The Facts Are Clear, The Rhetoric Is Wrong

It often gets lost in the debate about Medicare that the problem is our healthcare system, not Medicare itself, not big government. According to the Organization for Economic Cooperation and Development (OECD) and the World Health Organization, the US spends more per capita than any other country they surveyed. According to both organizations, the US spends more as a percentage of GDP than almost any other country. Compare this with a report from the Commonwealth Fund who finds that the US “fails to achieve better health outcomes than the other countries, and . . . is last on dimensions of access, patient safety, coordination, efficiency, and equity.” Our nation spends more than any other nation, we achieve some of the worst outcomes, and when compared to the majority of OECD countries and WHO countries, we are the most privatized, least socialized medical system in the world.

Medicare Spending As Share Of GDP

America has a healthcare system problem, not a Medicare problem, not a government problem.

Medicare Spending Per Capita

It also gets lost in the debate, that cutting Medicare budgets doesn't cut Medicare need. Cutting budgets means cutting benefits that our seniors and our citizens need. We know that a lack of healthcare means an increased likelihood of dying of preventable causes. A 2007 study conducted by researchers at Harvard University estimated that 45,000 people die every year in the United States from problems associated with lack of coverage. The study found that “uninsured, working-age Americans have a 40 percent higher risk of death than their privately insured counterparts,” even “after taking into account socioeconomics, health behaviors, and baseline health.”

Creating more uninsured and more underinsured Americans will only create a bigger problem.

The true Medicare problem that confronts our nation is that we have both skyrocketing health care costs AND the largest generation we've ever seen, the baby-boomers, nearing retirement. In short, we pay too much for healthcare, and we are about to pay too much for a larger portion of our population.

What confronts us is a choice. We can choose, as the wealthiest nation in the history of the world, to provide healthcare to our citizens, or we can choose not to. As Joshua Holland points out, "It's a tragic irony that so much of the discussion surrounding the public debt centers on “entitlements” like Social Security (which hasn't added a penny to the national debt) when we're still paying for Korea and Vietnam and Grenada and Panama and the first Gulf War and Somalia and the Balkans and on and on." Then there are the costs of the wars in Iraq and Afghanistan, the bail out for Wall Street, subsidies for oil companies to name a few. It's clear we can choose to fund things when we want to. The only question that remains is whether or not we will choose to provide affordable healthcare to our citizens.

How could the wealthiest nation in the world choose anything other than to provide healthcare for it's senior citizens? How could we turn our backs on those who have worked their entire lives to make our nation great? The choice is incredibly clear. If we are to choose the right thing then we must understand the problem we are facing in order to understand how best to solve it.

Scope of the Problem
When you boil all of the numbers, all of the debate, and all of the rhetoric down, you arrive at two fundamental factors affecting the future of Medicare.

1. Rising medical costs
2. Rising number of enrollees in the baby-boomer generation

Rising Medical Costs
Risiing costs are the biggest problem we face. It's why we pay too much for our healthcare today, and it's why we will pay too much for our healthcare into the foreseeable future. As Sawhill and Anrig note, "It’s the high rate of growth in healthcare costs that’s driving the spiraling deficit projections, not the baseline benefit levels." Any talk by any politician about cutting benefits is looking at the wrong solution. Until we control costs, there will be no end of the cuts in benefits.

Healthcare Cost Growth By Nation

It's striking to note, not only that rising costs are the biggest problem we face, but that they have been for 40 years. You read that correctly, we've known about this problem for 40 years and we're only now trying to do something about it. The Kaiser Family Foundation notes "Since the 1970s, national health care spending has grown on average about 2.5 percentage points faster than the economy, and this trend is expected to continue…The U.S. ranks far above all other countries in terms of health spending as a share of the economy, with France ranking second at 11 percent of GDP." The United States has the exceptional distinction of paying between 15 and 16% of GDP on healthcare, almost 4% more than the next closest nation, and we have among the worst outcomes of OECD nations.

KFF goes on to point out just how critical controlling costs will be to the future of our nation. According to KFF, if we take only growth in beneficiaries into account, Medicare spending would increase from 3% to 5% of GDP. However, when you factor in projected increases in healthcare cost, the number swells to 14% by 2083. Cutting benefits and cutting beneficiaries is clearly the wrong approach. Until we control costs, whether we privately insure or provide benefits through government programs like Medicare, we can expect healthcare to consume a larger and larger portion of our GDP.

As our friends on the right rail against government and seek to cut government spending wherever they can, healthcare reality is far different than their rhetorical Medicare fiction. According to the Trustees report, Projected Medicare costs over 75 years are about 25 percent lower because of provisions in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act" or ACA). You read that correctly, the much maligned "Obamacare" is the single most significant cost control in the foreseeable future of our healthcare system. The Trustees also note that "The Affordable Care Act introduced important changes to the Medicare program that are designed to reduce costs, increase revenues, expand the scope of benefits, and encourage the development of new systems of health care delivery that will improve health outcomes and cost efficiency. "

Further undermining the myth of the failure of government, the Kaiser Family Foundation and others point out that "Program administration is not a contributing factor to Medicare’s expenditure growth. The costs of administering the Medicare program have remained low over the years – less than 2 percent of program expenditures." What's more, when you compare government administrative costs to private sector costs, Medicare is the most efficient system and the most successful at keeping costs down. Moving beneficiaries from the efficient Medicare system to other systems only means that we will spend more of our GDP on less healthcare.

With costs being such a clear issue of focus affecting healthcare in our nation for the last 40 years, imagine how much better we'd be if we had addressed the problem sooner. We missed the opportunity during the Clinton administration and in the “Obamacare” witch hunt we missed much of our opportunity to talk about real efforts to control costs in favor of the mythical "death panels" of the right.

Retiring Baby Boomers
Similar to Social Security, some of the growth in Medicare is directly attributable to the retirement of the baby-boomers. In essence, the retirement of the baby-boomers decreases the wage earner to beneficiary ratio. Currently, there are about 3.7 workers for each beneficiary. However, by 2030 this number will fall to about 2.4, falling to it's final low of about 2.1 workers per beneficiary by 2080.

As noted above, this decline in workers and increase in beneficiaries contributes to an increase of about 2% of GDP in Medicare spending, the remaining 9% of increase in GDP comes from rising healthcare costs. The Kaiser Family Foundation notes that "Only until the bulk of baby boomer beneficiaries reach age 85, between 2040 and 2050, is age mix expected to contribute to higher program spending." This means that similar to Social Security, this is a one time and temporary problem. Once we address it for the baby-boomers, the problem of worker to beneficiary ratio is gone forever.

It’s worth mentioning that the retirement of the baby-boomers was foreseeable. We’ve known this problem was coming, but we chose not to act when we had the chance. Simply because we chose not to act then does not mean we should overreact now.

With the scope of the problem clearly defined, what can be done? Although there are many proposed solutions, it's clear that the focus should be on addressing rising healthcare costs.

It's clear that we must do something to address the projected growth of Medicare. When combined with the increases in Social Security, we can expect the two programs to increase from 8.4% of GDP in 2010, to 12.2% of GDP by 2085. In the short term we have bought ourselves a little more time with the passage of the Affordable Care Act. According to the trustees report,

"The financial outlook for the Medicare program is substantially improved as a result of the changes in the Affordable Care Act. In the long range, however, much of this improvement depends on the feasibility of the ACA’s downward adjustments to future increases in Medicare prices for most categories of health care providers."

This is not to say that we shouldn't act now, but to underscore that we don't need to overreact, or react poorly now. We have improved the outlook with the Affordable Care Act, now we can focus on finding appropriate solutions for the longer term, not knee-jerk reactions that would threaten the viability of the program. The great variety and complexity of solutions offered will not be covered here, but we will focus on several of the main themes currently in debate.

Controlling Costs
The key point to understand about the future of Medicare is that it is rising healthcare costs that pose the greatest threat. The key point to understand about rising healthcare costs is that they have been rising about 2.5 percentage points faster than GDP for 40 years. As terrible as this fact is, the fact remains that healthcare costs are projected to continue to outpace inflation for the foreseeable future unless we act to control these price increases.

Public & Private Spending on Healthcare

We already spend too much for our healthcare. Not just individually, but as a nation. We spend a higher percentage of our GDP on healthcare than any other nation, which makes the issue of controlling rising costs even more essential to protect the future of our economy.

Cost Savings of 1% Growth

Even if we were to set the bar quite low for controlling rising costs, it could have a huge impact on the future of Medicare and the future of our nation. KFF calculates that "if the rate of growth in per capita health costs were equal to the growth in GDP plus 1.0 percentage point, instead of GDP plus 2.5 percentage points, which is closer to the historic trend, by 2038 program spending would be reduced by half." In short if we were to allow our healthcare costs to continue to skyrocket, only just a little more slowly, we could cut our Medicare problem in two. I would argue that we should aim higher than this, but even this modest approach demonstrates just how significant rising healthcare costs are to our nation's future.

So what is it that has been driving costs up for so long? Regardless of what report you read the answer is always the same, Sawhill and Anrig summarize it like this "cost increases are driven by the availability of new and better treatments and drugs, the open-ended, fee-for-service nature of the system, and a lack of incentives for either providers or beneficiaries to control costs given that most of the bills are sent to third parties (either employer-based insurance plans or the government)."

Rising healthcare costs go beyond just new technologies, drugs and techniques, it turns out that they also vary by location. You read that right, literally living in different parts of the country you will pay markedly different prices for the same services. Regarding regional price discrepancies, KFF notes that "most variation is unexplained…Yet studies have shown that higher spending in these areas does not result in better quality of care as measured by processes, outcomes, or patient satisfaction."

It turns out that another contributing factor to rising costs is the disconnect between medical procedures and outcomes. We literally don't link the fees we pay to the actual effectiveness of the drug or procedure. We are literally paying for healthcare that we may not need and that may not be working. Sawhill and Anrig underscore this problem in this way, "Right now, there is little relationship between medical expenses and patient outcomes. Indeed, some estimates suggest that roughly 30 percent of all health-care expenditures do nothing to improve people’s health."

We can improve on that 30 percent savings by allowing Medicare to negotiate pricing for drugs and services like other governments do. In fact you've likely heard this one before, but maybe you didn't realize that just this simple change could add up to a savings in the range of 20 percent of our annual health care spending. According to Bloomberg News, "A 2007 McKinsey & Co. Inc. study surveyed a range of health-care delivery systems and concluded, after making adjustments for purchasing power, that we were overpaying for health-care services and products to the tune of $500 billion a year."

Some also suggest that we could implement means testing for Medicare. As popular as this idea has become, almost no one gives a number for the savings derived from means testing. The Huffington Post provided one estimate of around $38 billion. A large number to be sure, but when compared to the 30 percent savings from linking procedures to outcomes and the $500 billion we could save each year if we allowed Medicare to negotiate pricing, means testing seems like a distraction from the real savings we should be pursuing.

To be certain, there is much to be done within the healthcare system to control costs and save money, but we could also look at how we spend our money on things other than healthcare. We choose to spend our tax dollars in a variety of ways. We could also choose to solve the problem in part by selecting a different mix of where those dollars go. Sawhill and Anrig highlight a study in which "A bipartisan task force organized by the Project on Defense Alternatives issued a report in June spelling out specific defense cuts that would save $960 billion between 2011 and 2020 alone. The report emphasizes how those changes would not weaken America’s military capabilities."

Medicare Costs vs. Private Sector

At the end of the day the fact remains that Medicare does a much better job of controlling costs than the private sector. Furthermore, almost every other nation with better health outcomes than the US has a nationalized, Medicare-like system. Fundamentally altering or eliminating Medicare flies in the face of all the data we have collected both here in the US and in countries around the globe. Krugman puts it best when he says "since Medicare-type systems in other advanced countries have much lower costs than the uniquely privatized U.S. system, there’s good reason to believe that Medicare reform can do a lot to control costs in the future."

Cutting Medicare will do nothing to control costs and will likely drive more healthcare dollars to the private sector. Doing so is virtually guaranteed to cost us more while delivering less healthcare. Controlling costs is the single best method for addressing our healthcare crisis and for preserving our social safety net. Any proposal that focuses it's attention elsewhere is not a serious proposal.

Our friends on the right beat the drum of privatization to solve almost any problem that confronts us, and Medicare is no different. Let us set this notion to rest immediately. First, Medicare has lower healthcare cost increases than the private sector. Second, we have data and experience with privatization in the Medicare Advantage program. As KFF points out, this experiment in privatization has proven that it only increases costs. KFF notes "Growing enrollment in Medicare Advantage plans has increased program expenditures because each MA plan enrollee costs significantly more on average than if the beneficiary was in the traditional Medicare program, a differential of 14 percent in 2009."

Krugman's conclusion matches that of the Kaiser Family Foundation,

“Consumer-based” medicine has been a bust everywhere it has been tried. To take the most directly relevant example, Medicare Advantage, which was originally called Medicare + Choice, was supposed to save money; it ended up costing substantially more than traditional Medicare. America has the most “consumer-driven” health care system in the advanced world. It also has by far the highest costs yet provides a quality of care no better than far cheaper systems in other countries."

If data doesn't do enough to convince you, then perhaps logic will. While private market forces can do a lot to drive down prices through competition across a variety of markets, healthcare is not one of these. What makes healthcare so different? First, healthcare is far more complex than making the decision to buy a Mini Cooper or the latest iPhone. The typical consumer understands very little about medical conditions, medical procedures, or medical options. With no true understanding on the part of the consumer, there is no informed purchasing to help regulate the market. After all, medical students and pharmacists spend literally decades training to help us make these decisions, and if you talk to a collection of medical professionals you'll find a wide range of approaches and answers. The idea of the informed consumer exerting market forces to control healthcare costs is a myth.

Second, healthcare often isn't something you choose. You may choose to buy that new pair of Nikes because they are on sale, but you often don't get that choice with healthcare. You don't get to choose when you are going to need that new heart bypass, or even if you want it.

Third, the intensity of life and death decisions affecting the future of one's life and one's family can not compare to the decision between Coke or Pepsi. The choice is simply of a higher order of magnitude, and you don't get to try Pepsi tomorrow if you chose Coke today, the heart bypass you get is the heart bypass you live with.

Krugman summarizes the problem like this, "there’s something terribly wrong with the whole notion of patients as “consumers” and health care as simply a financial transaction…those decisions often must be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping."

Privatization can't be ignored, it will have a role to play, but it should not be relied upon as the primary lever for controlling healthcare costs. Market forces have been driving costs up, there is little to suggest that these same market forces applied more broadly would do anything but more of the same.

The Paul Ryan Plan
Since the Ryan Plan has gotten so much press, it's worth mentioning. The value in mentioning the Ryan Plan can be found in how clearly it points out how fundamentally altering Medicare while doing nothing about rising healthcare costs, will certainly make the problem worse.

Ryan Plan Effect On Individual Costs

The Center for Economic and Policy Research emphasizes that "According to the Congressional Budget Office's assessment of the Ryan plan, it would increase the cost of buying Medicare equivalent policies by $34 trillion (5 times the projected Social Security shortfall) over the program's 75-year planning horizon. Adding in the $5 trillion in costs shifted from the government, the Ryan plan would increase the cost to beneficiaries of buying Medicare equivalent policies by $39 trillion." In a separate article, Rosnick and Baker underscore that "This increase in costs – from waste associated with using a less efficient health care delivery system – has not received the attention that it deserves in the public debate."

The LA Times put it like this "because commercial insurers cost more to run than government plans, the Wisconsin Republican's proposal to privatize Medicare starting in 2022 would actually spark a dramatic increase in how much the nation spends on healthcare for the elderly, according to an independent analysis by the nonpartisan Congressional Budget Office."

It's difficult to understand how we cut the deficit by adding between $30 trillion and $40 trillion in additional healthcare spending. It's difficult to understand how one argues for adding so much to our deficit while simultaneously guaranteeing a decrease in access and quality of healthcare. Perhaps most difficult of all is understanding why we have spent so much time as a nation pretending to be serious about this plan.

The Medicare problem is a national problem. Simply put, the problem is that we pay too much for healthcare. The answer to this problem, in whatever form it takes, must address the rising cost of healthcare. Killing or fundamentally altering Medicare will do nothing to address the problem, but will instead make it worse. In fact, the complete opposite presents a much more likely solution. Medicare provides healthcare more efficiently than any other system currently at our disposal. Medicare does a better job of controlling costs than any other system at our disposal. If we are serious about the deficit, we would look to expand Medicare not cut it. This is not a case that the left or the right can argue against, the data both here in our own country, and around the world is strikingly clear.

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