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.