Demands of an aging population will have Medicare, Medicaid fighting for dollars

From modest beginnings a half-century ago, Medicare and Medicaid grew and evolved in dramatically different ways. Medicare, which provides healthcare coverage for the nation's seniors, became the third rail of American politics. Liberal politicians never proposed tampering with the program except to call for expanded benefits. Conservative politicians and think tanks with the temerity to suggest major structural changes, either to save money or limit financial support, invariably suggested a start date at least a decade away.

Medicaid, on the other hand, existed in a political netherworld. Because it was a state-based program that provided healthcare coverage for the poor, financial support was grudging and its payments to providers were woefully inadequate.

Moreover, Medicaid's beneficiaries were largely politically invisible. Its supporters had little voice in day-to-day politics. Some labeled the program a burden on the nation's hardworking, taxpaying public.

All that is about to change. Medicare over the next few decades will become a lot more like Medicaid.

The senior citizen healthcare program already has lost its untouchable status. It's become the go-to source for funding everything from free- trade agreements to faster drug approvals.

Looking ahead, the demographic and fiscal realities facing the nation are such that Medicare will inevitably become a politically charged program whose underlying financing demands will be routinely scrutinized by the working-age, taxpaying public and the politicians who represent them.

It's not that Gen Xers and millennials are more likely to throw granny under the bus than the 77 million baby boomers born between 1946 and 1964, who are now entering retirement at a rate of 10,000 a day. Millennials, who were born between 1981 and 1997, tend to be politically more liberal than either of the two previous generations.

But, like the smaller and politically more conservative Gen X cohort just ahead of them, millennials are less likely to believe social programs like Medicare and Social Security will be there for them when they retire. That makes young adults more open to political messages that suggest major changes to those programs will be necessary to keep them available for future generations.

Whether changes are required—and whether those changes need to be dramatic—are questions that will be hotly debated in Washington over the next few decades as boomers move through their retirement years. We're already seeing it in the nascent 2016 political campaign, where many of the candidates vying for the Republican nomination are willing to endorse changes like more extensive means-testing for wealthier seniors and turning Medicare into a defined-contribution program.

Many Democrats, no doubt, will continue to use the “Mediscare” tactics that have served them well in the past. But it's doubtful they will be able to maintain the current Medicare program without at least some changes to its financing and benefit structure.

Framing the entire debate will be the underlying demographics. The long-expected graying of America is arriving right on schedule.

When Medicare was created a half-century ago, there were nine people in the under-65 population for every person drawing benefits from the new program, which was far less generous and far less effective than Medicare today. The average life expectancy then was 74.

Today, there are about five people for every adult in his or her retirement years. Beneficiaries enjoy a prescription drug benefit, access to artificial knee and hip surgery, and life-saving cardiovascular interventions that were undreamed of a half-century ago. The life expectancy of someone turning 65 today is 82, with the hope to extend life even further if the promise of genomic medicine, especially in fighting cancer, is realized.

To pay for these miracles over the next five decades, there will be relatively smaller working-age and youth populations, eventually reaching just 3½ people under 65 for every Medicare beneficiary. Demographers at the U.S. Census Bureau project average life expectancy will reach 85 in 2035 and 87 by 2060.

They also warn about the growing “dependency” ratio—which has huge implications for Medicaid funding. The relative number of children under age 18 will fall only slightly over the next half-century. Working-age adults will constitute just 57% of the population by 2060, down from 63% in 2012. They will be supporting an over-65 population that grew from 14% to 22% of the total, and a youth population that fell from 24% to 21% over that half-century.

Moreover, many more of America's children will need public assistance given current economic trends. Already, over a third of the nation's kids get their healthcare through Medicaid because of poverty and growing income inequality. That share is expected to reach 44% within a few decades.

When you factor in poor seniors needing nursing home assistance, which also comes out of Medicaid budgets, it adds up to well over half the population dependent on public programs and taxpayer support for their healthcare.

The good news is that the recent slowdown in healthcare spending growth has created more breathing room before existing taxpayer sources become strained. Medicare and Medicaid projections for 2023 are now $1 trillion below where they were before the recent Great Recession and passage of the Affordable Care Act. Whether the economic downshift or delivery system changes account for the slowdown remains hotly debated.

But for the future of Medicare and Medicaid, only one thing matters. Will that cost slowdown continue?

CMS actuaries think not. They reported last year that government spending on Medicare (not including seniors' out-of-pocket expenses) consumed 3.5% of the nation's gross domestic product. By 2035 they expect that to grow to 5.4%. Medicaid—both the federal and state shares—consumed 2.9% of GDP last year, and by 2023 is expected to grow to 3.4%, according to the Congressional Budget Office.

The CBO's most recent budgetary update on government spending estimates all federal healthcare expenses will reach 6.1% of GDP in 2025, up from 5.1% today. To reach that level of spending without adding to the deficit or crowding out other programs, the government tax take would have to grow at least 1 percentage point from current levels of around 18% of GDP. Over the next five decades, given the shifting demographics, government support for healthcare will require tax levels of anywhere from 21% to 23% of GDP. While not unprecedented, that is definitely higher than what most Americans are usually willing to vote for.

“More people living out their full lives is something we should celebrate and be willing to devote more of society's resources to support,” said Stuart Guterman, vice president of Medicare and cost control at the Commonwealth Fund. It's a sentiment typical of most people on the left side of the political spectrum.

To hold the required tax increases to a minimum, those in the more liberal camp are banking on the success of value-based healthcare payment and delivery reforms begun under the ACA. They also are calling for a single financing mechanism that combines Medicare's hospital, physician and drug benefits (Parts A, B and D), which would make traditional Medicare more like private Medicare Advantage plans—a public option, if you will. Medicare Advantage plans have already captured nearly a third of the senior market and have proved popular with younger, healthier beneficiaries like the baby boomers who will be entering the system over the next two decades.

But for those on the political right, the tax-and-spend implications of the looming demographic realities are fueling their desire to make more sweeping changes in the financing and delivery system.

Distilled to their essence, their Medicare premium-support proposal would define an essential set of benefits for Medicare beneficiaries, provide a fixed amount to help purchase plans that include those benefits, and allow seniors who can afford it to purchase additional coverage on their own.

“Medicare reforms based on the principle of defined contribution can provide the framework needed to slow program spending while preserving beneficiaries' access to high-quality services and promoting continued medical innovation,” Joseph Antos of the American Enterprise Institute wrote.

The stakes in this debate for hospitals, physicians and the other providers who care for seniors and the poor couldn't be higher. If the essential benefit package isn't generous enough, who will pay for the care of those who can't afford, but are equally deserving of, life-saving treatments? If taxpayers balk at paying the higher level of taxation needed to finance healthcare programs, how will quality of care and access be maintained?

The CMS' increasingly aggressive embrace of value-based payment programs is a gamble that physicians, hospitals and the broad array of ambulatory and post-acute-care providers can be weaned from the fee-for-service system that fueled their spectacular growth over the past half-century. The early experiments provide hope that such approaches can succeed, but they are hardly definitive.

The healthcare system has only begun to scratch the surface of eliminating wasteful or unnecessary care. Redefining end-of-life care in ways acceptable to older Americans, their families and society is a work in progress.

“We need further steps to make the program sustainable,” said Dr. Mark McClellan, a former CMS administrator under the George W. Bush administration who is now at the Brookings Institution.

Ultimately, a system that is fiscally sustainable will need to deliver high-quality care within a fixed budget that grows no faster than the rest of the economy. Maryland is experimenting with such a model. Suppliers like the drug and device companies that set prices without regard to total healthcare spending will have to adapt.

Whether managed by insurance companies, provider-led accountable care organizations or a government program, care delivery systems under capped financing will begin to resemble those found in Western Europe and Canada (though not like the United Kingdom, where the National Health Service is government-run). The recent budget battles and resulting sequester cuts that slapped limits on Medicare funding are only the start of a decades-long war over how to finance healthcare during the baby boomers' retirement years.

So here, finally, is where the new buzzwords like value-based reimbursement and population health management come into play. Changing payment policy to make the healthcare system deliver higher-quality, less wasteful and more cost-effective care is the least painful path to a financially sustainable future.