Babies become old men and women. Of course! We know it as a biological fact. We know, too, that from 1946 to 1964 there was a postwar boom in babies. Still, it is something of a shock to realize that beginning Jan. 1, 2011, the first baby boomers became—statistically—retirees. More of a shock still is that there are 79 million more baby boomers headed for retirement. And the biggest shock of all is that we don't have the money to ensure the good health of those onetime babies.
The baby boomers are a critical element of the explosion in healthcare costs—but not the only one. The projected increases in Medicare and Medicaid to treat the old, the sick, and the poor represent the greatest risk facing America's fiscal future. Those increases could raise deficits dramatically in the 2020s and 2030s. Entitlements, primarily Social Security augmented by Medicare and Medicaid and other retiree programs, now constitute roughly half of non-interest federal spending. These transfers have become so huge that, unless checked, they will sabotage America's future. Arithmetic still matters.
The Medicare hospital insurance trust fund is running a deficit and could be exhausted by 2024. Employer costs for health benefits, meanwhile, have been rising far faster than worker productivity in the postwar period. Employer health benefit costs have increased from approximately 0.5 percent of total compensation in 1950 to over 8 percent today. Healthcare premiums paid directly by workers have soared in recent years, outpacing wage increases and inflation, rising 131 percent between 2001 and 2011 for a family. Employer costs have gone up 113 percent over the same period.
Medicaid now pays for both health and long-term care for 55 million needy Americans. It finances more than one third of all births in the United States and pays the cost of almost two thirds of the people in nursing homes. The federal government underwrites one half to three quarters of the cost, depending on the state. Even so, Medicaid is the second biggest and fastest-growing category of spending by states. Costs are up more than 50 percent in the last five years. They are expected to exceed $450 billion this year and to keep growing by about 8 percent annually for the next decade.
By the mid-2030s, the 65 and over population will nearly double. By then, their healthcare costs may be completely out of control, resulting in a tidal wave of federal spending to sustain these programs. At the end of fiscal 2010, medical programs for seniors made up the bulk of the government's total unfunded liability—estimated at $63 trillion, or over $200,000 per person and $500,000 per household.
All the (true) scary projections about America's long-term fiscal imbalances demand a fundamental change in how we manage healthcare. The costs are at the core of the impending fiscal crisis, which is bad enough, but the consequence isn't just a tide of red ink. Unless we get the costs under control, we will be confronted by a crippling inability to invest in other areas of national need.
Erskine Bowles, cochair of the bipartisan Simpson-Bowles deficit reduction commission, put it well: "It is a fiscal crisis that is completely predictable and from which there is no escape."
What can be done? Peter Orszag, who while director of the Office of Management and Budget was at the center of the healthcare reform negotiations, points out that costs are heavily concentrated among a small number of relatively sick patients. The top 5 percent of Medicare beneficiaries, ranked by cost, account for roughly 40 percent of total Medicare spending, and the top 25 percent account for more than 85 percent of total costs.
This is where we must focus our efforts. We must stop the epidemic of procedures that neither the patient's needs nor the results can justify. Orszag offers evidence for this assertion: Renowned institutions like the Mayo Clinic are delivering high-quality healthcare at substantially lower cost by using information technology intensely, examining best practices rigorously, focusing on doctors' financial incentives, and utilizing procedures to minimize mistakes
Two forces work against that kind of rational approach. The first is the litigation doctors fear if they think about good medicine and the particular patient rather than follow "customary practices." Doctors who avoid unnecessary tests and follow evidence-based guidelines for specific illnesses or conditions put forth by professional associations must have a safe legal harbor.
Second, we should change the fee-for-service payment approach that dominates our system. It doles out separate payments for everything and everyone involved in patient care. It rewards doing more over doing right. It increases paperwork and duplication, and discourages clinicians from working together. In other words, all the wrong incentives.
We should have a payment system that reflects a fee-for-value approach, that drives quality rather than quantity, and that will not serve as an incentive for unnecessary care. Today doctors can order expensive tests because it is profitable and provides a potential defense in a lawsuit. The patient has no role and there is no room to question these decisions. We have to overhaul the entire medical structure.
That can only happen if Congress delegates the responsibility to a group similar to the military base closing commission. It is a legitimate tactic to avoid hysteria and the Balkanization of responsibility implicit in the congressional process. Not to mention the pressure on Congress from the typical cry that "patients will suffer" and the fear that lobbyists will desert them.
Let's face it. What we now have is a zombie social program, unsustainable without giant tax increases, huge cuts in benefits, or cuts in payments to hospitals, nursing homes, outpatient facilities, physicians, and homecare providers. The waste is enormous, estimated at between 30 and 40 percent of the total cost. There cannot be billions of dollars of general waste and no specific waste. The only way to cut healthcare costs is to cut healthcare costs.
Health insurance companies have to be part of the drive. They are basically unregulated de facto monopolies in most states, with one or two companies controlling 80 percent or more of the market. Former president Bill Clinton points to a provision in the new law: For plans from big insurers, 85 percent of the premiums should go to healthcare and not to profits or promotions; if the insurer is small, 80 percent.
The public understands this. All the polls suggest they came to a common-sense conclusion that we could not maintain the quality of healthcare, expand coverage to all, and yet lower the cost. People know that soaring healthcare costs inevitably shift government priorities away from everything else, be it schools, roads, higher education, lower taxes, police and national security, all just to preserve the income of doctors, hospitals, insurers, and other providers.
Some higher taxes may be inevitable, but a doubling or tripling of taxes for working-age families is neither economically sensible nor politically feasible. And yet, if trend lines continue, Medicare and Medicaid alone will absorb every dime of federal revenues at current tax rates by sometime in the 2040s. As healthcare goes, so goes the future solvency of the U.S. government. Most or all of the above reforms I've mentioned are going to have to be considered if we are to return America to the land of opportunity and away from the land of entitlement.
The first three words of the Constitution are "We The People." Ultimately, "we the people" must take responsibility for what happens, and this applies to the fiscal future of the country as well.
- See a collection of political cartoons on the budget and deficit.