Medicare's Long-Term Fiscal Outlook Not Good

January 21, 2014

Medicare's long-term fiscal outlook is unlikely to improve, even with the recent slowdown in health care costs, says Charles Blahous, a senior research fellow at the Mercatus Center, a research fellow for the Hoover Institution, and a public trustee for Social Security and Medicare.

The Affordable Care Act's supporters are claiming that the law has slowed the growth of health care costs. There is little if any basis for that claim, as the cost slowdown began prior to the Affordable Care Act and because the law appears to be increasing health spending, not decreasing it.

Putting that aside, there have been questions as to whether the slowdown in health care costs will do something to improve Medicare's financial health in the long term. Unfortunately, Medicare's financing problem is likely to get worse, not better, and the program needs a complete change in policy before it can get its financial problems in order.

  • Over the next 20 years, growth in Medicare costs will be driven by the population aging. Even eliminating health cost inflation, Medicare costs will rise faster than national economic growth solely due to America's aging population.
  • And while Medicare's costs have slowed, its revenue growth has slowed even more, putting it in a weaker financial position than pre-Recession analyses expected.
  • Medicare's long-term costs are likely to be higher than currently projected, not lower. Current projections of Medicare costs operate under the assumption that Medicare spending will shrink relative to gross domestic product perpetually, which has not been the case historically.

While a slowdown in health cost inflation is a good thing, the slowdown has actually led to a weakening of Medicare's finances because its revenues have dropped more than its costs. The program's finances need reform before it can have a positive long-term fiscal outlook.

Source: Charles Blahous, "Why Slower Health Care Cost Inflation Isn't Fixing Medicare Finances," Economic Policies for the 21st Century, January 14, 2014.

 

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