NCPA - National Center for Policy Analysis

Medicare: Obstacles And Options For Long-Term Reform

September 28, 1999

For the past three decades, Medicare spending has grown substantially faster than the economy and faster than private health spending, say economists. Aging baby boomers will place unprecedented demands on the program as they reach age 65, beginning in 2011.

  • In 1999, the Medicare program will spend $230 billion, about 13 percent of the federal budget, on the behalf of some 39 million elderly and disabled individuals.
  • Medicare enrollment is projected to reach 47 million people by 2010, growing to about 75 million people in 2030.
  • Assuming no change in policy, Medicare spending will grow from 2.6 percent of Gross Domestic Product in 1995 to 6.3 percent of GDP in 2030.

Recent policy debate has centered around two approaches to restructuring Medicare, both of which rely on making beneficiaries more aware of the cost of health care, ensure efficiency and maintain high standards of quality.

  • Proposals to prefund Medicare would require people to save during their working years to finance health insurance after they retire.
  • Unlike pay-as-you go financing, prefunding fully accounts for both the greater health needs of a larger number of beneficiaries and their greater ability to finance those needs over their lifetimes.
  • Under a defined-contribution or voucher plan, Medicare would make a fixed payment to beneficiaries who would choose from a range of health plans, paying extra if their chosen plan's premium exceeded Medicare's payment.

In principle, by requiring beneficiaries to pay the marginal costs of higher-cost plans, health plans would have incentives to compete on the basis of price and become more efficient in lowering costs and reducing the future financial burden to workers.

Source: Joseph R. Antos and Linda Bilheimer (Congressional Budget Office), "Medicare Reform: Obstacles and Options," American Economic Review: Papers and Proceedings, May 1999.


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