Why the Medicare Cost Problem Is Still Unsolved
Policy + Politics

Why the Medicare Cost Problem Is Still Unsolved

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On August 28 The New York Times published a provocative article entitled “Medicare: Not Such a Budget Buster Anymore.” Its thesis was that Medicare no longer poses the budgetary threat it was projected to just a few years ago (The New York Times piece contrasts current projections with those made in 2006), thanks in part to the Affordable Care Act and other changes in the healthcare sector.

After its publication, other commentators such as Paul Krugman and those at Vox picked up the theme, with Krugman arguing that “our supposed fiscal crisis has been postponed, perhaps indefinitely” by the Medicare cost slowdown.

Related: Medicare by the Numbers

These articles exhibit substantial confusion about the significance of recent changes in Medicare projections. Full understanding of these factors renders it clear that the Medicare cost problem (and the broader federal budget challenge) has not been solved:

#1: That current Medicare spending is lower than projected in 2006 is not significant in and of itself; virtually every relevant economic variable is also lower. Measured in dollars, current Medicare spending is indeed smaller than the 2006 projections. But so is almost everything else pertinent, including cumulative general price inflation, tax revenue, and indeed our whole economy.

To see this, let us look at total Medicare spending as a percentage of GDP. (I will use Medicare trustees’ projections rather than CBO’s as the Times did, because CBO made some earlier mistakes in their health spending analyses that were not corrected until current CBO director Doug Elmendorf came on board in 2009).

The reality shown in this graph is quite different from the impression formed by The Times piece. Yes, in 2006 we thought Medicare spending would be a lot higher than it is now. But we also thought our economy as a whole would be bigger and that Medicare would receive more revenue.

Related: How Medicare Data Could Revolutionize Health Care

As a share of the economy, current Medicare spending is only slightly smaller than expected in 2006. The graph also reveals two other key pieces of the story:

a) Medicare spending jumped as a percentage of GDP in 2009 because GDP itself shrank with the recession. The more recent leveling on this graph reflects GDP resuming growth since then.

b) Lower spending in year 2006 itself accounts for most of the subsequent drop relative to 2006 projections, indeed more than the combined effects of all annual changes since then. The 2007 Medicare trustees’ report attributes the 2006 drop to a one-time “abrupt decline in the number of inpatient hospital readmissions.” That obviously has nothing to do with the ACA, enacted in 2010.

Many of the same factors that reduced Medicare spending have reduced Medicare payroll tax revenue by even more. As a result the Medicare Hospital Insurance Trust Fund is actually in weaker condition than projected in 2006, not stronger. This next graph shows how despite starting from a stronger position, the HI fund has been depleting faster than then projected. Thus whatever factors have slowed Medicare HI spending are outweighed to date by the factors that have reduced HI tax revenues. 

Clearly it is not telling the whole story to proclaim that slower Medicare spending growth is solving the program’s financial problems. As but one additional example, consider that at the start of this year the HI fund had $205 billion in assets. In 2006 the trustees thought that number would be $270 billion.

#2: Health cost inflation is not and never was the biggest problem projected for Medicare; population aging was, and that problem remains. It is helpful to slow excess health cost growth but Medicare’s biggest source of financial strain is the sheer number of people coming onto its rolls.

Related: Medicare Gets a 4-Year Reprieve from Bankruptcy

CBO estimates that only 33 percent of the growth in all major federal health program spending projected through 2039 is due to excess cost growth, population aging being a bigger factor. This is especially true for Medicare specifically because it serves the senior population.

#3: The ACA’s cuts in future Medicare spending do not translate into lower federal health spending overall, because the ACA spends those savings on expanding Medicaid and subsidizing coverage under new health insurance exchanges. Analysts (including CBO) widely agree that the ACA will cut the growth of Medicare spending; they also agree that the ACA significantly increases total federal health spending. Instead of solving the problem of federal health spending driving budget deficits, the ACA shifts health spending from one program to another and does more of it.

This year the Medicare trustees (I am one, as are four members of the Obama administration cabinet) lowered our projections for future Medicare spending growth relative to last year’s report. 

But the factors cited above are among the reasons why we also wrote that “notwithstanding recent favorable developments… Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation.” And my fellow public trustee Robert Reischauer and I wrote in the same report, on the question of whether “a recent slowdown in national health expenditure growth may indicate less urgency in legislating Medicare financing corrections,” the answer is, “unfortunately, this is not the case.” 

Despite public statements to the contrary, the financial problems caused by rising Medicare spending are far from solved. 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21, where this article originally appeared.

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