ON NEW YEAR’S DAY, President Obama looked ahead to the post-“fiscal cliff” deficit-reduction battles and declared: “I agree with Democrats and Republicans that the aging population and the rising cost of health care . . . [make] Medicare the biggest contributor to our deficit. I believe we’ve got to find ways to reform that program without hurting seniors who count on it to survive.” The question — a tricky one for a president who won reelection in part by defending “Medicare as we know it” — is how to accomplish this feat. Medicare as we know it is not sustainable.
Medicare cost $555 billion in 2012, according to the Congressional Budget Office. The CBO has projected that this number, already 15 percent of non-interest federal spending, will nearly double by 2022. Medicare’s trustees estimate that the hospital insurance fund supported by the payroll tax will run out of cash by 2024, but this is mainly a symbolic threat: The government will draw on general revenue to keep Medicare going. The real threat is that Medicare spending will crowd out other necessary federal endeavors, forcing undesirable cuts, substantially higher taxes, unsustainable borrowing — or some combination of the three.
There are two major reasons for Medicare’s rising costs. The first is the program’s design, often tweaked but left fundamentally intact since its creation in 1965, which basically pays doctors and hospitals fixed fees for whatever they do. At a time of rapid (and often beneficial) medical innovation, the dominant incentive has been to provide more, and more expensive, care. Hence the House Ways and Means Committee’s 1965 estimate that Medicare hospital insurance would cost $9 billion by 1990 fell short by $58 billion. The second reason costs keep going up, of course, is the rising number of elderly eligible for Medicare, which is inevitable; the 50 million beneficiaries today will be 78 million in 2030.
The ultimate solution is structural: to limit growth in expenditures per beneficiary. Easier said than done. Liberals would empower the Independent Payments Advisory Board (IPAB) to stop payment for treatments it deems not cost-effective. The idea hasn’t gotten very far, partly because Republicans denounce it as “rationing.” Conservatives favor “premium support,” which would subsidize seniors to shop among competing insurance plans, but Democrats, the president included, have tarred that idea as a skimpy “voucher.”
It’s unfortunate but not disastrous that no structural solution is, for the moment, politically possible. Not even their advocates can guarantee that a beefed-up IPAB or premium support would work as advertised. The impact of policy changes on health-care costs is notoriously difficult to project. Indeed, the past three years have seen an unexpected and so far unexplained slowing in Medicare spending’s rate of growth. This happy development doesn’t mean that there’s no problem — far from it. But it buys time to mitigate Medicare’s costs incrementally, while working out the partisan impasse over more fundamental reforms.