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.

The government created Medicare in 1965 to cover doctor and hospital bills faced by Americans 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 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 and chronic diseases have become more prevalent, particularly those related to obesity. And the number of beneficiaries is climbing rapidly. Enrollment is projected to grow from 50 million today to 80 million in 2030.

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 health care law, most notably the new restraints on payments to Medicare providers.

But even if the cost per beneficiary holds steady, 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 percent of federal spending, to $1.1 trillion in 2022, or 19 percent.

Republican budget negotiators have endorsed a plan to cut $600 billion from Medicare and other federal health care programs. Obama has called for cutting about half that amount, as many Democrats argue for no cuts at all to Medicare benefits.

The government 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.

The United States spends far more per capita on health care 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 health care is organized, delivered and paid for.

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.

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 percent of beneficiaries who need the most care account for almost 40 percent 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 health care 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. Lawmakers need to recognize they can’t devise a long-term solution without addressing Medicare. And sadly, the program’s problems — like those in the health care industry as a whole — defy easy solutions.