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(Figure)
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Other than the prescription-drug benefit, however, neither President George W. Bush nor Senator John F. Kerry has focused much attention at all on Medicare during the presidential campaign through September. Nonetheless, Medicare will pose both substantive and budgetary questions for any incoming administration, and its sheer size will force those questions to the fore. The substantive questions revolve around how and how much to pay providers of medical goods and services, as well as the role in Medicare of private insurance plans. The budget issues are both short- and long-term. Their resolution will determine how the cost of Medicare beneficiaries' care is distributed, both between the elderly and the nonelderly and among the elderly of varying incomes.
Although it seems unlikely that any new administration will be willing to address the long-term budget issues, the short-term issues must be tackled. The Congressional Budget Office estimates that the budget deficit for fiscal year 2005 will be $348 billion, or 2.8 percent of the gross domestic product (GDP) — high by historical standards in a year when the country is not in a recession. Both Bush and Kerry have indicated that they would like to cut that figure in half by 2009. As they confront the budget deficit, they will come eyeball to eyeball with the large proportion not only of the budget, but also of the projected increase in federal spending that is accounted for by Medicare (see Table). These percentages make it difficult to imagine reducing the deficit in any meaningful way without touching Medicare.
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Although neither candidate has announced a plan for financing Medicare, one can speculate on strategies they might use on the basis of the policies that have traditionally been favored by Democrats and Republicans in Congress. Kerry might take aim at payments to health plans — the program now called Medicare Advantage. The 2003 Medicare Modernization Act increased the amount of these payments in an effort to increase the participation of health plans, and plans have responded. The Congressional Budget Office, however, estimates that the higher payments cost only $14 billion over a 10-year period, a modest portion of the $395 billion increase in Medicare spending. Kerry might also seek to have beneficiaries with higher incomes pay more for Medicare coverage. The Medicare Modernization Act already moved in this direction by reducing the subsidy for Part B premiums for elderly persons with higher incomes; in the future, the subsidy for Part D drug premiums could be similarly reduced.
It is less clear what Bush would do to reduce Medicare spending. Possibly he, too, would look to shift more expenses to higher-income beneficiaries, but he is unlikely to reduce the amount of payments to private plans, because he strongly favors increasing their role in Medicare.
In the longer run, as the baby boomers turn 65, Social Security and Medicare, as well as the quarter of the Medicaid program that finances long-term care, will claim a considerably larger share of public spending than they do today. Any notion of how much larger a share, of course, is highly speculative; it depends in large part on how rapidly per-beneficiary medical spending increases.
One estimate, based on the intermediate of the three assumptions of the trustees of the Medicare program, is that between now and the mid-2020s, annual spending per beneficiary for Parts A and B (i.e., excluding the drug benefit) will increase at a rate 1.1 percentage points faster than the GDP. The trustees do not say how they arrived at this figure, but the historical record suggests that it is optimistic: since 1960, the annual growth of health care spending has exceeded the growth of the GDP by 2.7 percentage points. And Medicare growth must be reasonably related to the growth of total health care costs, or physicians may become unwilling to treat Medicare patients. The Figure shows spending per person on hospital care and provider services by Medicare and other payers; between 1975 and 2002, Medicare spending grew slightly faster than the remainder of health care spending, although the rates of growth have been nearly identical since 1995.
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Even if spending per beneficiary does increase only 1.1 percentage points faster than the GDP, approximately 3 percent of the GDP will still have shifted to Medicare by the mid-2020s, and Social Security and the long-term care component of Medicaid will claim additional amounts. If we assume that other federal spending increases at the rate of the GDP and there is no increase in the deficit, this shift to Medicare would require federal tax revenues to increase by more than 15 percent.
The seemingly irresistible forces of medical spending and demography, however, will increasingly run up against the historical reluctance of American voters to allocate much more than 18 percent of the GDP to federal spending. Since 1946 the federal government's share of the GDP has stayed remarkably close to 18 percent, going below 16 percent in only 2 of the 57 years and above 20 percent in only 1.
One response, of course, is to ignore this de facto ceiling on federal revenues and assume that an increasingly graying society will want to spend a greater share of its money on pensions and health care for the elderly. But Medicare and Social Security both rely on a substantial component of payroll-tax financing, the burden of which falls primarily on nonelderly workers. Although many of these workers have elderly parents and are anticipating their own age of eligibility, it is unclear whether there would be political support for such a large transfer of resources from the nonelderly to the elderly.
The late Senator Daniel P. Moynihan (D-N.Y.) famously characterized Social Security as the third rail of American politics. Since he made that remark, the dollars spent on both Social Security and Medicare have increased, raising that third rail's voltage. As a result, an enormous amount of political capital is required to address the issue of long-term financing, making it highly tempting for the next administration simply to leave the matter to its successors. Unfortunately, deferring the issue will only exacerbate the problem for future administrations and taxpayers.
Dr. Newhouse reports serving on the board of directors of and holding equity in Aetna.
Source Information
From the Department of Health Care Policy, Harvard Medical School; and the Department of Health Policy and Management, Harvard School of Public Health — both in Boston; and the Kennedy School of Government, Harvard University, Cambridge, Mass.
References
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Related Letters:
Controlling Health Care Costs
Abbo E. D., Coca S. G., Ellis E., Campbell K. N., Ginsburg P. B.
Extract |
Full Text |
PDF
N Engl J Med 2005;
352:415-416, Jan 27, 2005.
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