How Rising Medical Costs Impact Our Budget Deficit

 | Dec 14, 2012 | 4:55 PM EST
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Having discussed why Medicare (and to a lesser extent, Medicaid) spending is a big culprit behind our deficits in The Truth About Deficit Spending, it is worth examining exactly why medical costs are soaring.

Can we resolve the issue by simply increasing the Medicare eligibility age or asking seniors to chip in a few more dollars at the doctor's office? Probably not, and let's explore why.

First, part of the reason behind growing Medicare costs is that there are more beneficiaries, as the number of people eligible (about 20 years' worth of baby boomers) for the program is rising as the population ages. Raising the eligibility age won't be much of an offset, just a bit of a delay.

Total Medicare spending is projected to increase from $480 billion in 2011 to $811 billion by 2020, according to the Office of Management and Budget. The smaller Medicaid program is projected to see spending grow from $275 billion to $517 billion in this period, also per the OMB.

From 2010 to 2030, Medicare enrollment is projected to increase from 47 million to 79 million, and the ratio of workers to enrollees is expected to decrease from 3.7 to 2.4, according to the trustees of the government medical spending programs Research Data and Systems. Thus, we can see why spending on Medicare can present a budgetary challenge for the U.S., as there are fewer taxpayers to support each beneficiary.

But what about healthcare costs more broadly? This presents an issue beyond just Medicare, as it can affect any employer's benefit costs.

Recent research Federal Reserve Bank of San Francisco Working Paper Series  decomposes the source of rising medical costs among four categories: service price growth, service utilization growth, prevalence growth of treated diseases and demographic shifts (including an aging population). This study focuses on commercial insurer costs. 

The researchers found that between 2003 and 2007, rising medical-care expenditures per capita came from two primary sources: an increase in the prevalence of treated diseases (accounting for around one-third of the increase in expenditure growth) and an increase in service prices (accounting for around half of the increase in expenditure growth).

The remaining increase is attributable to demographic shifts, in particular, a slightly aging commercially-insured population. It wasn't because people were seeing the doctor more each time they were sick; instead, service utilization may be falling slightly for some conditions.

However, after accounting for inflation (which grew by 11.5 percentage points between 2003 and 2007), real service prices grew by 1% per year, or about 4% from 2003 to 2007. This suggests that cost of services hasn't been as much as a culprit as the fact that more people sought treatment, either due to greater awareness or greater illness.

In other words, of the 28% expenditure per capita growth from 2003 to 2007, 15.1 percentage points were attributable to things other than inflation. Two-thirds of those 15.1 percentage points are attributable to the increasing prevalence of treated diseases and one-fifth was attributable to demographic shifts.

We learn that there are four conditions in particular that are responsible for increased disease prevalence: hypertension, obesity, hyperlipidemia (cholesterol, basically) and diabetes. Some of these are due to the documented fattening, not just aging, population, and might be better controlled through diet and exercise, although the researchers did not note this in their report. Or, perhaps those advertisements for cholesterol drugs, etc., may be getting more people to see their doctor for treatment of those problems.

That said, treatment for these conditions, often a precursor to heart problems, may have resulted in the observed lower incidence -- and cost -- of cardiac conditions. In other words, we see more costs for treatment in the precursors to cardiac problems, lowering the cost of heart care. 

On the other hand, cancer care costs have risen markedly beyond the rate of inflation, suggesting a greater use of more innovative (and expensive) treatments for cancer.

In my opinion, based on this research, part of the increased cost of healthcare arises from Americans' health habits, given that the cost increases are due to more people presenting problems with obesity, high cholesterol, high blood pressure and diabetes.

Add in an aging population that is adding more people to Medicare benefit rosters, and you have the ingredients for government budget problems as healthcare costs consume a greater portion of GDP.

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