Medicare, the beloved budget buster

While President Obama spars with congressional Republicans over whether to raise taxes, advocates for the elderly have been girding for a fight that promises to be at least as intense: what to do about the rising cost of Medicare, the federal health insurance program for the elderly and disabled. The program is vital to its beneficiaries, but its expenses are growing far faster than federal revenues or the economy. In fact, it is the single biggest factor in the deficit over the long run. And with multiple forces driving up costs, there’s no easy way to solve the budget problems it presents.

The government created Medicare in 1965 to cover the doctor and hospital bills faced by Americans age 65 and over, almost half of whom had previously gone uninsured. The program’s benefits have become more generous over the years, with the government picking up a greater share of the cost and adding heavily subsidized coverage for prescription drugs.

Meanwhile, the cost of medical care in general has risen considerably faster than inflation, spurred by expensive new pharmaceuticals, diagnostic equipment, treatment regimes and medical devices. At the same time, the average lifespan of Medicare beneficiaries has increased by about eight years (although not for lower-income seniors), and chronic diseases have become more prevalent, particularly those related to obesity. And as the baby boom generation reaches retirement age, the number of beneficiaries is climbing rapidly. Enrollment is projected to grow from 50 million today to 80 million in 2030. That’s twice as many as in 2000.

Costs per beneficiary have stabilized in recent years, thanks largely to slower growth in spending on prescriptions, improvements in efficiency and the cost controls put in place by the 2010 healthcare law, most notably the new restraints on payments to Medicare providers. Some healthcare experts argue that those restraints are artificial and unsustainable, and history is on their side. Similar efforts in the past foundered within a few years, after doctors and hospitals, objecting to low rates, threatened to stop treating Medicare patients.

But even if the cost per beneficiary holds steady, the coming demographic changes darken Medicare’s long-term outlook. In 2000, there were four times as many workers paying Medicare taxes as there were retirees receiving benefits. By 2030, there will be fewer than 2.5 workers per retiree. The trust fund that supports hospital coverage is projected to run out of money in 2024. And Medicare costs are expected to consume an ever-growing share of the federal budget, from $560 billion in 2011, or 15% of federal spending, to $1.1 trillion in 2022, or 19%.

In the face of these numbers, Republican budget negotiators have endorsed a plan to cut $600 billion from Medicare and other federal healthcare programs. Obama has called for cutting about half that amount, even as many Democrats argue for no cuts at all to Medicare benefits.

The government simply cannot put its fiscal house in order without addressing Medicare’s ballooning expenses. And there are only three ways to do so: reduce the cost of coverage, cover fewer people or collect more money. Negotiators are considering all of the above, including increasing competition among providers, raising the minimum eligibility age from 65 to 66 or 67, boosting premiums for high-income seniors and hiking the Medicare portion of the payroll tax, which is already set to rise next year by 0.9 percentage points for wealthier households.

Many of the steps lawmakers are considering treat Medicare’s growing costs as an isolated phenomenon. In fact, they’re symptoms of larger problems in the healthcare system. The United States spends far more per capita on healthcare than any other country, including Western European nations with much older populations. The extra spending yields better results in some areas, worse in others.

One factor in the elevated costs is advancing medical technology, or rather the fact that new and more expensive technologies are continually introduced with no consideration of whether they’re more effective than what’s already available. Another factor is the way healthcare is organized, delivered and paid for. Historically, there has been little coordination among the various doctors, specialists and hospitals who see a given patient. The payment system is even more Balkanized, creating a confusing matrix of prices and reimbursement rates that seem to have no relation to the value of the service performed.

More fundamentally, the system rewards providers for treating the ill and injured, not for keeping the public hale and hearty. Its financial incentives encourage providers to deliver as much treatment as possible. And there’s little or no connection between what providers are paid and how effective their care is. As a result, the industry has an incentive to deliver an increasing number of treatments of greater complexity — to build more capacity, then find a way to fill it.

Beyond the general problems, there are the specific challenges Medicare faces because it serves the elderly and the disabled. Much of the program’s spending is for patients in the final weeks of life, which raises delicate questions about how to manage those costs. The questions are hard to ignore, however, because the costs are so extreme; the 5% of beneficiaries who need the most care account for almost 40% of all Medicare spending.

That’s not to suggest we can’t do anything about the rising cost of Medicare. It’s to say that the challenge is daunting. The 2010 healthcare law included a host of initiatives to hold down the program’s cost per beneficiary, including the provision of free preventive care and pilot projects testing various ways to deliver care more efficiently. But even if these efforts manage to keep the cost per enrollee steady, Washington still must deal with the enormous expansion in the rolls. As lawmakers grapple with the government’s fiscal mess, they need to recognize that they can’t devise a long-term solution without addressing Medicare. And sadly, the program’s problems — like those in the healthcare industry as a whole — defy easy solutions.

This is the first in a series.