January 14, 2014

Why Slower Healthcare Cost Inflation Isn't Fixing Medicare Finances

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

Followers of the national healthcare policy debate may have noticed an interesting recent turn. After the Affordable Care Act (ACA)’s troubled rollout, the law’s supporters shifted to a new line to promote it: specifically, crediting the ACA with slowing the growth of national healthcare costs. This line is being pushed aggressively by the White House and its outside advisors. There is not much basis for this claim, as I have explained before. For one thing, the cost slowdown predated the ACA’s enactment; for another, there is more evidence suggesting the ACA is on balance increasing health expenditure growth than decreasing it. In any event, no one knows precisely why healthcare cost growth has slowed. The best we can say with certainty is that most of the slowdown has nothing to do with the ACA.

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Followers of the national healthcare policy debate may have noticed an interesting recent turn. After the Affordable Care Act (ACA)’s troubled rollout, the law’s supporters shifted to a new line to promote it: specifically, crediting the ACA with slowing the growth of national healthcare costs. This line is being pushed aggressively by the White House and its outside advisors. There is not much basis for this claim, as I have explained before. For one thing, the cost slowdown predated the ACA’s enactment; for another, there is more evidence suggesting the ACA is on balance increasing health expenditure growth than decreasing it. In any event, no one knows precisely why healthcare cost growth has slowed. The best we can say with certainty is that most of the slowdown has nothing to do with the ACA.

Closely related to this discussion is another ongoing one: specifically, whether the health cost slowdown will improve Medicare’s long-term financial picture relative to current projections. Today the Mercatus Center is publishing a study I have written on this subject. Unfortunately the answer is almost certainly no: Medicare’s long-term financing problem is much more likely to be worse than currently projected than it is to be better. Suggestions to the contrary fail to account for important realities underlying the current projections. This piece attempts to summarize some of those realities and to explain why, irrespective of the reasons for the recent cost slowdown, a change of Medicare policy course will be needed.

#1: For the next two decades—well beyond the projected date (2026) of Medicare Hospital Insurance (HI) insolvency—Medicare cost growth will be driven primarily by population aging, not by health cost inflation. While slower health cost inflation would certainly be helpful, it will not change the biggest contributor to Medicare’s cost growth: namely, Baby Boomer retirements swelling the beneficiary rolls. Moreover, due to longevity growth the Boomers will collect benefits longer than any previous generation, since Medicare’s eligibility age of 65 has not changed since the program’s inception. 

One result is that, whereas in 2012 there were 3.3 workers to support each Medicare HI beneficiary, there will only be 2.3 by 2030. Largely due to this demographic shift, Medicare costs are projected to rise from 3.6 percent of GDP in 2013 to 5.6 percent by 2035. Even if excess health cost inflation were completely eliminated, Medicare costs would still rise faster than national economic growth for decades due to population aging alone. Thus, whether policymakers adjust Medicare’s eligibility criteria to reflect these changing demographic realities will long remain a much more important financial factor than incremental changes in health cost inflation.

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