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Both Obama and Romney Medicare Plans Fail To Solve the Cost Problem Both Obama and Romney Medicare Plans Fail To Solve the Cost Probl... Both Obama and Romney Medicare Plans Fail To Solve the Cost Problem Both Obama and Romney Med...

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Health Care / Analysis

Both Obama and Romney Medicare Plans Fail To Solve the Cost Problem

Mitt Romney writes on a white board as he talks about Medicare during a news conference at Spartanburg International Airport, Thursday, Aug. 16, 2012, in Greer, S.C .(AP Photo/Evan Vucci)

Fight as they may about whose plan will shore up Medicare’s fiscal future, neither President Obama nor Mitt Romney has a proposal to address Medicare’s real long-term cost problem.

The dramatic growth projected for the program is largely courtesy of the aging of the baby-boom generation, whose members began retiring last year and are set to nearly double Medicare enrollment by 2030. That demographic bulge will ultimately overwhelm both candidates’ proposals for modest reductions in the program’s per-capita cost growth.

The Congressional Budget Office laid this out starkly in its latest budget update. Under current law, a full 60 percent of the growth in health entitlement spending over the next 25 years will be due to the aging of the population, compared with 40 percent attributable to excess spending on each patient. (Those numbers include Medicaid as well as Medicare, but the aging effects on both programs are similar.) The numbers get slightly better when CBO adjusts its expectations to reflect likely legislative changes. But in the “extended alternative fiscal scenario,” aging is still responsible for 52 percent of the problem.

 

That means that even if either candidate’s plan could slow Medicare spending growth for each senior to keep it even it with gross domestic product — an achievement that would be unprecedented in the program’s history — he would still only be solving half the problem.

“Spending in the program is going to increase dramatically, even if spending per person were to stand still,” said Mark McClellan, the director of the Engelberg Center for Health Care Reform at the Brookings Institution and a former administrator of the Centers for Medicare and Medicaid Services in the George W. Bush administration.

 

Medicare's Booming Growth

The retirement of those in the generation born after WWII, and their increasing longevity, are the biggest reasons Medicare costs will double over the next 40 years as a percentage of GDP.

Growth in Medicare spending as a percentage of GDP, by cause
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Source: Centers for Medicare and Medicaid Services

 

Although they won’t admit it, Romney and Obama have pretty similar visions for how much they think Medicare spending should grow in the future. Both have backed plans that would cap per-capita spending at about the same rate, though they would use vastly different means to do so. Neither would come close to eliminating Medicare’s projected long-term deficits.

The Romney plan would give seniors fixed-value vouchers to purchase health insurance, ascribing to the theory that market competition would help drive down prices. Rep. Paul Ryan’s budget, which running mate Romney has endorsed, would limit the growth of those vouchers to the increase in GDP plus half a percentage point. (Romney has been vague about the exact growth rate cap he would impose.)

The Obama health reform law seeks to constrain future Medicare growth by reducing pay raises to hospitals, reducing subsidies to insurance companies, cutting special payments to safety-net hospitals, and setting up a series of payment-reform pilots designed to encourage doctors and hospitals to offer lower-cost care. But if those things don’t work, Obama has also set up a hard cap on growth per beneficiary. The law says an independent board should cut Medicare payment rates to keep increases below growth in GDP plus 1 percent. His fiscal 2013 budget, lowered that target to GDP plus half of 1 percent, the same as Ryan’s.

With the Obama law on the books, current Medicare projections reflect most of these changes. The Medicare actuaries and the Congressional Budget Office both forecast that costs for each beneficiary will grow at close to the target rate already. But the program’s overall costs are still expected to rise precipitously in the coming years. The Medicare trust fund, which pays for most of the program’s hospital care, is expected to go broke in 2024.

The Romney plan isn’t designed to outperform that growth rate. In fact, given statements that Romney and Ryan have offered this week, it’s likely to be worse. Because they would repeal the health reform law, including the cost-saving measures, implementing their plan would mean Medicare would grow by $716 billion more over the next 10 years. Their premium-support system, with its growth cap, wouldn’t kick in until then and wouldn’t affect every senior in the program for decades.

“You’ve got to start with a good diagnosis of the problem,” said John Holahan, director of the Health Policy Center at the Urban Institute, who helped develop the Massachusetts health reform law. Holahan was a coauthor of a recent paper in the New England Journal of Medicine, arguing that current reforms are already achieving the stated goals of voucherization.

But the kinds of reforms that would be needed to hold spending steady for the whole Medicare program would be dramatic and politically unpalatable. They could involve raising the eligibility age significantly, upping premiums for middle-income beneficiaries, or cutting back expensive benefits. The government could also raise Medicare taxes, as it has done repeatedly since the program launched in 1965. There is hope that health system changes, which could arrest the growth in health spending overall, could be part of the solution — but probably not the whole solution.

Regardless, the contours of this debate mean that Medicare reform will be with us for several more election cycles. Some analysts have referred to the aging of the baby boomers as the “pig in the python,” but with the boomers anticipated to live a long time, their costs will stay with us for decades.

“I don’t like the pig in the python; I like the telephone poll in the python,” said Rea Hederman Jr., a research fellow at the Heritage Foundation. “Because it isn’t like it drops off.”

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