V I E W P O I N T

The Future Cost of Medicare: Why Seniors have a Stake in Health Care Reform

As the new Administration and the 111th Congress begin work on priority issues in 2009, health care reform will be one of the early challenges considered.  The cost of health care affects individuals, businesses, and government programs at local, state and federal levels.  Rapidly rising health care costs are eroding family resources, undermining our ability to compete in the global economy and creating fiscal burdens that crowd out other important investments of social capital. 

In past years, much of the debate over health care reform focused on covering the millions of uninsured workers in the United States .  More recently, the financial burden posed by the unchecked growth of health care costs has become more prominent. Both workers and employers have increasingly become aware that health care costs are responsible for the erosion in employee benefits and economic growth.  Little of this discussion, however, has directly affected America's seniors, as Medicare has provided those over age 65 with accessible, reasonably affordable, universal health care coverage. 

As costs continue to grow unchecked, however, the impact on Medicare has become increasingly apparent.  According to the Congressional Budget Office (CBO), total spending on health care would rise from 16 percent of the Gross Domestic Product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082. Federal spending on Medicare and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082. A s a share of the economy, 19 percent of GDP is roughly equivalent to the total amount that the federal government spends today.

The impact on individuals is no less dramatic.  Under projections by Medicare's actuaries, by 2025 over one-half of the average senior's Social Security benefit check would be consumed on Medicare out-of-pocket costs.

In recent years, conservative economists have promoted a steady drumbeat of negative economic news in an effort to convince Congress and the American public that this nation is experiencing an entitlement crisis, and that we can no longer afford critical programs such as Social Security and Medicare.  But a point these economists neglect to mention is that the real problem our nation is facing is not out-of-control entitlements, it is the uncontrolled growth of the cost of health care. 

While Medicare may not be perfect, it has been a godsend for millions of seniors.  It provides basic, affordable, universal health care to a population abandoned by private industry decades ago.  Although Medicare costs are rising for both beneficiaries and the federal government, the increases are not unique to Medicare.  Because Medicare is a health care program, it is subject to the same upward inflationary pressures that are forcing many employers to drop their policies and leaving their workers to join the ranks of America 's 46 million uninsured.  In fact, Medicare's low administrative overhead and efficiencies of service have helped Medicare's costs grow at roughly the same rate as the cost of private health insurance for the under-65 population, despite seniors' higher need for services.

According to the Congressional Budget Office, t he rate at which health care costs grow relative to national income - rather than the aging of the population - is the most important determinant of future federal Medicare and Medicaid spending. The bulk of the projected increase in federal spending for these two programs reflects higher costs per beneficiary rather than an increase in the number of beneficiaries associated with an aging population. If the new Administration and Congress are successful at enacting health care reform that slows the rate of growth in overall health care so that it is no longer growing faster than the rest of the economy, Medicare's long-range financial deficit could be cut by well over one-half. 

The rising costs of Medicare and Medicaid have been characterized by some as an entitlement crisis. However, according to analysis by the Congressional Budget Office (CBO), if every entitlement in the federal budget were repealed outright - eliminating Social Security, Medicare, Medicaid and other critical programs - but nothing were done to slow the growth in health care costs overall, we would still find ourselves spending almost 70 percent of the nation's wealth on health care by 2082. It is clear America does not face an entitlement crisis; it faces a health care financing problem. 

The health care financing problem affects the entire health care system, not just the government programs.  And the solution to the problem, both on the government side and for the private sector, is effective health care reform that ensures we are getting the most value for our health care dollars. This is the goal of proposals to provide universal coverage for all Americans and to improve the delivery of health care through payment reforms and investments in comparative effectiveness research and health information technology that enhance the quality of care being provided.

To achieve this reform, it is inevitable that policymakers will look to Medicare - both as a model and as a tool.  Medicare is this nation's largest purchaser of health services, and it can therefore have an affect on costs in the private sector.  In addition, many of its coverage decisions are adopted by private health insurers and incorporated into their own health care coverage for those under age 65.  For example, once Medicare agrees to cover a particular procedure, many private insurers follow suit.  In addition, it is much easier to achieve many areas of savings in Medicare because it is run by the government - as opposed to enacting private sector mandates.  As private plans adapt, these changes expand to the broader health care system over time.  The key will be for legislators to use Medicare as a tool for enacting broad changes in the way health care is provided, not to arbitrarily cut the federal government's commitment to America's seniors. 

Recent legislation encouraging the use of electronic prescribing by practitioners is an example of such an approach.  Physicians prescribing drugs for Medicare patients first receive a bonus for use of electronic prescriptions, which transforms into a penalty for those who are still using paper prescriptions after 2013. This reimbursement methodology only applies to prescriptions for Medicare patients, but because most medical practices are expected to change their systems in order to continue serving their older patients, the ultimate effect will be for all practitioners to use electronic prescribing for all of their patients.  In this way, Congress will have used Medicare to spearhead changes that will eventually apply throughout the health care system, without imposing an undue burden on Medicare's beneficiaries or their providers.    

The challenge in this type of approach is to ensure that changes imposed on Medicare do not compromise care for seniors, but create improvements in health care delivery that can be incorporated by private health plans and applied to other Americans.  Finding this delicate balance, while still achieving measurable savings in health care costs, is the true challenge of health care reform. 

For seniors, the stakes are very high.  If overall health care costs are not brought under control, it is almost inevitable that Medicare and Medicaid will face deep cuts, as it is difficult to imagine how our nation can sustain long-term spending at currently projected levels.  Unfortunately, putting more pressure on these programs without affecting overall cost growth risks converting Medicare into a second-rate health care system, leaving seniors with expensive but inadequate coverage. 

Such an alternative would shift these societal costs to individuals who are among the most vulnerable in our nation.  If not for Social Security, fully one-half of today's seniors would be living in poverty. One out of every five seniors relies on Social Security for all of their income, and two out of three rely on Social Security for over half of their income. Social Security benefits are modest - with an average payment of around $12,000 a year.  Today this replaces about 40 percent of workers' average earnings, and once the retirement age increases to 67, that replacement rate will shrink further. Among 30 countries with advanced economies, the United States is 5th from the bottom in the generosity of its benefits for average earners, and single older women have the lowest income relative to married couples in cross-national comparisons of Western industrialized nations.

About 70 percent of Medicare beneficiaries have incomes under $25,000 a year and 85 percent have incomes under $40,000.  Almost two out of three elderly households have incomes under $20,000, and they are already spending 30 to 50 percent of their incomes on health care. 

Arbitrarily cutting Medicare without getting at the root of the continuing upward trend of health care costs is not a hypothetical financial exercise.  It would have real impacts on real people - most of whom have nowhere else to go for coverage and limited options for increasing their resources. 

It is critical for seniors to be actively involved in the process of health care reform, because the future of Medicare depends on a successful outcome to this debate.   

For this reason, the National Committee to Preserve Social Security and Medicare is committed to working with President-elect Obama and the 111th Congress to ensure that health care reform is successful at slowing the growth of the cost of health care, while improving Medicare for existing seniors and for future generations. 

Government Relations and Policy, December 2008

The National Committee is a nonprofit, nonpartisan organization that acts in the interests of its membership through advocacy, education, services, grassroots efforts and the leadership of the board of directors and professional staff. The work of the National Committee is directed toward developing a secure retirement for all Americans.