At 50 Years Old, Medicare Is Showing Its Age

Published August 14, 2015

When President Lyndon Johnson (D) signed Medicare into law on July 30, 1965, nobody realized the program would grow to its current size.

In 2014 alone, Medicare spent $613 billion on nearly 54 million beneficiaries. Seniors qualify for Medicare when they reach age 65. When Medicare was created, only Americans born in 1900 and before would have been eligible for benefits, and the life expectancy for that demographic group was below 50 years of age.

Life expectancy has increased dramatically over the past 115 years. Americans reaching Medicare eligibility today were born in 1950, and about 70 percent of Americans born in that year are still alive today. Furthermore, men born in 1950 enrolling in Medicare can expect to live another 17 years, and women can expect another 20 years of life. By the next century, scientists may even extend longevity by decades, with new treatments and advances in anti-aging drugs being made daily.

Medicare has undoubtedly grown well beyond what Congress imagined in 1965. Its outlandish spending, however, is not solely due to the increased number of Americans reaching the Medicare eligibility age. Neither is it solely due to the number of years they remain on Medicare. Per-beneficiary spending has also skyrocketed, because perverse incentives in the program’s design drive up costs, and new treatments unavailable when Medicare was created add to the expense.

In 1970, five years after the program began, annual Medicare spending per beneficiary was only $385. Today, it is $12,430, and it is projected to balloon to nearly $19,000 over the next decade.

Rapidly Rising Share of GDP

In July, the Medicare trustees released their 2015 report on the financial condition of the program in 2014. The news was welcomed as positive because per-beneficiary spending was only 2 percent higher than the previous year. The report claimed Medicare is expected to remain solvent until 2030, unchanged from the estimate released in 2014. Additionally, Medicare spending growth is projected to slow by mid-century.

Upon closer inspection, however, the report isn’t very reassuring. Medicare spending as a percentage of GDP is still rising sharply. It was 1.3 percent in 1980, 2.2 percent in 2000, and about 3.5 percent of GDP today. Medicare spending is expected to surpass 4 percent of GDP by 2022 and reach 5 percent in about 15 years. The “good” news is that Medicare spending is projected to stabilize between 5 and 6 percent of GDP for a period of about 60 years, from 2029 until 2089.

The problem is this projection assumes conditions contained in “current law.” This means the projection assumes the Independent Payment Advisory Board will retain its power to cut Medicare spending arbitrarily if spending surpasses a particular growth rate threshold. It also assumes present changes to Medicare physician fees remain in place, along with other Medicare fee reductions. These assumptions present a false picture of what is likely to occur in coming decades.

In their “Illustrative Alternative Scenario” report, Medicare’s trustees also looked at spending under conditions they believe are more likely to occur. Under this set of assumptions, Medicare spending could reach 9.1 percent of GPD in 2089, about 50 percent higher than projections made based on current law.

Specialty Drugs Factor

Rising drug costs are another reasons to worry about Medicare’s financial future. In 2014, Medicare spending on drugs was .48 percent of GDP. This proportion will rise as specialty drugs supplant cheap generics. Specialty drugs are the new generation of costly treatments and biological agents, which can cost $15,000 per year or more. Some drugs cost as much as $1,000 per pill.

Whereas only about 10 specialty drugs were available 20 years ago, today there are more than 300. Despite constituting only 1 percent of drugs prescribed, specialty drugs accounted for one-third of spending on drugs in 2014. By the end of the decade, half of our drug spending will be on specialty drugs.

Fast-Growing Funding Gap

The amount of general revenue necessary to fund Medicare will rise substantially over the coming decades. In 1970, premiums and payroll taxes funded all costs of the Medicare program. Today, general revenue funds are needed to pay about 43 percent of Medicare’s spending—equal to about 1.5 percent of GDP.

That’s scary enough, but taxpayers will be on the hook for Medicare spending equal to 3.2 percent of GDP about 20 years from now. Of course, that assumes the provisions under current law are actually followed. Under the actuaries’ more likely “Illustrative Alternative Scenario,” taxpayers could find their share of unfunded Medicare spending quadrupling from its current level of 1.5 percent of GDP to 6.1 percent of GDP.

Like the Social Security Trust Fund, the Medicaid Trust Fund is a fiction. It’s little more than a filing cabinet full of IOUs future taxpayers are expected to cover. There is no trust fund in the sense of an account holding assets than can be sold to alleviate the burden on taxpayers.

Somebody is going to be very disappointed when those IOUs come due.

Devon M. Herrick, Ph.D. ([email protected]), is a health care economist and senior fellow at the National Center for Policy Analysis. An earlier version of this article originally appeared at Townhall. Reprinted with permission.

Internet Info:

The Boards of Trustees of The Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, “2015 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medicine Insurance Trust Funds,” July 22, 2015: