Loren Adler: Medicare at Middle Age

Loren Adler, Research Director for the Committee for a Responsible Federal Budget, wrote a guest post that appeared on the RealClearPolicy blog. It is reposted here.

Medicare hits an important marker today — its 50th birthday. To make sure it reaches its 100th, policymakers must remain vigilant in improving the program for generations to come.

On July 30, 1965, President Lyndon Johnson signed Medicare into law to provide health-care access to millions of Americans at a time when over half of the elderly population had no health insurance. Medicare was a game-changer back then, providing quality health care to older Americans who previously could not afford it.

Now, Medicare faces a landscape changed by demographic forces and rising health-care costs. As the venerable program turns 50, it faces questions beyond whether or not to join AARP. Policymakers need to take action to guarantee the program's financial stability for the next 50 years and beyond, as well as to improve the overall fiscal situation.

While the growth of health-care costs has slowed in the last few years, federal spending on health care remains on a dangerous path. Due to an aging population, fast-growing per-beneficiary costs, and expanding coverage, this spending is expected to grow substantially faster than the economy, continuing to crowd out other national priorities and investments.

The number of people age 65 or older will rise by more than 75 percent over the next 25 years. Meanwhile, per-beneficiary costs are projected to return to growing faster than the economy, with annual growth averaging over 4 percent through 2040. As a consequence, Medicare spending is set to consume an additional 2 percent of GDP within 25 years and double as a share of the economy by 2051, helping to push debt to levels never seen before in our history.

Devoting more and more resources to Medicare and other health spending will also squeeze public investments that can help grow the economy. Medicare spending currently accounts for 16 percent of federal non-interest spending, and is on pace to consume nearly one-quarter by 2040.

The increased spending will also drain Medicare's coffers, which could jeopardize benefits. Medicare's Hospital Insurance Trust Fund is projected to run out of money within 15 years, causing an automatic 14 percent cut in Medicare Part A benefits.

It doesn't have to be this way. Almost every other developed nation manages to spend far less money on health care while still delivering high-quality care.

Promising reforms are currently underway that seek to shift the U.S. health-care system away from the volume-based fee-for-service payment model that dominates today and encourages excessive services without regard for quality. Initiatives such as Accountable Care Organizations and bundled payments, both in Medicare and the private sector, hold great potential to moderate cost growth and improve the quality of care delivered in this country.

To achieve their full promise, though, policymakers will need to intervene over time to improve these models and double down on what works. Dartmouth-Hitchcock Health, the Dartmouth Institute for Health Policy & Clinical Practice, and the Campaign to Fix the Debt released a paper earlier this year with a number of suggestions for how to bolster the shift away from fee-for-service reimbursement and toward rewarding quality and coordinated care.

Moreover, there is much spending within Medicare today that provides little value or promotes waste. Beneficiary cost-sharing in Medicare is outdated and bears little connection to the value of care received. In many cases, the government unnecessarily pays more for a brand-name drug when an equivalent lower-cost alternative is available or for identical care provided in a hospital outpatient facility as opposed to a physician's office.

The Independent Payment Advisory Board and the Center for Medicare and Medicaid Innovation also have an important role to play in controlling federal health-care costs and promoting valuable reforms, and thus should be kept intact.

The Medicare Trustees recently warned that "even under current projections, Medicare faces a substantial financing gap," and that "we will need all of current law's cost containment and more to ensure that it remains on a financially secure footing."

Health care, particularly Medicare, will be the largest driver of the national debt in the years to come. Taking action in the near term to bend Medicare's cost curve to make it less of a drain on the budget and economy, while ensuring its sustainability for generations to come, would be a very appropriate birthday present.

As lawmakers sing Medicare's praises this week, let's see if they truly honor it by working to strengthen it.

"My Views" are works published by members or staff of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.