Medicare Part D and the Deficit
Medicare’s Part D drug benefit is going to cost taxpayers a lot of money. A really, really lot of money.
You can find the story deep in the bowels of the Medicare Trustees report that was released earlier this week. It is a nice little case study of how a well-intentioned government program can add tens of billions of dollars annually to the federal deficit. And it is a cautionary tale of how hard it will be to bring medical costs under control, despite the promises of the Obama Administration and industry lobbyists.
Part D was adopted by Congress in 2003 and began to pay full benefits in 2006. When Congress passed the drug program, conservatives groused that it was too expensive, while liberals complained it was both too complicated and not generous enough.
Premiums finance only about 25 percent of the program’s cost—the rest is paid through general tax revenues. Unlike Part A hospital insurance, there is no payroll tax funding for this piece of Medicare.
For the past three years, benefits have been significantly lower than government actuaries first projected, in part because so few costly new drugs have made it on to the market. But don’t worry. That bit of fiscal good fortune is not likely to last long.
According to the actuary’s intermediate cost assumptions, Part D spending will nearly triple from about $50 billion last year to a staggering $140 billion in 2018. Per capita spending will more than double, from $1,500-a-year to almost $3,200. And the program’s long-run costs are even more troublesome: growing from about 0.4 percent of Gross Domestic Product in 2008 to 1.4 percent of GDP by mid-century to 1.8 percent by 2080. Yikes. That’s about 10 percent of what it has historically cost to run the entire federal government.
Just as troubling is the uncertainty of these estimates. While $140 billion is the mid-range forecast for 2018, the actuaries warn the cost could range from as low as $107 billion to as much as $180 billion. With admirable understatement, the trustees say, “there remains a very substantial level of uncertainty surrounding these costs projections.”
It is probably worth adding that these are net drug costs. Presumably, some of these medications will reduce other medical expenses by keeping people out of hospitals, and by avoiding surgeries and other costly treatments. That is surely an argument that the pharmaceutical industry will make when the White House asks it to do its part to trim medical expenses by 1.5 percent.
But how will we ever know? Reducing $140 billion by 1.5 percent would save only about $2 billion. And that is so far within the estimating error that it is little more than loose change under the statistical sofa cushions.
The drug benefit was a sensible reform. It was absurd that in 2003 Medicare was still offering health insurance that excluded pharmaceutical drugs. But those House conservatives were right about one thing: Part D will be hugely expensive. And we need to find a way to pay for it.
This may also make the case of old people who are left without their children or anyone else in the family to look after them in hard times. There are care giving centers that deal with any particular need of these people. Adopting tutor and loss therapists for children, as well as assisted living facilities for seniors finding themselves in such situation. Community always finds a way in solving these social issues.
Why does anyone believe any government (CBO, democrat or republican)cost projections, particularly on healthcare costs.
I used to work in Medicare policy. When Medicare was passed in 1965, 10-year cost projections were made. When 1975 costs were tallied, they were 7 times the projected costs for that year.
Politicians will come up with any number they feel will sell their program. And, the CBO has a very poor track record doing its projections.
[...] Policy Institute analysis of the People’s Budget Reuters Prism Money look at Medicare Part D Tax Policy Center look at Medicare Part D What we’re not being told about Paul Ryan’s Medicare [...]
The program was indeed well intentioned, but I think they forgot about other medical care centers like drug rehab and such. I worked for three years as a volunteer in a drug rehab San Diego, and I do know that the government should invest more money in this area of medical care.
The Medicare Part D will cost the taxpayers more, indeed, but will also give equal chances to everyone. Now, people with financial problems will have their chance to get treatments when needed. I work as a volunteer for this drug rehab Utah, and I know how hard the old system was making it for the poor ones.
Oops! The commitment was trim expenses by 1.5% a year, not 1.5%.
The distributional aspects are what are interesting.
Cost cutting measures are an implicit subsidy to families without elderly members or to families with large numbers of working children. If the family either picks up the slack when benefits or cut – or can expect a smaller inheritance – it in effect pays for any benefit cuts.
To put it another way, individuals whose parents have already passed and who are not retired receive an undeserved benefit when benefits are cut in preference to increases in the payroll tax.
When Bill Clinton took office, U.S. News published a budget balancing exercise. I calculated that to forestall cuts, taxes would have to be raised by 1.05% of income for both employers and employees to avoid cuts – increasing taxes from 2.9% from both sources to 5%. Given the increase due to Part D, I am sure that figure is now higher.