2005 February 09 Wednesday
New Medicare Drug Benefit Estimate $724 Billion

Cost projections for the US Medicare drug benefit keep rising.

When the plan to help seniors cope with skyrocketing drug costs passed Congress in 2003, the advertised price was $400 billion over 10 years. Two months later, the Bush administration “revised” the estimate to $534 billion. Now, Medicare officials project the cost to be $724 billion from 2006 to 2015, its first full decade.

The Bush Administration played games by using a 10 year total cost that included 2 years during which the drug benefit did not even exist.

The new figure for years 2006 through 2015 is much higher than the $534 billion cost calculated for years 2004 through 2013. That’s because under the previous decade-long projection, the benefit did not exist for two of the 10 years.

The chief actuary of the US government's Centers for Medicare and Medicaid Services (CMS) was silenced by the Bush Administration to prevent Congress from learning how expensive the drug benefit was going to be before the bill creating it was voted on.

Rick Foster, CMS’s top actuary, said last year he would have been fired if he provided his price tag of the Medicare bill as it was working its way through Congress.

The projected yearly costs in 2014 and 2015 show an increase of over 10% from one year to the next.

The new estimates show spending of $98 billion in 2014 and $109.2 billion in 2015. That reflects more beneficiaries, more prescriptions being filled and inflation, said Medicare administrator Mark McClellan.

Imagine what the Medicare drug benefit money could have accomplished if instead the money had been allocated to increasing basic and applied biomedical research. Allocated to the NIH it would have more than quadrupled the NIH's budget.

The United States is peaking as a world power because rising medical costs are going to eat the federal budget and rising taxes to pay for medical costs are going to choke future US economic growth. The Medicare drug benefit alone has a bigger unfunded liability than Social Security. The United States is going to become like Europe with a slower rate of economic growth and a less motivated workforce working many fewer hours per year at paying jobs as high marginal tax rates make work less financially rewarding and less attractive.

I see only one way to avoid economic stagnation: fund medical research to discover cheaper ways to treat and cure illnesses.

Because of the financial crisis building up in the Medicare program Tyler Cowen argues for indexing Social Security to inflation rather than to wage increases.

3. It is necessary to freeze social security benefits only because Medicare is in future fiscal trouble. Social security itself can keep on going at current levels with only marginal adjustments, if we so choose. But broader fiscal problems loom, as Bush's critics so correctly and frequently remind us. Medicare, of course, benefits the elderly. We would not be freezing social security benefits to throw a giant party for the young. I will admit that if we can solve the Medicare problem (I don't know how to), we can drop my social security proposal. I will also admit that my social security proposal is only one drop in a much bigger bucket; other reforms and spending cuts will be needed also. Many of these burdens should fall on the young, which will make the relative effects fairer to some degree.

4. The projected growth in Medicare implies a huge shift in relative resources devoted to the elderly. A gradual freeze of social securty benefits should be viewed in this broader context. The net flow of resources is still very much toward the elderly.

Tyler also argues that the indexing should be to the inflation rate that the elderly experience for their market basket of goods. But this proposal brings up an obvious question: Is it reasonable to assume that the inflation rate for the mix of goods and services the elderly purchase is less than the rate of increase of wages for the working population? To put it another way, do the elderly spend so much out-of-pocket for medical treatments that the inflation rate for their market basket of goods and services is higher than the rate at which wages increase?

What is the rate at which, for example, the price of nursing home care is going up? The rising average age of the elderly is increasing the fraction of them that need nursing home care. For example, half of the people over the age of 85 have Alzheimer's. (Alzheimer's would be, btw, a very cost effective disease on which to spend research money to find a cure.) So even if the cost of a year of nursing home care does not go up faster than the overall rate of inflation isn't the amount of nursing home care purchased per elderly person going up so fast that the elderly are really experiencing rapidly rising costs of care?

An argument can be made for lowering monthly Social Security payments for people in their 60s and early 70s and then increasing the payments in their 80s and 90s to pay for the more expensive forms of care that the elderly need as they become more frail and cognitively impaired.

Update: One factor that may work in favor of proposals to change Social Security indexing from wages to inflation is that most Americans incorrectly believe that the cost of living has been rising more rapidly than wages over the last 20 years.

Perhaps most significant, about seven in 10 Americans believe that the cost of living has been rising faster than wages over the past 20 years, although the reverse is true. This belief probably shapes policy preferences: The same percentage wants to peg initial Social Security benefits to the cost of living, as Bush reportedly wants, instead of the current formula, which pegs them to wage increases. That change would result in significantly lower guaranteed benefits for future generations, according to both supporters and opponents.

Of course in some parts of the country housing costs have been rising faster than wages. But does a larger fraction of the people in those parts of the country which have rapidly rising housing costs report that wages are not keeping up with inflation? Also, do people who have medical insurance through their jobs perceive a faster or slower rate of rise in costs than those who pay medical insurance payments directly? What is behind these perceptions?

Share |      By Randall Parker at 2005 February 09 11:40 PM  Economics Health

gcochran said at February 12, 2005 12:13 AM:

Bush has threatened to veto any attempt to rein in this ghastly program. If he were a sleeper, how would he act differently?

Proborders said at February 18, 2005 4:29 PM:

Taxes could be raised. If all earned income were subject to Social Security taxation, the additional taxes collected could be used to pay for a variety of programs. See http://www.lasvegassun.com/sunbin/stories/sun/2005/feb/17/021700706.html?

Perhaps millionaire seniors should not be eligible for the prescription drug benefit. The government should help financially needy seniors buy prescription medications, however.

Jake said at July 18, 2005 8:27 AM:


To give an insight on your third-to-last question, I have been told for as long as I have known economics (not that long - 5 years) that the inflation numbers are incorrectly calculated.

This mainly comes from my father who claims that not including ENERGY and real estate costs distorts inflation significantly - especially in recent years. However, he is a rather Dooms-Dayish predictor.

Also, does anyone know where do to find real wage statistics? I've looked on BLS and BEA, but have had no luck.

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