Uses and abuses of long-term medicare cost estimates

Health Affairs

Volumn 18, Issue 1, 1999, Pages 63-79

  White, Joseph ^a,b  

^a TULANE UNIVERSITY   (United States)

^b UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; BUDGET; COST; ECONOMICS; FORECASTING; HEALTH CARE COST; HEALTH CARE POLICY; HUMAN; MEDICARE; STATISTICAL ANALYSIS; STATISTICS; UNITED STATES; UTILIZATION REVIEW;

ACTUARIAL ANALYSIS; BUDGETS; COSTS AND COST ANALYSIS; FORECASTING; HEALTH EXPENDITURES; HEALTH POLICY; HUMANS; MEDICARE; UNITED STATES;

EID: 0032608194     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.18.1.63     Document Type: Article

References (37)

1. M.A. Carey, "Failure Is Not an Option for This Commission," Congressional Quarterly Weekly Report (14 March 1998): 669-670; and A. Simendinger, "Another Problem, Another Commission," National Journal (13 December 1997): 2514-2515.
2. M.A. Carey, "Failure Is Not an Option for This Commission," Congressional Quarterly Weekly Report (14 March 1998): 669-670; and A. Simendinger, "Another Problem, Another Commission," National Journal (13 December 1997): 2514-2515.
3. R. Pear, "Panel Finds Medicare Costs Are Underestimated by U.S.," New York Times, 3 June 1998, A23.
4. Board of Trustees, Federal Hospital Insurance Trust Fund, 1998 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (Washington: U.S. Government Printing Office, April 1998); and Board of Trustees, Federal Supplementary Medical Insurance Trust Fund, 1998 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund (Washington: U.S. GPO, April 1998). Since the two boards of trustees are identical, I refer to them hereafter as the Medicare trustees.
5. Board of Trustees, Federal Hospital Insurance Trust Fund, 1998 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (Washington: U.S. Government Printing Office, April 1998); and Board of Trustees, Federal Supplementary Medical Insurance Trust Fund, 1998 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund (Washington: U.S. GPO, April 1998). Since the two boards of trustees are identical, I refer to them hereafter as the Medicare trustees.
6. Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1999-2008 (Washington: CBO, January 1998); and CBO, Long-Term Budgetary Pressures and Policy Options (Washington: CBO, May 1998).
7. Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1999-2008 (Washington: CBO, January 1998); and CBO, Long-Term Budgetary Pressures and Policy Options (Washington: CBO, May 1998).
8. Estimates for trust funds financed by payroll tax also may use taxable payroll; since SMI is paid largely from general revenues, however, GDP is a better base for Medicare as a whole.
9. Compare the 1997 figure from Exhibit III.B1 of Board of Trustees of the Federal Hospital Insurance Trust Fund, 1997 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (April 1997), 70, to the same figure in the same table of the 1998 report, page 78.
10. Both the economics and demographics are taken from the "intermediate" scenario for Social Security's financial condition. The CBO and the Medicare trustees end up using only "virtually" identical demographic assumptions for their 1998 reports because HCFA, reporting later, could use the SSA 1998 assumptions, while the CBO used the 1997 figures. See CBO, Long-Term Budgetary Pressures, 3.
11. The relevant factors were the CBO's use of the same per enrollee increase factor for both programs (namely, average hourly earnings) combined with the way the CBO attempted to match HCFA given similar economic assumptions, the fact that the CBO was matching to the trustees' 1997 estimate of post-2020 growth rates instead of the 1998 estimate, and a very small difference between the CBO's and HCFA's projected gap between the growth of average hourly earnings and per capita GDP. None of this involved substantive modeling choices rather than data availability.
12. The purely economic aspect of the difference between the CBO's and HCFA's long-term projections may be two- or three-tenths of a percentage point. Higher real wage growth also would improve the position of the HI trust fund (see 1998 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, 69). But what matters for health care costs as a share of GDP, for example, is not the inflation rate but the difference between medical care inflation and general inflation - that is, the peculiarly medical cost factor. The major effect of differences in the CBO and SSA economic assumptions would appear not in estimates of long-term Medicare costs but of the rest of the budget, especially federal interest payments.
13. The standard CBO estimates say that national consumption would grow by slightly less than 1 percent for every 1 percent of GDP improvement in the federal budget balance. So, for example, reducing ultimate Medicare spending by 3 percent of GDP, lots of other things being equal, would at some point a few decades in the future raise consumption by a similar amount. Clearly, the effect on the numerator is much more important than the effect on the denominator of the Medicare-to-GDP ratio. See the following CBO reports: The Economic and Budget Outlook: Fiscal Years 1998-2007 (Washington: CBO, January 1997), 63; The Economic and Budget Outlook: Fiscal Years 1994-1998 (Washington: CBO, January 1993), 74-75; and Long-Term Budgetary Pressures and Policy Options.
14. The standard CBO estimates say that national consumption would grow by slightly less than 1 percent for every 1 percent of GDP improvement in the federal budget balance. So, for example, reducing ultimate Medicare spending by 3 percent of GDP, lots of other things being equal, would at some point a few decades in the future raise consumption by a similar amount. Clearly, the effect on the numerator is much more important than the effect on the denominator of the Medicare-to-GDP ratio. See the following CBO reports: The Economic and Budget Outlook: Fiscal Years 1998-2007 (Washington: CBO, January 1997), 63; The Economic and Budget Outlook: Fiscal Years 1994-1998 (Washington: CBO, January 1993), 74-75; and Long-Term Budgetary Pressures and Policy Options.
15. The standard CBO estimates say that national consumption would grow by slightly less than 1 percent for every 1 percent of GDP improvement in the federal budget balance. So, for example, reducing ultimate Medicare spending by 3 percent of GDP, lots of other things being equal, would at some point a few decades in the future raise consumption by a similar amount. Clearly, the effect on the numerator is much more important than the effect on the denominator of the Medicare-to-GDP ratio. See the following CBO reports: The Economic and Budget Outlook: Fiscal Years 1998-2007 (Washington: CBO, January 1997), 63; The Economic and Budget Outlook: Fiscal Years 1994-1998 (Washington: CBO, January 1993), 74-75; and Long-Term Budgetary Pressures and Policy Options.
16. For instance, see Organization for Economic Cooperation and Development, Ageing in OECD Countries: A Critical Policy Challenge, Social Policy Studies No. 20 (Paris: OECD, 1996).
17. OECD, Working Party No. 1 of the Economic Policy Committee, "Health Care Reform: Controlling Spending and Increasing Efficiency" (Unpublished paper, OECD, Paris, 7 September 1994), 64. In a later study, the OECD reported a smaller extra cost for persons age sixty-five and older, so a smaller demographic effect on total costs (OECD, Ageing in OECD Countries, 52).
18. OECD, Working Party No. 1 of the Economic Policy Committee, "Health Care Reform: Controlling Spending and Increasing Efficiency" (Unpublished paper, OECD, Paris, 7 September 1994), 64. In a later study, the OECD reported a smaller extra cost for persons age sixty-five and older, so a smaller demographic effect on total costs (OECD, Ageing in OECD Countries, 52).
19. Using background data provided by HCFA, the annual rate of increase in HI and SMI enrollments over those twenty years would be 2.19 percent and 2.06 percent, respectively.
20. Personal health care expenditure data for 1984-1994 were available for Australia, Belgium, Canada, Denmark, France, Italy, the Netherlands, and the United States. I used 1980-1990 data for Germany and Norway, 1977-1987 for Luxembourg, and 1984-1989 (the only available years) for Japan. The average growth rate per capita compared to the growth of per capita GDP was 1.13 percent for the entire group, and 1.01 percent excluding the United States. I also replicated the total expenditure analysis for all sixteen countries for 1980-1990; average spending growth exceeded per capita GDP growth by 1.01 percent per year, and 0.85 percent excluding the United States.
21. HCFA's estimates show SMI enrollment as a proportion of HI enrollment, for the years in Exhibit 3, falling from 94.0 percent in 2000 to 91.6 percent in 2020; rising to 92.2 percent in 2025; staying between 92.2 percent and 92.5 percent through 2065; and then falling to 91.2 percent in 2070. So the CBO's estimate comparing projected total costs with HI enrollment should slightly understate the underlying growth in medical costs per capita through 2020 and slightly overstate it from 2020 to 2025. These differences do not threaten the conclusion that the CBO and HCFA are projecting growth above the international norm through 2015 and not so far below it through 2035.
22. CBO, Long-Term Budgetary Pressures, 50.
23. The CBO's use of hourly earnings rather than per capita GDP as the growth factor cannot explain the difference. From 2030 to 2035, for instance, the CBO is assuming that average hourly earnings grow by 4.08 percent per year and GDP per capita at 4.05 percent. But its estimated annual increase in Medicare spending per enrollee above GDP per capita is 0.69 percent.
24. Demographic assumptions also explain why, after about 2040, the exhibit shows average spending growth declining: At that point, the large baby-boom generation dies off, and some very old beneficiaries are being replaced by younger ones. By 2060 the baby-boom bulge is gone, and the exhibit projects a small, steady increase in the average age of Medicare beneficiaries simply because of increased life expectancy.
25. J. Lubitz, J. Beebe, and C. Baker, "Longevity and Medicare Expenditures," New England Journal of Medicine (13 April 1995): 1001. See also M. Gornick, A. McMillan, and J. Lubitz, "A Longitudinal Perspective on Patterns of Medicare Payments," Health Affairs (Summer 1993): 140-150. Nursing home costs that Medicare does not cover may rise with longevity, but that is not relevant to Medicare cost estimates.
26. J. Lubitz, J. Beebe, and C. Baker, "Longevity and Medicare Expenditures," New England Journal of Medicine (13 April 1995): 1001. See also M. Gornick, A. McMillan, and J. Lubitz, "A Longitudinal Perspective on Patterns of Medicare Payments," Health Affairs (Summer 1993): 140-150. Nursing home costs that Medicare does not cover may rise with longevity, but that is not relevant to Medicare cost estimates.
27. P. Zweifel, S. Felder, and M. Meier, "Ageing of Population and Health Care Expenditure: A Red Herring?" (Paper presented to International Conference on Ageing and Old-Age Econometrics, University of Athens, 18-19 May 1995).
28. OECD, Working Party No. 1 of the Economic Policy Committee, "Factors Affecting Health Spending: A Cross-Country Econometric Analysis" (Unpublished paper, OECD, Paris, 29 September 1994), 31.
29. OECD, Ageing in OECD Countries, 57-59.
30. The relevant figures are in columns 4 and 5 of Exhibit 2, which show that enrollees' premiums as a share of GDP (the difference between "net" and "gross" spending) would be 0.5 percent of GDP in 2070, as opposed to 0.3 percent of GDP in 1995, and 1.0 percent in 2070 if there were no reform.
31. Author's calculations from Exhibit 4-5 of CBO, Long-Term Budgetary Pressures, 58.
32. See D. Cutler, M. McClellan, and J. Newhouse, "The Costs and Benefits of Intensive Treatment for Cardiovascular Disease" (Paper delivered at American Enterprise Institute/Brookings Institution conference, "Measuring the Prices of Medical Treatments," Washington, D.C., 12 December 1997).
33. The CBO briefly discusses such methods in Long-Term Budgetary Pressures, 55; the merits of that discussion are not my subject here. For analysis of international cost-control experience, see J. White, Competing Solutions: American Health Care Proposals and International Experience (Washington: Brookings Institution, 1995).
34. This did not stop the CBO from criticizing the Medicare trustees for not explaining what "policies designed to achieve that result" would reduce growth in costs per capita to the post-2020 forecast. CBO, Long-Term Budgetary Pressures, xix.
35. CBO, The Economic and Budget Outlook Fiscal Years 1999-2008, 146.
36. CBO, Long-Term Budgetary Pressures, 51-52, 57-61, especially figures 4.1 and 4.2.
37. Ibid., 52.