No Action Is the Best Action on Medicare

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    In 10 years we'll know much more about the health spending trajectory and cost containment approaches
    The most responsible thing to do right now about the forecasted insolvency of Medicare is nothing

Last week, Medicare’s Board of Trustees released its 2015 annual report. The board projected that the part of the Medicare trust fund that pays for hospitalizations will become insolvent in 2030, meaning the program will able be to pay only 86 percent of anticipated hospital expenses that year. Predictably, release of the report generated a chorus of demands that Medicare be overhauled immediately. Yet, as we explain in a Commonwealth Fund issue brief, the experience of the recent past suggests this prescription is wrong. Surprisingly, the most responsible thing to do right now about the forecasted insolvency of the Medicare Trust Fund is . . . nothing. Why? Because such projections are highly uncertain and we can make any necessary changes as we learn more over time.

In 2009, Medicare’s trustees projected the trust fund would become insolvent in 2017, and that by 2020, the program, including hospital, medical, and drug benefits, would represent 4.5 percent of the U.S. gross domestic product (GDP). The corresponding projection for 2020 in this year’s report is that Medicare will cost only 3.8 percent of GDP—a reduction of more than 15 percent in just six years. Two factors account for the change, and both have implications for how we address the future of the program.

The first critical factor was passage of the Affordable Care Act (ACA). The law expanded the Medicare drug benefit, but it also included new taxes and income-related premiums for high earners to finance the program, and included payment reforms designed to improve the efficiency of care delivery. These changes immediately improved the program’s short-term finances, and are likely to further improve solvency in the longer term. This very recent experience demonstrates that reasonable changes to Medicare can produce dramatic results very quickly.

The second important factor was the slowdown in overall health care inflation that has occurred since 2008. No one anticipated that slowdown, and no one entirely understands what caused it to happen or whether it will continue. We can only speculate about the next costly technological breakthrough or the next cost-saving innovation in treatment that could affect spending. Predicting the future of health care cost growth is notoriously difficult and small variations in assumptions about growth rates can lead to very large differences in long-term forecasts.

There are really only three ways to control Medicare spending: cut expenditures, raise revenues, or shift a share of risks to beneficiaries by moving to a voucher or premium-support system. Our recent experience indicates it would be unwise to take any of these dramatic steps right now.

On expenditures: the health care system is still digesting the broad array of the ACA’s payment changes, such as shared savings programs in which providers work with each other, and with Medicare or Medicaid, to coordinate care. The effects of these new models of care and payment are not yet completely understood. Until we know more about the consequences of these existing modifications, we should hesitate to make new ones.

On revenues: the revenue increases in the reform law have made the financing of Medicare much more progressive. Further changes in financing are best considered in the context of comprehensive tax reform, not piecemeal changes to taxes earmarked for Medicare.

Finally, on risk-sharing: the failure of past forecasts highlights the folly of shifting risk to beneficiaries. As the sharp change in the forecast from 2009 to 2015 shows, even professional actuaries cannot accurately project the average rate of growth of health care spending for the distant future. Similarly, it is unrealistic to expect that the average American could accurately forecast the savings and investment needed to cover his or her health care costs throughout retirement, as they would need to do if they bore the financial risk.

Of course, Medicare should be run as efficiently as possible, and it makes sense to continue to squeeze costs while maintaining quality. But this is not the time for drastic action. In 10 years, we will know much more about the trajectory of health care spending and effective approaches for cost containment. Recent experience has demonstrated that substantial savings in the health care system can be realized in a very short period of time. Sometimes, putting difficult decisions off until tomorrow is the wisest choice.

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Publication Details

Publication Date: July 31, 2015
Authors: Sherry A. Glied
Citation:
S. Glied, "No Action Is the Best Action on Medicare," The Commonwealth Fund Blog, July 31, 2015.

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