Friday, February 10, 2012

Manifold Factors for Rising Medicare Costs

Photo by Tyler aka trpO
Election year chatter includes discussions of ballooning costs of Medicare. Outlays for Medicare spending are projected to grow from $524 billion in 2010 to $938 billion in 2020.

Because many articles in the popular press about Medicare start with statistics about the graying of America, I assumed that the astronomical increases in Medicare spending are due to increases in the life expectancy in the United States. In 1900, the average life expectency beginning at birth was age 47; now it's 77. For those who reach age 65 today, they can expect to live another 18.6 years on average.

In addition to living longer, older adults constitute a larger percentage of the population: “About one in eight Americans are age 65 or above today, compared to one in 10 in the 1950s. By 2030, one in five Americans will be 65 or older, roughly the same as Florida today. The number of people age 65 or older will nearly double between 2000 and 2030.” (Source: Population Resource Center)
Closer inspection reveals multiple causes for Medicare cost increases. The Central Budget Office (CBO) prepared a report for Congress in January of 2008 that shares the results of three major studies. These three studies found slightly different percentages among 5 to 7 forces contribute to rising Medicare costs. The findings--combined into rough percentages--show that use of new technology (tests, devices, services, newly developed drugs, etc.) is easily the biggest contributor to rising costs:

· Technology-Related Changes in Medical Practice (50%)
· Personal Income Growth (16%)
· Prices in the Health Care Sector (13%)
· Changes in Third-Party Payment (11%)
· Administrative Costs (8%)
· Aging of the Population (2%)
· Defensive Medicine and Supplier-Induced Demand (scant, not even rounding to 1%)

(Source: Adapted from Table 2, Estimated Contributions of Selected Factors to Growth in Real Health Care Spending Per Capita, 1940 to 1990. Technological Change and the Growth in Health Care Spending, CBO, January 2008)

Note that these reports attribute age as one of the weakest factors contributing to rising Medicare costs. (Discussed elsewhere in the CBO report--but not illustrated in this chart--was the factor of obesity, which correlates with higher health care costs much more tightly than age.) Consequently, those seeking reform should not promote generational warfare between young adult / middle aged workers and retirees. Instead, they should examine the issue in more complex terms.

Instead of resenting the presence of older adults in our citizenry, voters should recognize the need to address upcoming budget shortfalls by one or more policy changes: 1) redirect funds from other government programs to Medicare, 2) increase taxes, 3) completely cut off some beneficiaries from receiving any Medicare services at all, or 4) reduce costs through a variety of means, such as restricting use of expensive tests and procedures and pushing more costs to the beneficiaries through increases in co-pays and deductibles.

Clearly, there are no easy answers and no pain-free option for reform. All generations of voters will need to demonstrate knowledge, patience, wisdom and co-operation so that we can decide which of any or how much of all of these policy changes to adopt.


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