Hope (and more hope) about future Medicare cost growth

post by Bill Gardner

Chapin White and Paul Ginsburg present good news about the rate of increase in US Medicare costs in the NEJM (and Sarah Kliff):

...there are indications that Medicare spending growth has slowed... growth in Medicare outlays per enrollee in 2010 and 2011 was roughly in line with growth in the economy. And in January 2012, the Congressional Budget Office (CBO) made a $69 billion downward revision to its 10-year Medicare spending projection — a technical correction that reflects emerging data showing surprisingly slow growth in outlays. Similar slowing trends have led to positive earnings surprises for publicly traded insurers.

Lori Montgomery made a similar point in the Washington Post last year.

This apparent reduction in cost growth is vital, because Medicare had been growing at a rate that was 2.4% greater than GDP over the past 30 years, increasing the deficit and encroaching on every other public spending program. It is as if there were a fiscal asteroid heading toward us. We could see it from a long way (and a long time) off, and there appeared to be nothing we could do about it. 

Let me, then, reprise a previous post, and argue that this news is even better than it looks. Part of the increase in Medicare spending has occurred because of a long term shift in human demography that has resulted in increasion fractions of elderly, retired persons being covered by Medicare. But this trend cannot and will not continue indefinitely.

To the right are data on the proportion of the US population that is 65 or older, with projections into the future (taken from the CDC). Notice first the rapid increase in this proportion as the Baby Boom retires. This is what will drive the expansion of Medicare costs, even if cost / retiree is stable. After 2030, however, the rate of growth of the elderly as a percentage of total population slows and then stops. As the CDC authors note:

...when the last Baby Boomers enter the ranks of the older population and the first Baby Boomer cohort enters the oldest old age categories, the proportion aged 65 and older will be relatively stable at around 20 percent.

This will happen because the baby boom was followed by falling birthrates (the "baby bust").

So, we have hope squared: We reduce the rate of growth in cost / Medicare enrollee now, and in a couple of decades growth in the denominator of Medicare enrollees stops too. The asteroid misses the earth.

Comments

[myboomernation.com]

The combination of health care cost growth exceeding general inflation and the swelling of beneficiary rolls with baby boomers will create fiscal pressure for Medicare. Despite dramatic declines in the growth of hospital costs following the introduction of Medicare’s prospective payment system (PPS), the growth in Medicare hospital spending per beneficiary has been close to three times the overall rate of inflation since 2000.