The Trustees for Social Security and Medicare released their 2015 Trustees’ Report. Liberal stalwart, Mother Jones, proclaimed how wonderful it was. Political blogger Kevin Drum had an interesting argument showing how long-term medical cost projections were down from a decade ago. However, he also conceded that others think the current slowdown is temporary. Yet, if you look at the report itself the news isn’t very reassuring. In 2000, Medicare spending as a percentage of GDP was just above 2 percent. It’s now about 3.5 percent and will be four percent by 2023.
The percent of GDP spent on Medicare is not projected to exceed 6 percent through 2089 (that supposedly the good news). That is, assuming conditions under “Current Law” actually take place. The Illustrative Alternative report (the report where the actuary says what he believes will actually happen) estimates Medicare spending could be 9 percent of GDP in 2089. That’s about 50 percent higher than under current law projections. Basically, Medicare spending will slow down if Congress does what it’s failed to do for the past 20 years. That sounds like a big “if”. For instance, current law assumes the Independent Payment Advisory Board will remain in place, the reductions to physician fees will remain, as will other Medicare fee reductions.
There is other bad news. In 2014 spending on Medicare drugs was .5 percent of GDP. This proportion will triple over the next 75 years as specialty drugs displace spending on cheap generics [see Part D in Figure II.D1.]. The reality is drug spending could be much higher than estimated. Only a decade ago, there were very few so-called specialty drugs. A couple years ago, one percent of drugs (i.e. specialty drugs) accounted for one-quarter of drug spending. Last year this increased to nearly one-third. By the end of the decade half of drug spending will be on specialty drugs.
Specialty drugs are those drugs that cost from $1,500 to $30,000 per month. Sometimes they cost even more. A course of treatment with some oncology drugs is in the hundreds of thousands of dollars. Specialty drug is not an official classification of the U.S. Food and Drug Administration. Rather, it is used to describe the new generation of high cost treatments and biological agents.
When the Medicare program was created, nobody expected spending to grow by much. Seniors didn’t qualify for Medicare until age 65, many didn’t make it that far. Heart disease was the primary killer of Americans who reached middle age. A doctor once told me cardiology was a dismal profession about the time Medicare began because every patient a cardiologist met would likely die with months. In 1970, annual per capita Medicare spending was only $385. Today it’s above $12,000; and it is projected to surpass $18,000 a decade from now. The point is, medical science will continually advance and create new treatments at ever-increasing prices.
In 1970, payroll taxes and premiums paid virtually all Medicare’s program costs. Only a few decades from now, general revenues will be needed to cover about half of program costs. That’s assuming program costs are constrained to only 6 percent of GPD. That’s scary enough; taxpayers will be on the hook for Medicare spending equal to three percent of GDP. Today, total Medicare spending is about 3.5 percent of GPD, while payroll taxes and premiums cover about 57 percent of that. In the coming years, taxpayers’ burden for Medicare spending will rise from about 1.5 percent of GDP to three percent of GDP. Of course, that assumes the provisions under current law actually take place. Under the Illustrative Alternative, Medicare spending could reach nine percent of GDP. Under that (more likely scenario), taxpayers could find their burden quadrupling from its current level of 1.5 percent of GDP to 6 percent of GDP. That is nothing to celebrate.
One parting thought. The Trust Fund itself is little more than a filing cabinet full of IOUs that are claims on future taxpayers. There really is no Trust Fund in the traditional sense. My colleague, Pam Villarreal, blogged about the Social Security Trust Report here.