In a much-publicized study, Duke University researchers recently reported that elderly disability rates have been declining, and concluded that if this trend continues over the next few decades it could erase much of Medicare's projected cost growth. Many, notably Senator Edward Kennedy, are citing the study as proof that major reforms are unnecessary. All we have to do to "solve Medicare's long-term financing problems," says the Senator, is to "modestly increase the existing trend toward better health for older Americans."
Unfortunately, this optimism is unwarranted. Although disability rates have been declining throughout the 1980s and 1990s, to date there is no evidence that this trend has slowed Medicare's cost growth. And even if we suppose it will do so in the future, the savings are already more than factored into the official Health Care Financing Administration (HCFA) projections.
In fact, according to these projections the rate of growth in real per-beneficiary Medicare spending will eventually slow to just one-fifth of its historical pace. What this means is that the Duke study has it precisely backwards: Major reform may be necessary simply to ensure that future costs do not vastly exceed the official projections.
It's time to move beyond delay, denial, and diversion. To save Medicare we will have to reform it, and to do that we will first have to get the facts straight.
The central empirical finding of the Duke study is that the incidence of chronic disability among the elderly has been declining for at least the past fifteen years. This finding seems solid enough. But the upbeat conclusions based on it are not. They rest on two mistaken assumptions: first, that a declining incidence of disability necessarily reduces Medicare spending, and second, that this reduction (if indeed it exists) will cut future Medicare outlays beneath current projections.
The first assumption, however plausible at first glance, violates the most basic rule of logical inference-- namely, that correlation is not causation. Think about it. Just because Americans who own jacuzzis tend to pay above-average taxes doesn't mean that if fewer people buy jacuzzis tax revenue will decline. By the same token, just because disabled elders tend to consume more health-care services doesn't mean that if fewer elderly become disabled Medicare spending will decline.
For one thing, the disabled are not homogeneous. Some consume much less health care than others, and the decline in disability may be concentrated among this less expensive group. For another, less disability may or may not mean less morbidity. The Duke study classifies as "disabled" those elders who are unable to perform at least one basic "activity of daily living" such as bathing or dressing. Even as the share of elderly with such limitations declines, the share with expensive medical conditions could be constant (or even rising). In other words, Grandma may be getting around a bit better but still be seeing the doctor just as often.
If falling disability really did portend slower future cost growth, we might expect it to have moderated past cost growth as well. After all, the trend has been underway for fifteen years, and perhaps much longer. But in fact, since Medicare was founded, real spending per age-adjusted beneficiary has risen at the blistering average annual rate of 5 percent. Far from slowing, this growth rate accelerated in the early 1990s-- just when the Duke study finds that disability fell most rapidly.
Clearly, any saving from falling disability is being overwhelmed by other factors that keep pushing costs up. Indeed, looking at the record, one can easily imagine a causal relationship between changes in rates of disability and health-care costs that is exactly the reverse of what the Duke study assumes. Perhaps the consumption of a high and rising volume of health-care services is the very reason people are becoming less disabled.
To be sure, it is possible that the ongoing decline in elderly disability really is saving money, and that without it Medicare costs would be growing still more rapidly than they are. But even supposing this to be true, does it follow that a continuation of these savings will cut future costs beneath current projections?
The Duke study says yes, it does follow. But this is its second mistaken assumption. In the near term, the HCFA projections are based on an extrapolation of historical trends in Medicare spending-- which means that they implicitly factor in a continuing decline in disability. Beyond the next decade, HCFA projects that the growth in real spending per age-adjusted beneficiary will slow from its historical rate of 5 percent per year to just 1 percent per year by the 2020s. Without this slowdown, total Medicare spending would climb to 54 percent of taxable payroll by 2040. With it, HCFA projects that total spending will rise to just 18 percent of payroll. The official projections thus not only take into account the "existing trend toward better health for older Americans," they assume vast additional savings.
None of this is to deny that the Duke study raises some interesting questions. Experts have long debated whether health spans will rise along with life spans as the population ages. One school of thought (the "compression of morbidity" theorists) believes that they will. Another school (the "failure of success" theorists) argues that the principal effect of modern medical science is to increase the number of "marginal survivors" in the population, and that as life spans rise so too will rates of chronic morbidity. Although the empirical jury is still out, the Duke study may lend some support to the "compression of morbidity" optimists.
That said, there is simply no reason to believe this dynamic will have much if any impact on today's cost projections. Medicare spending keeps rising inexorably even as most objective measures of elderly health improve. Obviously, there are forces at work having nothing to do with beneficiaries' health-- from the continuous introduction of new medical technologies to demographic aging to cost-blind reimbursement. "Good health," moreover, is not a fixed goal. It is a subjective standard that rises over time as society becomes more affluent, becomes less tolerant of bad health or risk, and becomes more secular --that is, more apt to see happiness in the here and now as life's ultimate goal. As this expanding concept of health interacts with medical advances, it is sure to transform the practice of health care. While once health care meant an occasional visit to the doctor, it will soon become a lifelong process of diagnostics and fine tuning in which any extra dollar spent is likely to confer some perceived benefit.
Keeping these buoyant expectations in mind, recall again that the official projections anticipate a huge and unprecedented improvement in current cost trends. HCFA does not posit any specific change in policies that might explain this rosy outcome. It simply assumes that someday, somehow, costs must be controlled if Medicare is not to consume the entire economy. But merely to assert that something will happen begs the real question: How will we make it happen?
Politicians are naturally averse to unpleasant policy choices. As such, they are eager to hear that the Medicare problem is smaller than the official projections tell us. In fact, it is bigger, not smaller. Researchers should be careful not to jump to mistaken conclusions -- especially ones that will be misused in the political world.
FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips