The trajectory of Medicare financing is sobering. Annual Medicare expenditures are expected to grow from $519 billion in 2010 to $929 billion in 2020. Spending is highly concentrated on the program’s sickest beneficiaries. About 25 percent of recipients account for 85 percent of the program’s spending. One study calculated that nearly all of the growth in Medicare expenditures from 1987 to 2002 could be traced back to beneficiaries with five or more chronic conditions.
The number of beneficiaries is expected to rise from 47 million in 2010 to 80 million in 2030. During that same period, the number of workers supporting each Medicare enrollee will decline from 3.5 to 2.3.
Medicare spending historically has grown about 2.5 percentage points faster than the economy, adjusted for inflation. This trend is a greater threat to the program’s financial sustainability than the aging of the population, according to the CBO.
The typical couple who turned 65 in 2010 and earned an average household income of $86,200 during their careers paid $109,000 in Medicare taxes over a lifetime. However, that same couple will receive an average of $343,000 in Medicare benefits. The federal government must pay the $234,000 shortfall from other revenue sources or cut spending elsewhere.
Health-care costs are also crimping Medicare beneficiaries’ household budgets. Median out-of-pocket spending as a share of income rose from about 12 percent in 1997 to more than 16 percent in 2006.
Yet a majority of Americans are not convinced Medicare is in trouble. A spring 2011 Wall Street Journal/NBC News poll showed that only 15 percent believe the program needs a major overhaul and an additional 28 percent say it needs “major changes.”
Medicare trustees estimated in May 2011 that the program will run out of money by 2024 because of a sluggish U.S. economy and longer life-expectancy projections for beneficiaries. The Obama administration projected in 2010 that Medicare savings in the health-reform law would extend the solvency of the program from 2017 to 2029.
Congressional resolve continues to evaporate in the face of hard choices on Medicare. The sustainable growth rate (SGR), a formula it created in 1998 to calculate physician fees and control costs, has been overridden numerous times. The SGR attempts to control total Medicare spending on physician services. In theory, the more the volume of care increases, the more prices must be cut the following year. The cuts are supposed to be cumulative and retroactive to 1998.
The overridden fee cut in 2010 was supposed to be 21 percent, with additional 5 percent cuts in subsequent years. Policymakers correctly feared that enacting such cuts would result in a mass exodus of physicians from the Medicare program, and create a potential crisis in access to health-care services for the elderly.
Health reform continues the charade. An SGR fix that would waive the cumulative fee cuts originally was part of the reform bill, but it was abandoned because proponents wanted to keep reform’s price tag below $1 billion. The Medicare trustees point out that, if the SGR formula continues, Medicare payment rates would fall to 27 percent of what private insurance pays and less than half of projected Medicaid rates by 2085. It would also render 40 percent of participating health-care providers unprofitable by 2050.
At this point, SGR is little more than an accounting fig leaf that understates the federal government’s future financial obligations. It also gives Congress the illusion that it somehow can control escalating Medicare costs, despite its clearly demonstrated impotence.