"The US Medicare Financial Problem" Reprint Of My May 17, 2009 Blog Post

To resolve the long-term US deficit problem, Congress must tackle Medicare funding. According to the 2010 Medicare Trustee Report, the recently passed new health care law, the Patient Protection and Affordable Care Act, did not resolve the long-term Medicare funding problem. See my recent post, "Time To Burst The Longterm Medicare Affordable Funding Myth."

Below is the full reprint of my still relevant 2-year old blog post, "The US Medicare Financial Problem" from May 17, 2009:

The US Medicare Financial Problem

Population Effects

According to US Census Bureau data and projections, the fundamental problem of Medicare is that the over 65 year old population and the over 85 year old population will increase in both absolute numbers and as a percentage: of the US. The US will have a doubling of Medicare enrollees by 2030. The high cost users, those over 85 years old, will quadruple by 2050.

The over 65 group will be twice as large. It will grow from 35 million, 12 percent of the US in 2000, to 71.5 million, and 20 percent of the total US population in 2030.

The US Census Bureau projects that the population age 85 and over will grow from 5.3 million in 2006 to nearly 21 million by 2050. Some believe that the 85 and over number will be higher due to longevity improvements. From 2030 onward, the proportion age 65 and over will be relatively stable, at around 20 percent.

Medicare Costs

More users equal more cost. More high cost users, those over 85 years old, means even more costs. A higher percentage of seniors in the US mean less tax revenue to pay for Medicare costs.

Even if medical costs per person do not grow, the total cost for Medicare will grow due to the doubling of the over 65 age group and the quadrupling of the over 85 age group.

The Medicare Trustee report states that Medicare costs for the over 65-age group is about $11,000 per person. Subtracting Medicare enrollees and Medicare expenditures from total US numbers shows that non-Medicare enrollees', (the under 65-age group less the few other Medicare categories), medical costs average about $8200 per person.

However, the 35 percent difference is due to more than the higher costs per person of a user of medical services. Medicare has a higher utilization of its services than the non-Medicare population. There are fewer non-users and low volume users to subsidize the typical medical service user in Medicare than in the non-Medicare population.

Add medical cost inflationary increases at a rate above the average US inflation rate and the US government faces a difficult problem. The US government cannot afford to continue Medicare as it is currently financed and structured. The senior citizen lobby and voting bloc, whose base is growing as a percent of the US population, makes changes to Medicare structure and costs politically difficult.

Way to a Solution

Politically, universal healthcare dilutes the senior voting bloc and gives the government an opportunity to modify Medicare under another rubric, but successful solutions to control costs that do not limit or ration medical services are not obvious. Additionally, the President and Congress also do not trust the capitalistic, market pricing based system to cost effectively meet the needs of the medical consumer.

When delivery solutions of a business service problem are unknown, the best route for success is the competitive market. Profit-motivated, competitive, market based pricing with costs borne by the end user drives all producers and deliverers to become as efficient as possible. This is what capitalism is all about and how the US standard of living has grown substantially since its founding to become the highest in the world.

Without a well-functioning pricing mechanism, investments in medical services are misallocated and users do not limit their use by need or seek lower cost effective alternatives.

Even the poor and uninsured will have their needs met in a market base system. The delivery system and provider cost per patient will change. There maybe fewer doctors and hospital in an area and longer wait times to increase their volume and profit per doctor and hospital. There will probably be more use of nurse practitioners and other low cost providers, but the medical providers will meet all the demand. Even surgeries will change to become more efficient and less costly. For example, right now surgical procedures have the highest profit margin in the medical profession due to high reimbursement rates. Under a market pricing system, this profit margin will narrow and procedures will become efficient. There will be many other changes that the government cannot even envision, but cheaper delivery systems and other cost-cutting changes are the strength and power of capitalism and market based pricing.

The government should focus on the best way to transition to a market based system for medical services. The government should also remove all the laws and regulations that drove medicine away from a competitive, market based system, such as the employer medical benefit tax deduction and many other misdirected government policies.

See my previous post, "Health Care Is A Pricing Mechanism Problem Not An Insurance Problem"