Medicare: Past, Present and Future

Policy Reports | Health

No. 299
Sunday, July 01, 2007
by Andrew J. Rettenmaier and Thomas R. Saving

Can Health Care Rationing Solve the Problem?

Can Health Care Rationing Solve the Problem?

If Medicare's funding problems cannot realistically be solved by finding new sources of funds (either from elderly beneficiaries or taxpayers), an alternative is to get off the projected spending path.  On the demand side, that means someone must choose between health care and other uses of money.  That is, someone must decide that the benefits of the next MRI scan or the next knee replacement are not worth the costs.  Such decisions could be made by the seniors themselves (see the next section), by government or by private insurers operating under government rationing rules. 

Rationing Health Care with Global Budgets.  A common technique in other developed countries is to impose a global budget on health care providers.  Sometimes a general spending limit is accompanied by special limits on the purchase of technology.  Recent studies by the National Center for Policy Analysis 11 and the Brookings Institution 12 examine how these spending limits affect patients.  The Brookings study, for example, concludes that Britain would have to increase its spending by one-third to match the level of patient care available in the United States. 13

To estimate the effects of rationing, assume that each year's cohort of newly eligible baby boomer beneficiaries will be limited in their access to care in the following way.  Initial Social Security benefits are determined by indexing a worker's past wages in line with wage growth over time for the economy as a whole.  However, once a beneficiary begins receiving payments, Social Security benefits are indexed only for inflation.  We examine a similar method for Medicare.  Upon reaching age 65, beneficiaries would receive a health plan that covers projected lifetime Medicare costs as they exist in the year they retire.  This benefit package will be indexed for inflation only.  Thus this constraint would not allow Medicare spending to grow with advances in medical science or with higher incomes.  Seniors will very likely want to spend more than the inflation-indexed Medicare benefit package.  Such additional spending, however, must be paid from the seniors' own resources. 

“Just as is done with Social Security, Medicare spending could be held to the rate of inflation once people are retired.”

Presumably, this policy will be announced in advance so that each generation of retirees will be able to plan and adjust to new Medicare budget caps.  Beneficiaries will be able to buy additional care - not provided by Medicare - much as the British do under the National Health Service.   This reform is unquestionably harsh, but it is structured to identify by how much such a reform would reduce Medicare's general revenue requirements.  Estimating the effect of this type of reform in two ways shows that such constraints on spending growth can reduce Medicare's unfunded liability by 20 percent to 40 percent.  It is important to note that under this reform Medicare benefits grow for each new group of retirees, but at a less rapid rate than is currently projected. 14

Why don't spending constraints accomplish more?  The reason: 48 percent of the projected growth in Medicare as a share of GDP by 2050 is due to population growth and aging, while 52 percent is due to per capita spending growth in excess of per capita GDP growth.  Therefore, reforms which limit reimbursements - even in a best-case scenario - can only affect part of the expected growth in Medicare spending.

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