Are We Asking the Right Questions?

Can Medicare be saved? In its present form and in the long run, the answer is surely “no.” The Medicare problem arises from the intersection of three other, more fundamental problems: health care costs, an aging society and the federal budget. To make meaningful, lasting progress on the Medicare problem, it is necessary to understand its relation to these others.

Americans 65 and older use more than one-third of the nation’s health care services, and the proportion increases each year. Thus, the future of Medicare is inextricably tied to the basic problem of health care costs: Insured patients desire all the health care that could possibly do them any good, but no nation can provide everyone with that level of care. Spending must be constrained. Most countries do this by limiting facilities, technology and personnel, especially those associated with high-cost specialty care.

The growth of private insurance plus Medicare and Medicaid was not offset by any constraints. Thus, between 1963 and 1993, health care spending grew at almost 6% a year (adjusted for inflation), double the rate of growth of the rest of the economy. In the last few years, managed care has slowed the rate of growth of expenditures for private insurers by eliminating some inefficiencies and squeezing professional incomes. But such belt-tightening measures are not likely to slow the growth of spending over the long run.

Only changes in the availability, accessibility and character of new technology can bring the rate of growth of health care spending into line with that of the rest of the economy. These changes will be resisted for many reasons, some more valid than others. The most valid one is that new medical technology frequently results in longer, healthier lives. Unfortunately, the resources required to deploy the new technology could be used for other worthy ends: better schools; housing for the homeless; protection of the environment and the like. Choices must be made, and the “free pass” that medical care has enjoyed vis-a-vis other goods and services cannot continue.

A much weaker argument is that new technology will result in lower health care expenditures. There have been such cases in the past--antibiotics and vaccines are often cited--but on balance, technological change has been the primary factor pushing the health sector’s share of the GDP from 6% to 14% over the last 30 years.

The worst argument of all for subsidizing biomedical innovations is that these products will increase U.S. exports. The same argument could be advanced for subsidizing agriculture or computers or motion pictures. Do we really believe that the government has the ability to do a good job of picking “winners and losers” in the marketplace?

The problem of an aging society arises partly from longer life expectancy and, more important, from lower fertility. In 1900 there were 10 children under age 18 for every person 65 and older. By 1960 the ratio had fallen to four to one, by 1990 to two to one, and falling. The burden of providing retirement income and health care for the elderly will become unsustainable under current programs when the baby boomers reach age 65.

The problem of the federal budget is not as fundamental as the first two problems, but it has tremendous political resonance. The high political profile given to the deficit has helped make Medicare a front-page story. The budget problem arises because the public’s demand for government services exceeds its willingness to pay taxes. The result is a chronic deficit that impairs the nation’s ability to invest in the future. Sound economics does not require that the federal budget should be in balance every year, but deficits incurred during a recession should be offset by surpluses when the economy recovers. The nation is now in the fifth year of a business cycle expansion but still has a substantial deficit.

Much of the budget discussion focuses on the difference between Medicare’s Part A (hospital care financed by payroll taxes paid to a trust fund) and Part B (physicians’ services financed by general taxation plus a premium paid by beneficiaries). This emphasis is misplaced. The growth of integrated health care systems makes the distinction between paying for hospital stays and paying for outpatient services anachronistic. The focus should be on more basic questions: How much should be spent on health care for the elderly? Who should pay for it? Through what kinds of financing mechanisms? How should that care be organized and delivered?

Temporary relief for Medicare is possible by raising the beneficiaries’ Part B premiums and by forcing the system to be more efficient. At some point, however, we must realize that it makes little sense to have one system of health care financing and reimbursement for people over 65 and another system for those under 65. If we seek efficiency and equity for all Americans, including millions of uninsured children, only comprehensive health care reform has a chance of success.