Before signing the historic Social Security Act of 1965 that would create modern-day Medicare and Medicaid, President Lyndon Johnson took a moment to reflect on tradition. “It calls upon us never to be indifferent toward despair,” Johnson said. “It commands us never to turn away from helplessness. It directs us never to ignore or to spurn those who suffer untended in a land that is bursting with abundance.”
This sentiment neatly encapsulated the reasoning behind the federal government’s most ambitious healthcare initiatives. The government, in its capacity as a caretaker, was to assume the responsibility of helping the elderly and the needy. But now, with the national debt rising, an uncertain economy, and federal programs such as Social Security looming on bankruptcy, these initiatives find themselves under question. They changed the shape of the American healthcare system and created a mixed market featuring private insurance companies, government plans, and corporate healthcare benefits. But this tangled web of healthcare in the United States is faltering with rising costs, prompting a vicious debate about the next big step the government should take to save the system.
Symptoms of a System in Peril
In the 2010 fiscal year, the United States federal government spent approximately $866 billion on healthcare initiatives ranging from Medicare to healthcare for American Indians. In 1966, the first year that Johnson’s new programs took effect, healthcare only occupied 4.8% of the budget, but in 2010 these programs represent 26.2% of all the government’s spending. This staggering rise to dominance in the federal budget will only continue: projections for the future from the Office of Budget and Management signal greater increases in the future. It is estimated in 2016 that healthcare will occupy almost a third of the entire budget and represent 6.8% of GDP.
Medicare and Medicaid receive most of the press for their significant presence in the budget, costing $793 billion and accounting for 23% of all government outlays in 2010. While these two programs alone account for almost 80% of all healthcare spending, the federal government also bears the burden of hospital and medical care for veterans, American Indian healthcare costs, and children’s health insurance among other programs. Each of these programs has witnessed growths in spending similar to the ballooning costs of Medicare and Medicaid.
These rising costs suggest that the problem is across the healthcare system as a whole. According to the Centers for Medicare and Medicaid Services (CMS), in 1970 the average person spent only $365 annually on healthcare. Projections for 2016 put that figure at $12,782 per person. What is most troublesome is the fact that these high costs have not translated to better care. The U.S. spends more on health care than any other nation, but the Commonwealth Foundation recently ranked the nation last in terms of the quality of care in comparison to similar countries.
The growth of costs is, appropriately, causing significant concern among lawmakers. Government programs have grown to accommodate a larger and aging population—by 2030, 19% of the population will be over 65—and bureaucratic costs are ballooning. No longer do Policymakers hope to temper the growing expenses with minor reforms alone.
The Obama administration’s Affordable Care Act, signed into law in March 2010, was the first successful overhaul of the nation’s healthcare system since Johnson’s 1965 Social Security Act. Although reforms were attempted in the decades since, notably the debacle during the Clinton administration, no other president has had such a strong impact on the system as a whole.
It is tempting to lay the blame of rising federal healthcare spending squarely on the government. But the problems facing lawmakers really involve two separate issues: costs of the programs themselves and the cost of health care in general. The explanation for soaring costs lies with the much larger issues of the current American approach to healthcare. The mixed market system that features government funding along with the private market is not necessarily a bad one, but it does make it difficult to tease out the real problems at hand.
In 2004 federal government spending represented approximately 34% of the entire market. The rest was distributed between state and local government spending, out-of-pocket payments, and private insurance. It is a complicated system, and with greater complication comes less responsiveness to possible reforms.
Nonetheless, experts say that such continued growth in spending is unsustainable. In fact, in 2009 the Social Security Advisory Board, a bipartisan group of advisors to Congress for the Social Security Administration, stated that rising health care costs are “perhaps the most significant threat to the long-term economic security of workers and retirees.” The payroll taxes and funds used to pay for the enormous quantities of healthcare consumed by participants in the federal government’s various programs are quickly running out. Medicare already runs with a significant deficit, and the Obama administration estimated that it will entirely run out of funding as early as 2017. With Baby-Boomers beginning to pour into the ranks of Medicare enrollees, the system is likely to face greater stresses ahead. Cutting spending to the programs cannot create long-term change, and experts are increasingly looking at how the roots of the healthcare turmoil can be addressed.
Examining the Causes of Disease
While there is often significant disagreement on how best to address the problems of the American health care system, there is almost universal agreement on the major causes of these issues. From the Kaiser Family Foundation to experts within the Brookings Institute agree that the increasing costs of healthcare, both for the average patient and the federal government, are related to four major factors: administrative costs, an aging population, new technologies, and an increase in chronic diseases.
As the baby boomers reach age 65, making them eligible for Medicare, the federal healthcare system faces greater stress. By the close of 2029, all 77.6 million baby boomers will have achieved eligibility for Medicare. Additionally, with increasing age comes increasing likelihood of chronic diseases. The general rule of thumb is that the older the population, the more care they require. This aging population represents more of a risk to the federal government than it does to the overall health care system. While a greater percentage of the cost will shift to the public sector in the coming years, the overall rate of healthcare consumption will likely not increase dramatically enough to change spending significantly.
Henry J. Aaron of the Brookings Institute explains without changes to the healthcare system, “Medicare as a whole is going to place increasing strains on the budget…with the assumption that per-patient costs are going to rise in the future.” And, as Aaron says, projections are that costs will rise and the United States will have to find a way to fund its entitlement programs.
But an aging population is not the only concern. Administrative costs, which relate to the unique way that the United States healthcare system as a whole operates, have also contributed to the rising per-patient costs. For most private healthcare transactions, insurance companies act as middlemen between the patient and the bills generated from his or her healthcare expenses. Some additional individuals pay for healthcare out of pocket, and even those with insurance or who are covered within a government plan may also find themselves paying coverage gaps, and that is in addition to co-payments. The government faces extensive administrative costs simply from working with the complex networks of hospitals, physicians, and caregivers across the nation.
Sound confusing? This tangle of private, public, and corporate makes for a system clogged with paperwork, which in turn increases the amount of administrative costs. According to the Kaiser Foundation, these costs, including billing and marketing, account for 2% of Medicare costs. For the overall system, the administrative costs are estimated as high as 7%.
Experts also point to the adoption of new technology and prescription drugs to explain the enormous increases in spending. New technology’s impact is twofold. The first is that the producers of these new technologies must recoup the costs through the consumers, driving up prices for even relatively simple but new procedures. The second is that patients, as consumers, often seek the newest treatments, establishing an expensive demand for services that are not necessarily better.
Finally, while life spans have increased from 68 to 77 years in the last half-century, so too have the number of chronic diseases. Cancer, for example, is no longer the death sentence that it once was, but it does mean a significant course of expensive treatments and frequent medical care for the patient. Similarly, rates of obesity and obesity-related diseases such as diabetes are on the rise. This increases the demand for care, and particularly more expensive, more intensive care.
Finding the Vaccine
There is little consensus among experts and politicians on how best to approach reform. The single-payer system popular in many developed nations has gained virtually no traction in the United States, but Americans are likewise unenthusiastic about a completely privatized healthcare system.
The real problem is not as simple as who is doing the spending, but rather the efficiency of the system as a whole. Many experts point to the need to “bend the curve,” essentially make the system more efficient. The Obama administration’s Affordable Care Act was, in part, an attempt to start a downward bend.
But further reform will have to address the problem of incentives within the current system. There are significant questions about what all the money is rewarding. For example, doctors receive significantly less compensation for preventive care than for highly intensive procedures, while preventive care actually has greater benefits to the patient in the long term.
The Affordable Care Act, if left intact, should have at least some effect on healthcare spending in the short-term. Cutting Medicare prices will put pressure on the entire healthcare system to reduce prices. The plan in its current form also supports numerous pilot programs that will test different paths towards reform. Dr. Robert Berenson, a fellow at the Urban Institute and Vice-Chair of the Medicare Payment Advisory Commission says that within five or ten years these programs should show the government which programs actually change incentives. “so hospitals and doctors aren’t rewarded for more care but better care.“
While the Affordable Care Act takes aim at the problem’s base, lawmakers have also been intent on reducing the government’s exposure to the rising costs. Proposals on the table generally involved budget cuts, or slight changes to the existing system. Senator Joseph Lieberman, for example, has proposed various reforms to Medicare in order to simplify the payment system.
Other lawmakers have suggested cutting funding to many of the healthcare programs, instead relying on the private sector to create a theoretically more efficient system. Representative Paul Ryan’s budget proposal, for example, would effectively get rid of the current Medicare system by 2022. Instead, those who are eligible would receive premium support to pay for private insurance.
But experts have met most of the recent proposals with skepticism, suggesting that there is no clear path to a functional system. Dr. Michael Chernew of Harvard Medical School says that Ryan’s plan would reduce federal spending, but it would not have a strong impact on the overall healthcare-spending problem. That sentiment is consistent with the criticism of most proposed reform measures: the focus on government spending is only examining a symptom of a system-wide illness, and not addressing the real problems.
Design by Melissa Wong