Annual Report | September 17, 2010 at 4:38 pm

Medicare and Medicaid

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It shouldn’t come as a surprise to anyone that spending in the United States on health care – both by individuals and by the government – has skyrocketed past the growth in the U.S. gross domestic product.  The Congressional Budget Office reported that health care spending accounted for 15 percent of GDP in 2010, up three fold from the 1960s. Federal spending on Medicare and Medicaid accounted for a healthy chunk of that, rising from 2.2 percent of GDP in 1985 to 5.3 percent in 2009. If current trends hold Medicare Part A will go broke by 2017, according to the Medicare Trustees Report. Those statistics offer just a small look at a troubling picture: America’s health care costs are growing unsustainably, and legislative action is becoming increasingly necessary to avert a fiscal disaster.

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Three major mandatory health care programs – Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) – comprise a substantial part of the growth in spending.  The CBO projects that spending on these three programs will grow from 24 percent of federal “primary” spending (spending other than on debt service) in 2010 to about 41 percent 25 years from today.  As Dr. Gail Wilensky, a former chair of the Medicare Payment Advisory Commission, told the HPR, if the federal health care programs continue to grow at current rates, “they will become the Pac-Men of the federal budget.”

Medicare and Medicaid account for the bulk of federal health care spending. Medicare pays most of the cost of healthcare for people over age 65 or who are suffering from permanent disability or end stage renal disease.  The program covers an estimated 46 million Americans, about 38 million of those are elderly. Medicare’s “Four Parts” offers assistance to individuals for hospitalization, physician services and prescription medications. Part A, which accounts for 40% of all Medicare spending, covers hospital services and hospice care. It is funded by a payroll tax of 2.9%, split between employer and employee. Part B assists in the payment of physician and outpatient services.  Part D, ushered into law in 2006, provides a prescription drug benefit.  Parts B and D are funded by a combination of general revenues and patient premiums.  Part C, enacted in 1997, gives beneficiaries the option of receiving their Medicare benefits through private health insurance plans. In total, the program cost $455 billion in fiscal year 2008.

Medicaid is a joint federal/state program that pays for health care services for eligible low-income individuals.  In 2009, the federal government spent $251 billion and the states spent another $130 billion on Medicaid.  About 71 million people will be enrolled in Medicaid at some point during 2010.  While the federal government provides funding and establishes guidelines, each state is responsible for administering its own Medicaid program.  Dr. Wilensky says that Medicaid has sometimes been described as fifty different programs, “since the states had so much latitude in choosing who to include and what services to provide them.” The 2010 health care reform will establish greater consistency in eligibility criteria from one state to the next, by requiring that all states must make Medicaid available to most nonelderly people with incomes less than 138% of the federal poverty level.  The CBO has estimated that this will result in roughly 16 million more enrollees in Medicaid and CHIP over the next ten years, and the Kaiser Family Foundation estimates that those costs will result in an additional $434 billion of federal spending.

The Children’s Health Insurance Program, often referred to as a companion program to Medicaid, is also funded through a partnership between the federal government and the states. The program originated from the desk of Senator Edward Kennedy and began operating in 1997, though it was nearly eliminated when George W. Bush twice vetoed legislative efforts to expand eligibility for CHIP assistance. In 2009, Barack Obama signed the Children’s Health Insurance Program Reauthorization Act, which succeeded in lowering the barriers to CHIP eligibility. That expansion, like the original program, was funded by an increase in taxes on tobacco products. CHIP covered 7.7 million children from low-income families at some point in 2009, at a cost of $9.2 billion to the federal government.

Two basic trends underlie the rapid growth in the costs of Medicare and Medicaid. First, the elderly population is growing, and growing more rapidly than the general population.  Over the past four decades, the share of the population that was age 65 or older grew by about one-quarter – from 10 percent to 13 percent.  This means that more and more people are becoming eligible for Medicare.  It also means that the people who are eligible for Medicare are becoming, on average, older and therefore more in need of medical services. Second, new medical technologies and services have been developed and widely adopted in recent decades.  New medical technologies and services tend to be more expensive than the older treatments that they replace or supplement.

What can be done to slow the growth in healthcare spending?   All of the possible answers will reduce coverage for some group of people, and there is no consensus answer.  One proposal might be to gradually raise the age of eligibility for Medicare, similar to what is being done with eligibility for Social Security.  Dr. Wilensky points out that the current age of 65 “was set when expected longevity was far lower than it is now.” David Himmelstein, a professor at Harvard Medical School, says that other options might be to make Medicare “just for people who are relatively poor, or to have the wealthy pay more,” though he suspects such actions might “fatally undermine political support” for the program. Ultimately, Dr. Paul van de Water, a Senior Fellow at the Center on Budget and Policy Priorities, told the HPR that we need to accept that “we don’t know precisely what steps need to be taken in order to reward quality health care” while still keeping prices under control. The only thing that seems clear is that the current generation of students should, as Dr. Wilensky advised this writer, “plan to work hard and for a long time, because we older people are counting on you to fund our Medicare.”

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