Medicare's Rising Popularity Brings Increasing Costs

Policy Experts Examine Program in Advance of 50th Anniversary

May 26, 2015 11:07 am Michael Laff Washington, D.C. –

During an Alliance for Health Reform panel discussion, Karen Davis, Ph.D., director of the Roger C. Lipitz Center for Integrated Health Care at Johns Hopkins University, discusses potential policy changes that could strengthen Medicare in the future.

As it approaches its 50th birthday in July, Medicare is widely hailed as a success by those on both sides of the political aisle.

Medicare provides a baseline of health insurance coverage for one of the nation's most vulnerable populations, but as politically popular as it is, there is an aspect of the program that some policymakers are reluctant to discuss: its soaring cost.

Medicare has undergone numerous changes since its passage in 1965. Eligibility expanded in 1972 to include individuals with a disability. Prescription drug coverage was added in 2006. Launched as a publicly funded program, Medicare now includes commercial insurers through Medicare Advantage.

In one sense, however, Medicare is a victim of its own popularity and success. As more people enroll and medical costs increase, the program costs more. Analysts and insurance executives addressed some of the obstacles to sustaining Medicare during a recent discussion( hosted by the Alliance for Health Care Reform.

Story highlights
  • Medicare has reduced the proportion of uninsured elderly individuals from 48 percent before its passage in 1965 to 2 percent today.
  • Often known simply as health coverage for seniors, Medicare has undergone numerous changes since its passage.
  • Life expectancy rates for individuals aged 65 increased by five years because of Medicare.

On the positive side of the ledger, Medicare has reduced the proportion of uninsured elderly individuals from 48 percent before its passage to 2 percent today. Seniors have a higher rate of access to care than do younger individuals. And life expectancy for people aged 65 has increased by five years.

"Individuals are living longer with chronic illness," said Samuel Nussbaum, M.D., EVP of clinical health policy and chief medical officer for Anthem Inc. "That is one of the highlights of care in our nation compared with other (advanced) nations."

Nussbaum said that some policymakers are concerned that Medicare is not addressing costs, coordination of care, high levels of waste or improved health outcomes. Rising spending on Medicare and Medicaid takes away from education and other social needs that influence health, he noted.

Stuart Guterman, M.A., vice president for Medicare and cost control at the Commonwealth Fund, acknowledged that Medicare will be a "big driver in federal budget concerns in the future," but said it's overplayed as a budget line item.

"We have to remind people that it is a social program that is very important and very popular," said Guterman.

In 2013, Medicare spending( accounted for 14 percent of the total federal budget, with $583 billion paid out in benefits. Overall program costs are growing along with the aging population, but the growth has slowed recently,( and spending per beneficiary actually declined slightly from 2013 to 2014.

"Medicare spending rates are growing at the lowest rate in history. We don't know why or whether that is permanent," said Karen Davis, Ph.D., director of the Roger C. Lipitz Center for Integrated Health Care at Johns Hopkins University. "I think it does relate to the transformation efforts (to move to alternative payment models). It preceded the ACA (Patient Protection and Affordable Care Act), but the ACA accelerated them (declining rates)."

One area where costs are increasing is pharmaceuticals. For instance, Medicare spent $4.5 billion on new medication for hepatitis C infection( in 2014, 15 times what it spent for treatment in 2013.

Furthermore, although the price tag for new cancer drugs is rising by 25 percent each year, their overall effectiveness remains limited. Since 2012, 13 new cancer treatments were approved by the FDA, but only one extended survival by six months. Two new treatments extended life by just four to six weeks. Yet the average monthly cost of the new treatments is $5,900. One in three chemotherapy patients is receiving treatment that is inconsistent with medical evidence, said Nussbaum.

Costs to Beneficiaries

Medicare reduced the total out-of-pocket expenses for seniors from 56 percent in 1966 to 13 percent today, according to Davis.

To curb federal spending, there are calls for beneficiaries to contribute more, but seniors are already carrying a substantial out-of-pocket cost. Overall, Medicare beneficiaries spend 22 percent of their income on premiums and other medical costs, according to Davis. Individuals whose incomes range between 135 and 149 percent of the federal poverty level spend 45 percent of their income on premiums and related costs.

To encourage patients to become cost-conscious, Medicare could share savings with beneficiaries by eliminating the deductible in Part B for individuals in a patient-centered medical home, Davis said, and premiums could be reduced for patients in a high-value physician network.

Alternative Payment Models

A long legacy of paying for procedures is contributing to increasing costs, yet Richard Gilfillan, M.D., president and CEO for Trinity Health, noted that Medicare is a leader in initiating payment reforms.

"We have a delivery system that is totally adapted to being paid for fragmented care," said Gilfillan, a former director of the Center for Medicare and Medicaid Innovation. "Care has gotten better and people are living longer, but it's wildly expensive and inflationary and we can't afford it. Now we're faced with changing a delivery system that is adapted to doing it this way."

He said some accountable care organizations (ACOs) are struggling to report savings because they are conditioned to the fee-for-service payment model.

And physicians are critical of the administrative requirements for incentive payment programs that sometimes include 32 different performance measures. Gilfillan said that figure is far too high and leaves practices striving to meet targeted performance measures rather than simply provide better care. He suggested that ACOs and other payers limit the number of performance measurements to four or five.