What if technology never stops improving? Medicare's future under continuous cost increases.

I. IntroductionIn discussing the future of Medicare, it is commonplace to remark on the ominous demographics that will begin to affect the financing of the program as the baby boom generation retires. Even after allowing for immigration, the population of beneficiaries is projected to grow at twice the rate of the workforce after the Depression-era Baby Bust works its way through, and temporarily brightens, the trust fund balance.1 The number of under-sixty-five worker-taxpayers per beneficiary will fall nearly in half by mid-century,2 and so financing of both the Part A trust fund and Part B general revenues will be a challenge, and there may have to be "cuts" in some aspects of the program.This gloomy conventional wisdom, however, misses a major point. The fact is that, adjusting for economy-wide inflation, there is very strong reason to believe that the Medicare program could avoid cuts in benefits and still be able to finance the cost of the baby boom generation with little or no increase in taxes. The increasing productivity of workers and the associated economic growth could, in principle, offset the demographic time bomb. The trend on taxable Medicare payroll per worker has inched upwards over the 1990s because of the expansion of the tax base to all non-capital income and the striking improvement in the productivity of American workers.3 Improvements in tax base per worker are, if anything, even stronger for the general revenues that fund Part B because those taxes could tap both profits and capital gains as well as higher worker wages.4 Roughly speaking, estimates of tax base growth per worker have increased to 1% per year, up from forecasts of 0.7% or less in the early 1990s.5 Because the Medicare population will grow at about 2% per year after 2015 and the worker population will grow at about 1%, the trend in tax base per worker is almost exactly what is needed to offset the difference.6 One should perhaps add an additional adjustment for growth in medical input prices in excess of overall prices (or wages), but this addition is relatively small on a per-year basis and is sustainable with either good luck in economic growth or modest tax rate increases.7Why, then, is there so strong a belief that the sky will eventually fall? The answer is that it seems quite unrealistic to forecast zero growth in real Medicare spending. Historically, real expenditures (deflated by the CPI) per beneficiary have grown at rates of 4% to 5%.8 Even the seventy-five-year projection by Medicare's actuaries puts the rate at 3%, 1% faster than the rate of growth of real Gross Domestic Product per capita.9 The new technology is presumably beneficial, at least in the aggregate.10 Cost trends in total spending are similar for those over and under age sixty-five, with slightly slower Medicare growth attributable primarily to lower growth in Medicare physician payments." If Congress included prescription drug coverage (the segment of medical spending with perhaps the steepest increase in technology and (in recent years) spending)12 as a covered benefit, then Medicare spending growth per beneficiary that accommodated new technology would probably be at or above the top of its historical range.The real policy questions for Medicare in the long run then are: (1) What rate of future growth in technology and associated cost do the citizens want Medicare to achieve?; and (2) can Medicare feasibly raise the resources to fund that growth? A benchmark here would be the rate of growth in the private sector, so another version of the question this Article addresses is whether one can expect Medicare to continue to keep up with the private sector in both technology and cost.I will argue that, as currently structured, Medicare definitely should not, and probably will not, be able to keep up with the private sector given plausible political models. Instead, monetary concerns will compel Medicare to adopt a policy more similar to Medicaid in those states that are budget constrained, with either explicit administrative decisions to ration out beneficial but overly costly technology, implicit decisions about reimbursement that have the same effect, or a delegation of that dirty job to contracted private insurers, HMOs, and other entities. …