A federal advisory panel has determined that the inflation assumptions underlying projections for Medicare spending need to be revised. The implication is that the hospital insurance trust fund, which pays the hospital bills of Medicare beneficiaries, will be depleted by 2021 rather than 2025. Further, it had been assumed that health care costs per beneficiary after 2025 would grow at the same rate as GDP, but the panel suggests that health care costs will grow 1 percent faster each year. The reason for the revision is that advances in medical technology have increased the cost of health care. Although some procedures are less intrusive, safer, and cheaper, such as the removal of a gall bladder through a few small incisions, the number of people having the surgery has increased, driving up costs.
Future generations are likely to demand more technology.
Cutbacks in payments to health care providers and the crackdown on fraud have helped to restrain the rise in health care costs. Managed care also reduces inefficiencies. However, it is unlikely to stem the introduction of new technology. Draw a supply and demand diagram of the market for Medicare-funded health care. Mark the initial equilibrium price and quantity.