Why Does U.S. Health Care Cost So Much? (Part IV: A Primer on Medicare)

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1 December 12, 2008, 6:30 AM Why Does U.S. Health Care Cost So Much? (Part IV: A Primer on Medicare) By UWE E. REINHARDT Uwe E. Reinhardt is an economist at Princeton. Medicare, the federal health-insurance program for America s elderly, plays a major and highly controversial role in our health-care system. To many Americans it is a blessing. Others view it as a source of all that s wrong with American health care. I propose to explore these views in this and the next two posts to this blog. Congress established Medicare in 1965, when close to 40 percent of America s elderly lived at or below the federal poverty line. They simply could not afford the ever more sophisticated and expensive health care then starting to come on line. The program now covers 45 million Americans 65 or older, as well as younger people with permanent disabilities, among them patients afflicted with End Stage Renal Disease. About half of Medicare beneficiaries live at or below 200 percent of the federal poverty line (i.e., $20,800 annual income for a single person and $28,000 for a couple). Over a third of the beneficiaries are afflicted with three or more chronic conditions. In 2009, Medicare is expected to cost the federal government about $480 billion. That represents over a fifth of total national health spending on personal health care, 13 percent of the federal budget and close to 3.5 percent of the country s gross domestic product. These outlays are financed with a combination of payroll taxes (41 percent), general tax revenues (39 percent), premiums paid by the elderly (12 percent) and sundry other sources, including interest earned on a trust fund established for the program. Because Medicare s benefit package traditionally has been less generous than traditional employment-based private insurance for younger Americans - it has covered prescription drugs only since 2006 many beneficiaries have sought supplemental, wrap-around coverage from their former employers (about 33 percent) or from a purchase of a private Medigap policy (about 20 percent). The federal-state Medicaid program for the poor provides such gap coverage for some 7 million (or 15.5 percent) Medicare beneficiaries, called dual eligibles. Even with such supplemental coverage, however, out-of-pocket cost-sharing at the time health care is received has always been high relative to employment-based private insurance for younger Americans. In 2005, the median fraction of income Medicare beneficiaries spent out of pocket for their care was 16.1 percent. For the 11 percent of beneficiaries without supplemental coverage, out-of-pocket spending can absorb 30 percent or more of their income. Medicare was originally established as a single-payer, government-run, fee-for-service plan whose claims by patients and health care providers were administered, for a modest fee, by a select group of private insurance plans called Medicare Intermediaries - typically Blue Cross plans. This arrangement is now known as Traditional FFS Medicare. Starting in the 1970s, however, Medicare beneficiaries have had the option of enrolling in a variety of health plans offered by private insurers. Starting with the Medicare Modernization Act

2 passed in December 2003, which offered beneficiaries drug coverage for the first time, these private insurance options have been called Medicare Advantage plans. About 23 percent of Medicare beneficiaries have chosen this option. Driven by an ideological preference for private over government-run health insurance, the Republican Congress in 2003 made taxpayers effectively pay these private plans an average of 13 percent more per Medicare beneficiary than these beneficiaries would have cost taxpayers under the government-run program. Consequently, the private plans can offer beneficiaries superior benefits, which has caused enrollment in them to double from 5.3 million to 10.1 million between 2003 and Because it is hard to justify this extra public subsidy to the private plans on the basis of health policy, however, it has been highly controversial among health policy experts and is likely to be eliminated by the new Congress in the next few years. Although often decried by its critics as socialized medicine, Medicare remains a highly popular health-insurance product among the elderly, who rate the quality of care they receive under it higher than younger, privately insured Americans rate their health care. This sentiment is not surprising, because, from both the patient s and the provider s perspective, claims processing under Medicare is relatively simple in comparison with the complexity of private health insurance, although Medicare is much more administratively complex than are similar government-run, single-payer health insurance systems in other countries (e.g., Taiwan or Canada). Furthermore, in surveys of Americans 50 and older, respondents expressed greater trust in Medicare as a source of health insurance, possibly still remembering the late 1990s, when many private plans terminated their coverage of Medicare patients.

3 December 19, 2008, 6:30 AM (NYTimes) U.S. Health Care Costs, Part V: Can Americans Afford Medicare? By UWE E. REINHARDT Uwe E. Reinhardt is an economist at Princeton. It is now generally believed that the federal Medicare program for America s elderly is unsustainable and must be restructured. This somber assessment is part of the more general cri de coeur so wondrously phrased some years ago in the title of the Brookings Institution s monograph Can America Afford to Grow Old? What if we couldn t? What would we do push the elderly into the ocean on an ice floe? Of course America can afford to grow old! We can more easily afford it than most other industrialized nations. The percentage of the American population age 65 or over is 12.4 now and is projected to rise to about 21 by Only 7 percent of China s population is 65 or over now, but that figure will shoot up rapidly to over 22 percent by And in a number of other industrialized countries notably in Japan, Germany, Italy and Sweden the elderly already represent close to 20 percent of the population, a level the United States will not reach until about Yet the world has not come to an end in these older countries. It s hard to say what fraction of America s gross domestic product future generations should allocate to people too old (or too young) to work, and how much should remain with those who have produced that G.D.P. This is a matter to be resolved by those future generations. They must decide how well the elderly in their midst should be housed, fed and cared for when sick. Our influence over that allocation is minimal, because future generations can always override our decisions while we cannot override theirs. The best we can do today is to put in place public policies that can help G.D.P. grow now and in the future, to ease the pain of sharing. We could also influence somewhat the age structure of future populations through current and future policies on immigration, although there are limits to that approach, because immigrants, too, grow old. Fortunately, as is shown in the graphical display below, future generations will most likely have the benefit of G.D.P. growth on their side, which should make it easier for them to house, feed and care for a larger fractions of elderly citizens. Current G.D.P. per capita in the United States is about $46,500 (tables B-2 and B-34 here), of which Medicare absorbs slightly over 3 percent, leaving about $45,000 of G.D.P. per capita for other things. Suppose between now and, say, 2050, inflation-adjusted G.D.P. per capita in the United States grows at an annual compound rate of only 1.5 percent per year, which is conservatively below the roughly 2 percent long-run annual growth rate of real G.D.P. per capita over the past several decades. Even at this low growth rate, inflation-adjusted G.D.P. per capita would grow from $46,500 now to about $87,000 by 2050.

4 According to the Social Security Trustees 2008 Report on the Status of the Social Security and Medicare Programs (Chart B), Medicare will absorb about 8.4 percent of G.D.P. by 2050 if it is not restructured. But even after that 8.4 percent haircut for Medicare in 2050, there would still be close to $80,000 inflation-adjusted G.D.P. per capita left over for other things in that year, which is still 78 percent more than the non-medicare G.D.P. per capita than we have today. Source: Uwe E. Reinhardt. So what do we mean when we lament that Medicare will not be affordable in the future? Do we assume that G.D.P. will be stagnant for the next 40 years? Those who make such statements, of course, may not even think about real claims on real G.D.P. Instead they may have in mind two quite different propositions. First, they may argue that even if Medicare were eminently affordable from a purely macroeconomic perspective, its current structure of mainly public financing may not be politically sustainable. There is no question that to allocate as much as 8.4 percent of 2050 G.D.P. to Medicare under its current structure would require sizable tax increases. But social values and preferences can change. Future cohorts of voting retirees and their children in the United States may well countenance the higher levels of taxation already long accepted in other industrialized nations, in return for greater personal financial security.

5 An alternative proposition may be that, even if (1) sustaining Medicare in its current structure were eminently affordable from a macroeconomic perspective, and (2) it were politically feasible, we still shouldn t sustain Medicare in its present form because the program wastes real and financial resources.

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