Wednesday, March 20, 2013

My short, in simple terms, take on why Medicare will continue to cost more and be a bigger part of the Federal budget for many years to come.


My short, in simple terms, take on why Medicare will continue to cost more and be a bigger part of the Federal budget for many years to come.

Let's use a very simplistic example to illustrate.
Assume there are 100 retired people receiving $100 per year in Medicare benefits.  The total cost for Medicare is $10,000 for year 1.
Assume in Year 2 we add 10% more retirees.  Now we have 110 retirees receiving $100 (assume no increases in prices) in Medicare benefits.  The total cost for Medicare is $11,000 in Year 2. 
Assume in Year 3 we add 10% more retirees BUT we cut the amount we spend on Medicare payments by 5% (arbitrary number I choose). Now we have 121 retiress receiving $95 in Medicare benefits. The total cost for Medicare is $11,495.
We cut payments ("saved" money!), but the overall cost of the program increased.

While we may be able to slow the "per person" payments (cost) for Medicare, the overall cost of Medicare is going to INCREASE because of the sheer number of recipients moving into eligibility for the program.  We may be able slow the growth in cost ("bend the cost curve") relative to projections, but we will not be able to make it less expensive overall. 

That is the reality.  That is the budget challenge, it seems to me. 

Ezra Kline (Washington Post) has a post on this topic (where I got the idea) and has this paragraph that highlights the issue for me:
"...There’s a reason that policymakers prefer to talk about health-care costs than old people. If the problem is just rising costs, then perhaps there’s some cost control “silver buller” — maybe premium support, or paying for quality rather than service — that will cut costs without hurting anyone. But if the problem is more people, then the answer, really, is higher taxes, lower benefits, more debt or some combination of the three..." (emphasis/underline mine)

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