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A primer on the costs of Medicare

  • December 15, 2012 - 7:12 PM

The projected growth of Medicare costs is the single biggest contributor to long-term budget deficits, many estimates show. No cohort of Americans, with the possible exception of the very affluent, pays enough in Medicare taxes and premiums to cover its eventual Medicare costs. Republicans are pushing for changes to Medicare in exchange for agreeing to tax increases. Democrats are arguing that Medicare is not the most pressing budget problem.

Q Is Medicare really a bigger long-term problem than Social Security or military spending?

A Yes. The Congressional Budget Office projects that, over the next 25 years, Medicare spending will rise to 6.7 percent of gross domestic product, from 3.7 percent this year. (Other federal health care spending -- such as Medicaid, the insurance program principally for low-income families -- is projected to rise to 3.7 percent of the GDP in 2037, from 1.7 percent this year.) In total, health care spending's percentage of the GDP is expected to rise by 5 points. Social Security spending is projected to rise by only 1.2 percentage points, to 6.2 percent in 2037.

Q Why is it the big problem?

A As much attention as the aging of society receives, the rise of medical costs is a bigger budgetary problem. The faster growth of Medicare costs, relative to Social Security costs, highlights this difference. Social Security costs will grow in coming years, but not nearly as rapidly as Medicare's because Medicare costs are a function of both the aging society and the cost of treating any one person. Social Security's costs stem almost entirely from the number of seniors.

Q Don't Americans pay for Medicare benefits through payroll taxes over their working lives?

A No. Two married 66-year-olds with average earnings over their lives will pay about $122,000 in dedicated Medicare taxes through the payroll tax, said Eugene Steuerle, Stephanie Rennane and Caleb B. Quakenbush of the Urban Institute. That couple can expect to receive about three times as much -- $387,000, adjusted for inflation -- in benefits. The projected gap is even larger for younger people because of growing health care costs.

Q What are possible solutions?

A We could pay more in taxes. Tax revenues are near a 60-year low as a share of the GDP. Covering the future costs of Medicare and Medicaid solely through higher taxes would involve sharp increases -- much greater than anything being debated now. So most budget experts believe that changes to Medicare need to be part of the deficit solution.

Q What are the upsides and downsides of each idea?

A Raising the eligibility age: The main arguments are that Americans live longer than they used to and that the 2010 health care law makes it easier for people to get insurance if they do not receive it from an employer. The main counterargument is that the longevity increase has been smallest for low-income people, who are most likely to benefit from Medicare coverage.

Reducing benefits for high-income families has some bipartisan support. But some Democrats worry that it could eventually undermine Medicare's popularity, making it more akin to a welfare program.

More competition in health care: Many Republicans advocate this option, noting that competition has reduced prices and raised the quality of service in many industries. It has an uneven record of doing so in health care, though, in part because insurers can often profit by denying care.

Paying for quality rather than quantity has support from many economists. But it is not always easy. Patients and doctors often want to proceed with high-cost care even when research has not shown it to be effective.

NEW YORK TIMES

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