Slowing the Growth of Medicare and Medicaid Costs

Without major changes, the federal deficit will explode and U.S. national debt will reach dangerous levels within the next twenty years. Any realistic plan to balance the federal budget must include two main elements.

1. A significant reduction in the growth rate of federal healthcare costs — primarily Medicare and Medicaid.

2. An increase in taxes.

The more we can slow the growth of Medicare and Medicaid costs, the less we will need to increase taxes.

Medicare and Medicaid cost growth can’t be slowed without similar changes in the private healthcare system

Attempts by Congress to slow the growth of federal healthcare costs have been unsuccessful primarily because Medicare and Medicaid are so closely linked to the rest of our healthcare system. All doctors and hospitals treating Medicare and Medicaid patients also have private patients. If Medicare and Medicaid payments are cut much below the standard charges to private patients, healthcare providers will stop seeing the poor and elderly. If the government restricts treatments available to Medicare and Medicaid patients, Congress will quickly receive complaints that it has created an inferior healthcare system for the poor and old. Consequently, slowing government healthcare costs in the long run is not politically possible without reforms that also apply throughout the U.S. healthcare system.

Slowing the growth of healthcare costs

Between 1975 and 2005, per capita healthcare costs grew much faster than costs in the rest of the U.S. economy — 2.4% faster for Medicare, 2.2% faster for Medicaid, and 2.1% faster for private patients. Rising costs are now threatening to bankrupt not only the federal government, but also many businesses and private patients. How can the growth of healthcare costs be slowed? That is now the $64,000,000,000,000 question.

There are three main approaches to reducing healthcare costs: reducing the need for treatment, paying less for treatment, and using less treatment.

Needing Less Treatment

The U.S. is currently suffering from an epidemic of obesity and diabetes. Getting Americans to eat better diets and exercise would reduce chronic illnesses now and in the future. However, we all will eventually get old and die, so the main effect of healthier lifestyles is to delay healthcare costs. The studies are inconclusive about long-run savings and, unfortunately, finding ways to motivate people to change their lifestyles is difficult.

Paying Less For Treatment

Congress has passed and rescinded many laws to reduce Medicare and Medicaid payments. Government efforts to pay less have so far been unsuccessful in reducing cost growth. Increasing competition among providers might reduce charges, but is very difficult to implement because of the special characteristics of the doctor-patient relationship (I’ll have more on this in a later blog entry.) More competition among insurance companies could reduce costs and this is one of the reasons the Task Force supported a voucher plan. However, unless government takes over the healthcare system, it is unlikely that the growth in payments per treatment can be slowed enough to solve our problem.

Using Less Treatment

This is where the hope (if there is any) lies. Evidence from two sources indicates that about one third of medical treatments have little if any benefit and, in some case, may harm the patient. For twenty years, researchers at Dartmouth have been examining Medicare payment records and have published the data in the now famous Dartmouth Atlas of Health Care.

Large variations exist in the cost of healthcare in different parts of the U.S. — with some areas spending twice as much as other areas. The surprise is that patients in high cost areas don’t do any better than those that receive less treatment in low cost areas.

The second source comes from international studies of healthcare. The U.S. spends about a third more of its GDP on healthcare than any other advanced country and other advanced countries usually have as good or better outcomes. See this report from the White House, particularly the discussion starting on page 9.

Our healthcare system seems to be surprisingly inefficient. If we can make better treatment decisions, we should be able to reduce costs without affecting the quality of care. How can this be accomplished? I’ll discuss this in the next blog entry.

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