NCPA - National Center for Policy Analysis

Medicare Whac-A-Mole

December 28, 2011

Medicare as we know it is the nation's biggest fiscal disaster.  For years members of Congress and the executive branch have been trying, and failing, to find ways to restrain the growth of government health spending on seniors.  As the single largest driver of long-term federal debt, the program is projected to increase in costs rapidly over the next few decades, with the twin drivers of a gradually aging population and rising health care costs that outstrip inflation and economic growth, says Peter Suderman, an associate editor at Reason Magazine.

  • Medicare is a $500 billion program on track to become a $1 trillion program before hitting estimated insolvency in 2024.
  • President Obama has made modest inroads, having signed a debt deal with Republicans over the summer that allowed for a 2 percent cut to Medicare spending.
  • He also endorsed a $248 billion Medicare cut as part of his own debt reduction proposal in September.

Despite recognition of the great problems that Medicare faces for its fiscal future, the recent legislative schemes do not address the problem.  Rather, by relying on a technical system of price controls and complicated payout formulas, Congress is continuing to play the same game that it has for years in which it drives down direct costs in one area only to see them spring up elsewhere.

In attempting to address the problems of Medicare and medical expenses on the whole, members of Congress should look to the history of the program.  Upon the program's initiation, actual costs routinely outstripped projections because coordinators failed to account for a dynamic system in which consumers respond to market changes.

  • The House Ways and Means Committee, when charged with assessing the costs of the program, projected that total costs for the first year would run no more than $1.3 billion when total spending in the first year actually was $4.6 billion.
  • The committee did not improve its accuracy over time, projecting that hospital spending would amount to just $3.1 billion in 1970 when it was actually $7.1 billion.

John Goodman, president of the National Center for Policy Analysis, explains that these chronic projection mistakes are because analysts failed to account for increased demand as 19 million people were given free access to unlimited health care.  Today, Congress makes the same mistakes in different ways, failing to account for a dynamic market that undermines direct controls and ignores price-controlling efforts.

Source: Peter Suderman, "Medicare Whac-A-Mole," Reason Magazine, January 2012.

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