Why is Medicare So Expensive? Episode II

A growing, aging population

Published on October 5, 2012by Abdul El-Sayed

Accounting for 12 percent of the federal budget, and costing $509 billion in total expenditures in 2010, Medicare is a massive expense. In part one of this series, we set out four trends that are key to understanding the rising cost of Medicare.

The undeniably important trend we’ll discuss here is actually a twofer, including both the massive growth of the elderly population between 1965 and present day, as well the vast expanse in life expectancy in the intervening period.

In 1966, the year after Medicare was passed, there were an estimated 19 million beneficiaries. Today, that number looks more like 48 million. In fact, given the aging of the baby boomer generation in the coming decades, the number of Medicare beneficiaries, barring any changes to eligibility, is projected to jump to 81 million by 2030.

The past 45 years have also seen the life expectancy of the average American increase from about 70 years in 1965 to about 78 years today. In other words, the average American today can expect to live about eight years longer than his or her grandparents.

Now, when it was in initially passed in 1965, it was only expected that Medicare would insure the average beneficiary for about 15 years, as that was the average life expectancy for someone who had already lived 65 years. And there were only 19 million beneficiaries.

This sets up some pretty simple math, which we can use to compare the number of people over the number of years the policy was initially intended to cover them in 1965 as compared to today. If the average beneficiary was covered for 15 years, and there were 19 million beneficiaries, then Medicare was on the hook for about 285 million person-years of overall coverage in 1966.

Let’s compare that to today’s scenario. There are 48 million beneficiaries who are covered for an average of 19 years (average life expectancy for adults aged 65 years in 2009), meaning that Medicare is now responsible for about 912 million person-years of coverage, more than three times as much coverage as when Medicare was first passed in the mid-1960s.

So, assuming no changes in the cost of healthcare, demographic changes in the American population alone would account for a three-fold increase in the cost of Medicare.

But there’s another wrinkle to this story. Baby boomers didn’t have nearly as many children as their parents did and the fertility rate continues to fall. Therefore, not only are there more elderly to care for today, but because of the shrinking number of working Americans per beneficiary as a result of lagging fertility, the number of workers paying into the pot per beneficiary is well below what it was in 1965 when Medicare was first passed. In 1965, for example, the ratio of American workers paying taxes to the number of Medicare beneficiaries was about 4.6 to every one. That’s fallen to about 3.4 in 2010, and is projected to fall as low as 2.3 by 2030.

While it’s impossible to decrease the growth in the number of elderly, it is possible to decrease the number eligible for Medicare benefits. In that regard, assuming the program was only intended to support the elderly through the last 15 years of their lives, on average, it might seem justifiable to increase the Medicare eligible age to 69 years, for example, instead of 65. To support that argument, pundits and policymakers point to data that suggest that today’s elderly are substantially wealthier than they were in the past.

In all, this seems like a fair policy at face value. But on closer inspection, the underlying logic is just a tad flawed. It’s clear that along with Social Security, Medicare is an important reason why the American elderly, on average, do not suffer the poverty and social marginalization they did in the past. But that was the point of the policy in the first place, right? It’s like a doctor who’s recently prescribed a new blood pressure pill that has successfully lowered his patient’s blood pressure arguing that because her pressure is now low, she should no longer use the pill.

To be sure, something does need to be done—but there are more effective and efficient ways of addressing the cost albatross. More in the next installment.

Edited by Dana March