• Chart of the day: Projected Medicare spending

    Medicare growth

    The vertical axis is percent of GDP. “Excess cost growth” means in excess of the rate of GDP growth. The chart is from a new ASPE report by Richard Kronick and Rosa Po. Description of what is meant by “OACT’s alternative scenario” is found in a follow-up post. Is an excess cost growth totaling three-quarters of a percentage point of GDP over two decades a lot?

    UPDATE: Deleted incorrect description of assumptions, which are now documented in a follow-up post.


    • I saw things a different way.

      If we locked all the proceduralists in a room and shut down the device and biopharm companies, and kept practice patterns static, and only let the population age, the country still hits a wall.

      Not major news, but I wish to emphasize the aging effect. The demographic alone tips us over the precipice. Taking away cath labs does not do enough.


      • That only means you need more revenue. The only other options are to cut beneficiaries or benefits. But beneficiaries will want coverage elsewhere and, if they can get it, it will cost more, only come out of different pockets (maybe). Bottom line, this points most clearly toward the need for revenue increases as well as vigilance on the efficiency front. What it doesn’t suggest is what Congress normally does, which is cut provider payments further. The per person trajectory is already pretty good!

    • “…and only let the population age, the country still hits a wall.”

      What percentage of healthcare costs can be attributed to branded drugs? In your scenario, the population would age AND patents would expire. What cost reduction could be expected if all drugs became generic?

    • FWIW, and I’ve said this before, Japan is already in a worse situation than the US will be in 50 years, if ever, in terms of the elderly to working population ratio (and they’re doing just fine. Now. Things will be getting a lot worse here in the future.). The US is (and will continue to be) in the best situation (in this regard) of the industrialized countries.

      So the question should be: given that we have such a high ratio of active wage earners to retirees, what’s the best way to support this very small (and growing only slowly compared to other rich countries) number of retirees we actually have. Or: What are we doing that is so stupid that makes this completely non-problem is so problematic?

      Also, FWIW, Japan limits what doctors (and other medical service providers) can charge patients for sevices, quite strictly. But it’s still a fee-for-service system. So it is possible to control costs in a fee-for-service system without going to a fee-for-disease or fee-for-outcome system.

      Richard: In another thread here, it was estimated that the savings available from more aggressive use of generics (which is something Japan is doing) are actually quite small as a percentage of total medical care spending. It would still be a lot of money in absolute terms, but wouldn’t solve the problem.

    • This just goes to show how fraudulent it is for the US federal government to use cash-basis accounting as opposed to the Generally Accepted Accounting Principle of accrual-basis accounting for post-retirement benefits. The problematic cash deficits that we are facing in the coming decades could have been addressed 40 years ago if the US federal government was expensing accrued post-retirement benefits due to US households.

    • “FWIW, and I’ve said this before, Japan is already in a worse situation than the US will be in 50 years, if ever, in terms of the elderly to working population ratio (and they’re doing just fine. Now. Things will be getting a lot worse here in the future.)”

      David: One of the key differences between Japan and the US is that their aging population actually saved for retirement, while the US baby boomers spent money they did not have like drunken sailors. 95% of Japanese government bonds are held by Japanese. It is 53% in the US.

    • Both Brad and David are right in their own way.

      ‘Hitting a wall’ can be translated as follows:

      even with aggressive cost controls, pure demographics will force Medicare expenditures into the $1 trillion a year range by 2022.

      The key is not what percentage this is of GDP.

      The key is what percentage this is of real federal revenue.

      Not to sound flippant, but the GDP does not pay taxes. We have just been through a decade since 2001 where GDP did grow but federal tax revenues were literally flat.

      (see David Cay Johnston’s writings for detail.)

      Where David is correct is that there will still be many workers to help pay the $1 trillion.

      But what will happen if a growing majority of those workers are in low wage jobs? This gets into the subject of outsourcing and automation, of course too broad to cover in one blog post but a serious matter nonetheless.

      We cannot finance heart transplants on the payroll taxes from dishwashers. We will indeed need new sources of revenue.

    • By the way, Japan’s fabled high savings rate is a thing of the past. And was always a bit of a myth (this paper* argues that it only existed for 10 years (1965 to 1975) anyway and there are lots of details of the Japanese society and economic system that mean that effective savings rates weren’t all that high ever). Interest rates have always been significantly lower here than in the states, so it didn’t do much good in terms of long-term retirement security.

      Anyway, it’s easy for me to get off topic, and other than their success in keeping medical costs down (and everyone insured), the details of Japan’s economic system/situation aren’t really relevant here.

      With per capita medical care costs twice the developed country average (and three times Japan’s), IMHO, the US has lots of work to do and wringing one’s hands about the horrible demographics is neither technically correct nor useful in figuring out solutions. (And, of course, I agree with Bob that the US tax system needs to more effectively target the real income that is being generated in the US.)

      *: http://www.nber.org/papers/w3205

    • My rough guess is that the USA will have to rely on sales taxes to pay for Medicare.

      This is not all bad. Those elderly persons who are wealthy go to a lot of restaurants and hotels, and take a lot of airplane flights. Just go to an airport or a nice restaurant to confirm.

      To use my dishwasher analogy, let us stop pretending we can pay for Medicare out of the $8 an hour that the dishwasher gets.

      Instead, let’s take $2 of that $20 restaurant bill.

      The rich elderly can avoid payroll taxes. They cannot avoid most sales taxes.

      Prof Robert Evans of Canada, a great advocate of public health, always made the point that if you paid for health care out of taxes, you did not have to worry about charging higher premiums to the wealthy. They would have already paid their fair share through taxes.