Medicare Facts and Fiction: Costs and Spending Edition

In the past few weeks, the media spotlight on the country's fiscal issues has led to a flurry of attacks on Medicare.[1] Pundits and some policymakers decry Medicare spending as "the largest driver of the federal debt" and argue that the program on which millions of American families rely is unsustainable and must be radically restructured to prevent fiscal calamity.  This simply isn't true.

The facts and data show that Medicare is a successful, cost-effective program for older and disabled people who otherwise could not afford good health coverage. Here, we compile some common erroneous assumptions about Medicare's costs and spending and dispel these myths with facts.

Question:  Is Medicare the biggest driver of the federal debt and deficit?

FACT: Medicare is not the biggest driver of the federal debt and deficit and, in fact, Medicare will play a critical role in lowering the projected deficit over the next 10 years.

When thinking about the federal debt and deficit, a short recap of how we got to where we are is critical to understanding Medicare's role in the current debate. The budget was last balanced in 2001.[2] Since then, the federal debt has increased dramatically, rising from 33% of GDP in 2001 to 62% in 2010.[3] Tax cuts for wealthy and middle-income Americans in 2001 and 2003 combined with the great recession (2007-2009) slashed revenue.[4]  Waging two wars simultaneously swelled spending.[5]  The implementation of the Medicare Part D drug benefit, which provided windfall payments to pharmaceutical and insurance companies, also contributed to the growing federal debt.

The Affordable Care Act (ACA), however, has already reduced Medicare spending by a projected $716 billion dollars over ten years through reforms that decrease fraud, waste, abuse and overpayments to private companies.[6] Year after year, Medicare continues to grow at slower than projected rates keeping the deficit at lower than anticipated levels. [7]

Question:  Is Medicare spending "out of control"?

FACT:  Medicare is currently the most efficient large payer of health care in the country and has consistently proven it can control costs better than the private market.[8]

For the past forty years, Medicare spending for comparable benefits has been less than private insurance.[9] Going forward, both the Centers for Medicare & Medicaid Services (CMS) and the Congressional Budget Office (CBO) project that Medicare spending per beneficiary will rise more slowly than per-capita spending under private insurance.[10] (Over the next decade, private insurance spending per enrollee is projected to increase by 4.9% per year, and Medicare expenditures per enrollee are expected to increase by only 2.7% per year).[11] Medicare per capita spending will nearly align with per capita GDP growth over the next ten years.[12]  This puts Medicare spending growth close to or below the target advocated by many Republican lawmakers concerned with the debt and deficit.[13]

Question:  Is Medicare as we know it sustainable?

FACT: The American population and Medicare enrollment will continue to grow. Luckily, Medicare is a cost efficient program and is prepared to meet the challenge of changing demographics.

Many pundits cite the statistic that Medicare spending will almost double over the next decade as evidence that its growth is unsustainable. This misrepresents the facts.  The CBO forecasts that expenditures for Medicare will total 3.7% of the gross domestic product in 2013, rising to 4.2% of GDP in 2022.[14] Hence, while dollar spending may go up steeply, percentage growth will not.  In the long term, Medicare will continue to control costs while providing good coverage.

Question:  Will requiring Medicare beneficiaries to have more "skin in the game" (pay more out-of-pocket) reduce government spending?[15]

FACT: Increasing cost sharing, also known as "skin in the game," discourages beneficiaries from seeking necessary primary and preventive health care services that are critical to reducing the use of more costly acute services .[16]

In  a recent letter to HHS Secretary Kathleen Sebelius, The National Association of Insurance Commissioners (NAIC)  stated that after studying  peer reviewed research and managed care practices, they were unable to find evidence that nominal cost-sharing  encouraged appropriate use (as opposed to  inappropriate overuse) of health care services. [17]

Shifting more costs to beneficiaries actually keeps people from obtaining needed health care – including primary and preventive care that reduces the need for further, more costly, acute health care services. [18] The RAND Corporation's Health Insurance Experiment (HIE) concluded that cost-sharing can – in some instances – reduce the use of health care services. But reduction in use of services resulted primarily from participants deciding to go without care.  The Rand study found that once patients entered the health care system, cost-sharing only modestly affected the intensity or cost of an episode of care.   Reducing access to less costly primary care – by requiring more "skin in the game" – does not provide meaningful savings.  Rather, it puts the health and wellness of beneficiaries at risk.

Question:  Can't Medicare beneficiaries afford to pay more in order to save the federal government money?

FACT:  Many people on Medicare already live on tight budgets and face high out-of-pocket costs.

In 2010, half of all people with Medicare had incomes below $22,000.[19] Women with Medicare live on much less: $15,000.[20]

Furthermore, Medicare beneficiaries already spend a greater percentage of their income on health care than non-Medicare households. Of people with Medicare, one in four spends 30% or more of their income on health expenses and one in ten spends more than half.[21]  While Medicare households spend roughly the same amount on food, transportation, and housing as non-Medicare households, they spend three times as much on health care.[22]

Conclusion

Merely shifting costs to Medicare beneficiaries does not work towards our long-term goal of cost containment and sustainability in addition to better health outcomes.  Policymakers should focus on reforms that encourage efficient, high value health care for all consumers, including people with Medicare.

Many ACA provisions are working towards a more efficient Medicare program by improving access to benefits, assuring quality, and reducing fraud, waste, abuse and overpayments. Rather than focusing on short sighted and arbitrary savings targets, the debate surrounding the future of Medicare should focus on sound public policies that help people stay healthy while promoting the delivery of quality, cost-efficient services and funding systems.