Medicare Spending

Before the start of the new year, there was constant talk in the news about the “fiscal cliff,” the mix of tax increases and spending cuts that was set to take place on January 1. As anyone following the subject knows, the United States Congress acted at the last minute[1] to avert most tax increases. But the deal that was passed only delayed enormous spending cuts — $1.2 trillion over 10 years, spread over several federal programs — for two months. Among the cuts set to take place[2] is a 2% reduction in Medicare funding, to which administrators of the program would probably react by lowering hospital and/or doctor reimbursement rates.

As is turns out, Congress just canceled a planned 27% cut to doctor pay through Medicare as part of the fiscal cliff deal. That 27% cut, however, was not part of the overall package of spending cuts that Congress created more than a year ago in an attempt to force a bipartisan deficit-reduction deal. As a Forbes article from earlier this month[3] notes, that planned pay cut was the result of a spending formula that Congress enacted in 1997 to limit Medicare spending. Since 2002, however, Congress has temporarily delayed pay cuts 14 times without fixing the formula, so that the drop in doctor pay would be greater each time the temporary fix is set to expire.


The unwillingness of Congress to cut Medicare spending has led New York Times columnist David Brooks to conclude, in a column published last week[4], that Medicare will be untouchable well into the future — at the expense of all the other worthwhile things the federal government does. Spending on defense, education, scientific research, infrastructure, and poverty relief, Brooks writes, will suffer as health care becomes the chief concern of the federal government. This will happen, he argues, because voters directly feel the benefit of Medicare and other health-care guarantees and will oppose any attempted cuts.

It is true that the federal Department of Health and Human Services (HHS) projects significant growth[5] in Medicare spending in coming years — mostly because of a spike in the number of retirees who will be eligible for the program. But as HHS also notes, Medicare spending per beneficiary has grown at a slower rate than the overall economy in recent years, including just 0.4% in fiscal year 2012. This suggests that Medicare spending growth cannot be significantly slowed just by eliminating frivolous care, or by ensuring that new, expensive technologies do not lead to spending growth. Instead, for Congress to limit Medicare spending in the future, it will have to fundamentally change the structure of the program. It could do this in several different ways: by paying doctors based on the condition being treated, rather than for individual procedures; by cutting doctor pay; by cutting benefits; or by converting Medicare into a voucher-based “premium support” program (see “Medicare Privatization[6]“).

What do you think — should Medicare growth be reined in, or should the program continue as it presently does, even if its cost means that other programs must be cut? What other programs, if any, would you cut to pay for Medicare? Would you favor making Medicare benefits dependent on income, so that higher-income individuals would have to pay a premium for the program or buy private health insurance? Should taxes rise to pay for higher Medicare costs as the baby boomers retire? Leave a comment below!

  1. the United States Congress acted at the last minute:
  2. cuts set to take place:
  3. article from earlier this month:
  4. column published last week:
  5. projects significant growth:
  6. Medicare Privatization:

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