07 November 2004

Medicare faces cost crisis
Multitrillion-dollar deficits loom over federal programs.

While policy-makers debate President Bush's plan to privatize Social Security, a bigger and more pressing problem is looming -- the mind-numbing future costs of Medicare and Medicaid.

Medicare is the federal program that covers hospitalization, doctor's care and, soon, prescription drugs for 41 million seniors and disabled people.

Medicaid is the joint state-federal program that provides health care to 51 million people. About three-quarters of the beneficiaries are the uninsured poor, mainly women and children. But 70 percent of Medicaid outlays are spent on the remaining beneficiaries -- the disabled and seniors, especially those in nursing homes.

In 2003, Medicare and Medicaid outlays accounted for 3.9 percent of the gross domestic product, the nation's total output of goods and services, according to the nonpartisan Congressional Budget Office.

But health care costs have been rising far faster in recent years than the general inflation rate. Coupling that with the surge of retiring Baby Boomers, the budget office projects spending for these two programs could grow to as much as 21.3 percent of gross domestic product by 2050.

To put that in perspective, budget office Director Douglas Holtz-Eakin says the entire federal budget today is 20 percent of the GDP. If the office's projections are correct, Medicare and Medicaid are on a trajectory to either crowd out other programs or boost federal outlays as a share of the economy.

"We have to decide how much we're going to spend, and on what,'' Holtz- Eakin said.

There is considerable debate about how much trouble Social Security is in and whether it requires the fix Bush has proposed. But there is little doubt about the difficulties in store because of the future costs of Medicare and Medicaid.

In fact, the secretaries of the Treasury, Labor and Health and Human Services departments said just that in a March report, "The Status of the Social Security and Medicare Programs."

"Medicare's financial difficulties come sooner -- and are much more severe -- than those confronting Social Security,'' the report said. So why does Social Security rather than Medicare top the president's agenda?

"Because Social Security is the easier of the two problems to solve,'' said Texas A&M economist Thomas Saving, who signed the report as a public member of the Social Security and Medicare Trust Fund, the board that oversees the financial health of the two programs.

Saving said elected officials of both major parties have been unwilling to face the future costs of federal health care programs.

"I don't have to be as careful,'' said Saving, who outlined the Medicare problem in an analysis issued after the official report.

In his analysis, he writes, "Although policy-makers have focused on the long-run sustainability of Social Security, the financial problem in Medicare is five times as great.''

Looking more than 75 years into the future, Saving estimates that the nation faces a $62 trillion unfunded liability for Medicare -- versus a $12 trillion gap for Social Security.

Yet, he said, lawmakers created a prescription drug benefit that added nearly $17 trillion in future IOUs to that $62 trillion shortfall.

As a frame of reference, the entire U.S. economy is worth about $11 trillion this year. And Saving projected only future Medicare costs. The separate Medicaid program -- whose combined state and federal costs of $270 billion in 2003 nearly equaled Medicare's $278 billion price tag -- is also on an upward trajectory.

Gary Burtless, an economist with the nonpartisan Brookings Institution, believes Social Security's woes have been exaggerated.

"If the tax reductions that went on the books between 2001 and today are made permanent, the resulting loss in revenue to the federal government will be bigger than the 75-year deficit in Social Security,'' Burtless said.

"That is not the case with Medicare and Medicaid,'' said Burtless. Their funding problems stem from two simple facts -- health care costs are rising faster than inflation or income, and people want to use more health care because it extends their life and makes them more comfortable.

It is this desire for more and better coverage that prompted Congress to add a costly prescription drug benefit to Medicare. Yet, while the nation may be hard-pressed to pay for it, some advocacy groups consider the new benefit inadequate.

"Seniors are very disappointed. It's not what they thought they needed,'' said Barbara Kennelly, president of the National Committee to Preserve Social Security and Medicare, which is now focused on opposing Bush's plan to privatize retirement benefits.

Some in Washington believe the president's prescription for Social Security is a dry run for Medicare.

"This president likes taking several bites at the apple,'' said Michael Cannon, director of health policy studies at the libertarian Cato Institute. "If he gets (Social Security privatization) in 2005 or 2006, it (could be) a warm-up to taking a similar approach to Medicare.''

Gail Wilensky, who was Medicare director in the administration of the first President Bush and remains influential in Republican health policy circles, disagreed.

"There's a lot of stuff on this president's plate,'' Wilensky said, adding that after being criticized for being both profligate and stingy on the Medicare drug benefit, "this Congress doesn't want to take on this issue now.''

She predicted lawmakers will defer action on Medicare -- not to mention Medicaid -- until the Baby Boomers start retiring between 2010 and 2015, increasing the fiscal pressure. And she thinks any changes will be incremental rather than dramatic, such as raising the age of Medicare eligibility and "expecting higher-income people to pick up more of the costs'' of their federal health care.

In fact, under the new Medicare drug bill, single seniors who make more than $80,000 (double for couples) will pay more for some benefits starting in 2007, something Wilensky called "a very important precedent.''

Harvard University economist David Cutler, who worked on the Clinton administration's failed attempt to develop a national health plan, said "the traditional lefty idea'' of having government take over health care is unlikely. He also rejected "the traditional Republican menu'' of boosting beneficiaries' share of the payments as an incentive for people to seek less medical treatment. "There's no reason we as a country couldn't spend more on health care programs,'' he said.

The most painless way to blunt the financial catastrophe for Medicare and Medicaid would be to slow the rise in health care costs. Corporate health care buyers like General Electric and San Francisco's McKesson Corp. have been trying to do just that. They formed a consortium called the Leapfrog Group to push for more efficient treatment as a means of reducing costs.

San Francisco physician and consultant Arnold Milstein, a leader in Leapfrog's efforts, offered the example of a patient with congestive heart disease. Such patients often end up in costly intensive care units. New technology could allow medical technicians to monitor their conditions at home, predict in advance when the patient is about to have trouble breathing and alert a physician to make a preventive -- and cheaper -- intervention.

"We've got to use team-based approaches and technology to take the waste out of the system'' and lower health care costs, Milstein said. Analyzing the crisis

Fiscal experts say spending on Medicare and Medicaid health care programs will swamp the federal budget in the decades ahead. Two government reports analyze the long-term funding crisis facing the programs:

Congressional Budget Office Long-Term Budget Outlook 2003 -www.cbo.gov

Social Security and Medicare Board of Trustees, Summary of 2004 Annual Reports www.ssa.gov

Tom Abate, Chronicle Staff Writer

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