FACING FACTS

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
Volume VII, Number 1 - January 29, 2001

A WAKE UP CALL ON MEDICARE

An HHS-appointed Medicare Technical Review Panel charged with evaluating the methods and assumptions underlying the Trustees' projections has released its final report. Its main conclusion: The Trustees are greatly underestimating Medicare's long-term cost.

The Concord Coalition applauds the Panel for its wake up call. We have long argued that the Trustees' cost assumptions are too rosy.*  The CBO also believes that the Trustees are "overly optimistic," and last December began using a higher health-care growth assumption in its own long-term budget projections.

Amid the bipartisan rush to enact a prescription drug benefit, Medicare's long-term cost challenge has vanished from the national agenda. And amid the hoopla over the latest improvement in the federal fiscal outlook for the next decade, what no one seems to have noticed is that, beyond the next decade, CBO's estimate of the total cost of federal spending programs has actually risen. Let the White House and Congress take note: The Medicare cost problem is still there, and it's much worse than the official projections suggest.

Clearly Inconsistent

In their latest report, the Trustees project that Medicare spending will double from 2.3 to 4.8 percent of GDP by 2040. This forecast may appear pessimistic. But in fact, just the opposite is true. It posits a dramatic and permanent slowdown in real cost growth that, in the Technical Panel's words, is "clearly inconsistent with Medicare experience over virtually any historical period."

Over the entire thirty-five years since Medicare was founded, real spending per beneficiary (adjusted for age) has grown at the average rate of nearly 5.0 percent per year. Over no ten year period has it grown at less than 3.4 percent per year. Yet the Trustees assume that this growth rate will fall to just 1.3 percent after 2025, or to roughly the rate of growth in per capita GDP.

The Trustees do not point to any change in medical technology, or health status, or social expectations that might account for the slowdown. The only justification they offer is that Medicare spending cannot indefinitely grow faster than the economy. While this is true, it begs the real question: How will we keep it from growing? By implicitly incorporating a policy response into their baseline, the Trustees subvert its purpose. As the Panel reminds them, their projections should show the consequence of leaving current policy on autopilot--even if the consequence is fiscal and economic meltdown.

The Panel recommends that the Trustees substantially raise their long-term cost growth assumption. A reasonable assumption, it believes, is that the rate of growth in per beneficiary spending will equal the rate of growth in per capita GDP plus one percent. This works out to half the historical rate. Why not the full rate? The Panel's explanation is that whatever else happens in health care, technological advances will continue, and over the postwar era these have accounted for roughly half of the rise in real per capita health-care spending.

The Panel does not quantify the effect of its recommendation on projected Medicare costs. We estimate that switching to the GDP-plus-one-percent growth rate would raise Medicare's officially projected cost in the year 2040 to 6.8 percent of GDP, almost exactly what the CBO now anticipates. Under the revised projection, just the increase in Medicare spending over the next forty years--4.5 percent of GDP--would be greater than everything we spend today on Social Security.

The Lower End of the Range

Even this projection is conservative. For one thing, it is based on SSA's "intermediate" economic and demographic scenario, which assumes that longevity will grow at just half the pace over the next seventy-five years as it has over the past seventy-five. If we plug the Panel's health-care cost assumption into SSA's "high-cost" scenario, which allows for bigger gains, the cost of Medicare rises to 8.2 percent of GDP by 2040.

The Panel also acknowledges that its GDP-plus-one-percent assumption falls toward "the lower end of the reasonable range." Many observers believe that the pace of technological innovation in medicine is now accelerating. "Good health," moreover, is a subjective standard, one that naturally rises as society becomes more affluent. As technology and expectations interact, they are transforming the practice of medicine. While once health care meant an occasional visit to the doctor or hospital, it is fast becoming a lifelong process of diagnostics and fine tuning in which any extra dollar spent is likely to confer some perceived benefit.

We cannot dismiss the possibility that per-beneficiary spending will continue to grow at its historical rate. If it does, the cost of Medicare would reach a staggering 15.4 percent of GDP by 2040--more than everything Americans now spend on health care.

An Unflinching Look

The Concord Coalition joins the Technical Panel in urging the Trustees to "improve the realism" of their projections. They should adopt the Panel's GDP-plus-one-percent recommendation-instead of arbitrarily assuming away the forces driving up health costs. They should also publish alternative projections that reflect the real possibility of a worse outcome, including a historical trend projection and a projection based on SSA's high-cost economic and demographic scenario.

As things stand, the official numbers obscure the full magnitude of the long-term Medicare challenge. It's time we took an unflinching look at what lies ahead.