Wednesday, August 19, 2009

Comparing Medicare taxes and benefits

Over at AEI's Enterprise Blog I look at whether current retirees have "paid for" their Medicare benefits. Answer: not even close. Here's the original post, plus a follow-up.


Arne said...

I'd be interested in knowing to what rate of growth would we need to hold health care expenditures in order for it to be true that people will have paid for their Medicare benefits before they start receiving them.

WilliamLarsen said...

Rate of growth is an interesting concept in terms of medical care. For example how is a doctor paid? If they want their standard of living to grow like everyone else’s (faster than inflation) then the base cost of nurses, doctors, technicians will result in greater than inflation rates of growth. Now add in efficiencies, what are they: better treatments (more likely more costly and sold to the public as being cost effective – life or death), new Rx drugs coming out to prolong life months to a couple of years (the past these people would have died), new procedures prolong life months to a couple of years (in the past these people would have died).

Then of course the age factor alone. Those under 45 tend to have very low healthcare costs. When you hit 50, the cost you spend on healthcare increases. When you hit 60 it is double what you spent at age 45. It doubles again when you hit 65 and by age 85 it is over $23K per senior on Medicare.

A boom begets a boom and a bust begets a bust. We are entering the boom for senior while entering the bust cycle for young people. However, the off spring of any generation is greater than that generation. With Medicare shifting 43% of the cost of treatment to all others (70% reimbursement rate) we can expect more cost shifting.

The fact is we used to ask the provider what something was going to cost beforehand. Now we ask afterwards. I asked a hospital what the cost would be before hand, the answer, we have no idea. Yet the hospital is able to put a CPT code that has a predetermined price to it. It is very easy for them to identify the procedure upfront and thus the CPT code resulting in a price, but they fail to do so. This puts the provider in the driver seat and not the consumer.

Until the consumer actually pays the bill at the time of service, continued Medicare cost shifting and insurance negotiations, expect higher rates of growth. However, the rate of growth cannot exceed the rate of growth in wages for long. At some point in time, providers will have no one to treat due to cost.

As for Medicare costs, by law (1984) Medicare can only spend what its dedicated tax and trust fund has. When the trust fund is reduced to 20% of any given years projected expenses, it must by law cut benefits across the board or propose and have congress pass changes. This means that the maximum Medicare spending that future years are limited to 5.8% of payroll (2.9% payroll tax, 25% paid by beneficiaries - deductible - copay and 25% paid by federal income taxes).

It will correct itself in 2017.