lawmakers 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 45% trigger on federal expenditures for Medicare, reached in 2008, that created 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, nearly 62 percent of Medicare's beneficiaries have annual incomes below $30,000.

Income of the Population 55 or Older, 2006 , Total Money Income of Aged Units. Social Security Administration. February 2009.

Gaps in Medicare benefits mean beneficiaries must bear a large financial burden for medical and long-term care services. In 2004, the average beneficiary paid nearly 20 percent ($2,477) 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.

Health care reform is essential to Medicare's future. Congress is currently embarked on an ambitious effort to reform our national health care system so quality is improved while costs remain affordable. It is essential that this effort be successful if our economy is to continue growing in the future and if Medicare is to remain affordable for both seniors and the federal government

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Sources:

The Board of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. The 2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Washington , D.C. : 12 May 2009.

The Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund . Washington , D.C. : 12 May 2009.

Congress of the United States , Congressional Budget Office. Growth in Health Care Costs . 31 January 2008. Online: http://www.cbo.gov/ftpdocs/89xx/doc8948/01-31-HealthTestimony.pdf

Congress of the United States , Congressional Budget Office. Health Care: Capturing the in the Nation's Core Fiscal Challenge . 12 March 2008. Online: http://www.cbo.gov/ftpdocs/90xx/doc9054/03-12-Princetonwnews.pdf

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.

Orszag, Peter. Health Care and Behavior Economics: A Presentation to the National Academy of Social Insurance . Washington , D.C. : 29 May 2008.

Chernew, Michael E. Testimony Before the House Sub-Committee on Health . House Committee on Ways and Means. Washington D.C. : 14 May 2008.

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.

Department of Health and Human Services, Center for Medicare and Medicaid Services. Medicare and Medicaid Statistical Supplement. 2008 Edition. National Health Care Spending: Figure 1.2Factors Accounting for Average Annual Growth in Selected Types of Personal Health Care Expenditures, Selected Periods: 1970-2018. Online: http://www.cms.hhs.gov/MedicareMedicaid StatSupp/downloads/08Fig1.2.pdf

Henry J. Kaiser Family Foundation. Medicare Chartbook, Third Edition . Summer 2005. Online: http://www.kff.org/medicare/7284.cfm

Henry J. Kaiser Family Foundation. Medicare Spending and Financing Fact Sheet . June 2007. Online: http://www.kff.org/medicare/upload/7305-02.pdf

Government Relations and Policy, July 2009