This Selected Issues paper on the United States analyzes problems in the measurement of output and prices. The paper examines income versus expenditure measures of national output. Sources of consumer price index and findings of the Boskin Commission are discussed, and mismeasurement of output and productivity is analyzed. Developments in productivity across industries in the United States are described. In particular, the paper focuses on the slowdown in aggregate productivity growth that began in the mid-1970s and examines whether this slowdown has continued in recent years and is common across industries.

Abstract

This Selected Issues paper on the United States analyzes problems in the measurement of output and prices. The paper examines income versus expenditure measures of national output. Sources of consumer price index and findings of the Boskin Commission are discussed, and mismeasurement of output and productivity is analyzed. Developments in productivity across industries in the United States are described. In particular, the paper focuses on the slowdown in aggregate productivity growth that began in the mid-1970s and examines whether this slowdown has continued in recent years and is common across industries.

IX. Medicare: Financial Problems and Reform Options1

1. Spending on Medicare has risen rapidly in recent years, consuming a growing share of GDP and the federal budget. Under provisions of the current system, financial pressures on Medicare will intensify in the years ahead, particularly as the baby-boom generation begins to retire. A solution to the longer-term financial requirements of the Medicare system will probably require a combination of increases in the Medicare payroll tax, further constraints on payments to health care providers, increases in the costs paid by the system’s beneficiaries, and some increase in the age of eligibility. In addition, given the uncertainties about how the demand for Medicare services, and the price of medical services, will evolve over time, there may not be a “once-and-for-all” solution for Medicare’s financing problems.

A. Structure of the Medicare System and its Financial Problems

2. The Medicare system comprises two separately financed trust funds: the Hospital Insurance (HI) trust fund, which reimburses health care providers for the costs of inpatient hospitalization, skilled nursing facilities, home health care, and hospice services; and the Supplementary Medical Insurance (SMI) trust fund, which covers services provided by physicians and hospital outpatient services (Table 1). Persons age 65 and over, and most disabled persons are eligible for HI coverage. Funding for HI benefits comes from a payroll tax, with employees and employers each currently paying 1.45 percent of earnings. SMI coverage is optional and available to all people eligible for HI benefits. SMI is financed through federal government general revenues and enrollee premiums, which currently are set at 25 percent of SMI costs through 1998 (the current monthly premium rate is $43.80 per enrollee). Medicare beneficiaries incur other health care expenses reflecting deductibles and co-payments for some services, as well as payments for medical services not covered by HI or SMI.

Table 1.

United States: Medicare Enrollees and Expenditures, According to Type of Service

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Sources: National Center for Health Statistics. Health, United States, 1995; and Medicare Trustees’ annual reports.

Preliminary estimates.

3. Medicare beneficiaries can choose between two kinds of coverage: fee-for-service, in which beneficiaries freely choose their health care providers, and managed-care plans, in which beneficiaries receive services from a network of providers. About 90 percent of current beneficiaries opt for the fee-for-service coverage. Fee-for-service providers are paid directly by Medicare according to an established fee schedule or reasonable costs. Managed-care plans are paid 95 percent of fee-for-service costs, with adjustments for demographic and other characteristics of the plan’s beneficiaries. While managed-care plans limit the choice of providers, they tend to cover a broader range of services and entail less out-of-pocket expenses for beneficiaries.

4. The most immediate financial problem faced by Medicare is the growing deficit in HI In the near term, this deficit can be met by drawing down trust fund assets. However, on the basis of current policies, the Medicare Trustees expect HI expenditures to continue to outpace revenues and to exhaust the trust fund by 2001 (Table 2).2 SMI does not face the same immediate financing problems since it is funded in part from federal government general revenues. Nevertheless, the program’s effect on the federal budget would grow significantly, since current law limits SMI premium increases after 1998 to the rate of increase in Social Security benefits. Hence, based on SMI cost projections, premium receipts would account for a declining share of SMI costs over time.

Table 2.

United States: Income, Outlays, and Balances of the Medicare Trust Funds 1/

(In billions of dollars)

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Source: Medicare Trustees’ annual reports.

Data for 1997 - 2006 are the Trustees’ projections based on their intermediate scenario.

5. The basic financial problems of Medicare reflect the rapid growth in outlays per beneficiary that has occurred over the past two decades. As a percent of GDP, Medicare spending more than doubled between 1975 and 1995 (Table 3, Chart 1, and tabulation below), with the percentage of the population enrolled increasing from 10.8 percent to 13.6 percent. Outlays per enrollee rose by 650 percent over this period, in part reflecting the relatively rapid rate of increase in the cost of medical services (Table 1). However, outlays per beneficiary rose by 60 percent in real terms over the same period, largely owing to changes in program coverage and advances in medical technology which have introduced new treatments.

Table 3.

United States: Medicare Outlays, Income, and Program Gap Projections 1/

(In percent of GDA, unless otherwise indicated)

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Source: Social Security and Medicare Trustees’ 1997 Annual Reports; and Fund staff estimates.

Data for 2000–2070 include the Trustees’ projections (based on their intermediate scenario) for HI outlays, SMI outlays, and HI income. The 2000–2070 projections for SMI income are staff estimates.

CHART 1
CHART 1

UNITED STATES: MEDICARE ENROLLEE AND OUTLAY PROJECTIONS 1/

Citation: IMF Staff Country Reports 1997, 097; 10.5089/9781451839494.002.A009

Source: Social Security and Medicare Trustees’ 1997 Annual Report; and Fund staff estimates.1/ Data for 2000–2070 include the Trustees’ projections (based on their intermediate scenario) for HI and SMI outlays. The number of enrollees is based on the Trustees’ demographic projections.

6. Projections in the Medicare Trustees’ annual reports suggest that, while growth in outlays per beneficiary is expected to slow gradually over the period to 2070, the number of enrollees would rise rapidly to nearly 25 percent of the total population by 2070 (Table 3, Chart 1, and tabulation below). The sharp rise in the number of enrollees, particularly in the early part of the next century, reflects members of the baby-boom generation reaching 65 (Table 4). Accordingly, Medicare outlays are expected to rise from about 2.6 percent of GDP in 1996 to around 4.2 percent in 2010, and double to 8.4 percent by 2070. Medicare income is expected to rise from 2.8 percent of GDP in 1996 to 3.6 percent in 2010 and 5.6 percent in 2070, leaving a rising gap in the program’s finances.3 At the same time, to cover the growing costs in the SMI program (and assuming no changes in the current SMI premium structure), budget outlays to meet the federal government’s share of SMI expenditures would rise from 0.9 percent of GDP in 1996 to 1.9 percent in 2010 and 3.8 percent in 2070 (Table 3 and Chart 2). Hence, the combined financing required to meet projected Medicare costs would rise from around 0.7 percent of GDP in 1996 to 6.6 percent in 2070.

CHART 2
CHART 2

UNITED STATES: MEDICARE INCOME AND GAP PROJECTIONS 1/

Citation: IMF Staff Country Reports 1997, 097; 10.5089/9781451839494.002.A009

Source: Social Security and Medicare Trustees’ 1997 Annual Report; and Fund staff estimates.1/ Data for 2000–2070 Includes the Trustees’ projections (based on their intermediate scenario) for HI outlays, SMI outlays, and HI income. The 2000–2070 projections for SMI income are staff estimates.
Table 4.

United States: Population by Age

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Source: Social Security Trustees’ 1997 Annual Report

7. It should be emphasized that the Medicare Trustees’ projections of the program’s longer-term costs are “best guesses” of medical care costs. In the past, Medicare expenditures have been substantially underestimated because of more-rapid-than expected increases in prices of medical services and demand for health care services. In part, this development has reflected advances in medical technology that have dramatically changed treatment regimes.

Medicare Enrollment, Income, and Outlays

(In percent of GDP)

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Sources: Social Security and Medicare Trustees’ 1997 annual reports; and Fund staff estimates.

B. Options for Reform

8. The Medicare Trustees estimate that measures enacted promptly equivalent to a 4 percentage point increase in the Medicare payroll tax would be required to fill the projected gap in the HI program through 2070. Payroll taxes, however, are already high, and it might not be desirable to address the system’s needs solely through increases in these taxes. Equity considerations would also argue for spreading the burden of financing Medicare across generations. Medicare costs will have to be contained by further efforts to reduce the growth in payments to health care providers and by changing incentives in the system to promote greater efficiency and to encourage beneficiaries to choose lower-cost options. In addition, reductions in benefits also may need to be considered.

9. Measures to shore up Medicare’s short-term financial position are included in the balanced budget agreement reached between the Administration and the Congress in May 1997. The balanced budget agreement stipulates that overall Medicare savings will amount to $115 billion over the next five years ($434 billion over ten years), extending the life of the HI trust fund through 2007. Details regarding the measures to be taken to meet the agreements provision remain to be finalized. Measures are expected to include reforms in payments to medical service providers, a reallocation of home health care services from coverage by HI to SMI, and maintaining SMI premiums at 25 percent of the program’s costs after 1998.4 While these proposal will contribute to lowering Medicare’s costs, they would not redress the system’s long-term financial problems in a substantial way.

10. Limitations on Medicare providers in the fee-for-service sector usually have focused on restraining costs by limiting the increase in the system’s fees under the current practice of periodic “updates.”5 Controlling costs in this way runs the risk of creating incentives for providers to offer a higher volume of services in order to maintain fee income, while beneficiaries do not have substantial incentives to refuse “unnecessary” services. Hence, as past experience suggests, measures to limit the rise in the prices for medical services may not be fully effective in curbing Medicare spending. In the managed-care sector, Medicare’s payments are a fixed amount per beneficiary, giving providers an incentive to enroll relatively healthy beneficiaries who are expected to use fewer services on average. As a result, Medicare may pay more for the typical beneficiary in a managed-care plan than it would have cost for such beneficiaries in the fee-for-service sector. One way to realize savings would be to reduce the reference rate for payments to managed-care plans to attempt to capture at lent part of the impact of this “favorable selection” incentive, by having Medicare reimbursement more directly linked to costs in this sector.

11. Redressing Medicare’s long-term financial viability would require overhauling the structural characteristics of the system in a way that would control costs and provide some incentive for beneficiaries to be more prudent users of Medicare services. Increases in deductibles or co-payments would provide such an incentive for beneficiaries to be more prudent users of Medicare services.

12. Medicare costs also might be reduced by the introduction of some means testing in the program. This could be achieved by raising the premiums or the deductibles that affluent Medicare recipients pay.6

13. A more radical approach would be to convert Medicare into some form of a defined contribution plan under which Medicare would pay a fixed amount annually toward the health care costs of each beneficiary and costs in excess of this amount would have to be paid by the beneficiary. While a switch to a defined contribution plan would make Medicare outlays more predictable, it would shift the risk of unanticipated increases in medical service costs to beneficiaries. For lower-income beneficiaries, this risk would likely be borne by other government programs (in particular, Medicaid), but this could help target benefits more effectively. Converting Medicare into a defined-contribution plan would provide incentives for beneficiaries to be more discriminating, while at the same time fostering greater competition among the various kinds of health care providers. Both of these factors would serve to limit the growth in overall health care costs.

14. Potential savings from limiting Medicare’s cost increases can be quite significant. For example, a permanent 1 percentage point reduction in the annual rate of growth in outlays per enrollee would reduce projected annual Medicare costs by $10.5 billion in 2000, $81.4 billion in 2010, and $785 billion by 2030 (Chart 3).

CHART 3
CHART 3

UNITED STATES: GROWTH PER ENROLLEE AND OUTLAY PROJECTIONS 1/

Citation: IMF Staff Country Reports 1997, 097; 10.5089/9781451839494.002.A009

Source: Social Security and Medicare Trustees’ 1997 Annual Report; and Fund staff estimates.1/ Data for 2000–2070 include the Trustees’ projections (based on their intermediate scenario) for HI and SMI outlays. The number of enrollees is based on the Trustees’ demographic projections.

15. Medicare benefits also might be cut by reducing eligibility. In particular, the age of eligibility might be raised to more than 65 years old over time, reflecting increased life expectancy and paralleling possible increases in the retirement age for receiving full Social Security benefits.7 The Congressional Budget Office developed a scenario based on an increase in the age of eligibility for Medicare from 65 to 70, phased in over the period from 2003 to 2032 (tabulation below). Medicare enrollment as a percent of the total population would be reduced by 4¼ percentage point in 2010, by 4¼ percentage points in 2030, and by nearly 5½ percentage points in 2070. On this basis, Medicare outlays would be reduced by 0.1 percent of GDP in 2010, by 1 percent of GDP in 2030, and by 1¼ percent of GDP in 2070. Larger savings could be realized by either speeding up the phase-in of the increase in the age of entitlement, or by raising it to more than 70 years old.

Medicare Enrollment and Outlays Projections Assuming Age of Eligibility is Raised to 70 by 2032

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Sources: Medicare Trustees’ 1997 annual reports, Congressional Budget Office; and Fund staff estimates.

List of References

  • Congressional Budget Office, 1997a, Reducing the Deficit: Spending and Revenue Options, A Report to the Senate and House Committees on the Budget, March.

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  • Congressional Budget Office, 1997b, Long-Term Budgetary Pressures and Policy Options, A Report to the Senate and House Committees on the Budget, March.

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  • Social Security and Medicare Boards of Trustees, 1996, Status of the Social Security and Medicare Programs, Washington D.C., June.

1

Prepared by Brenda González-Hermosillo and Jeffrey Cole. Additional information is available on request.

2

The Medicare Trustees’ projections reported in this note are based on “intermediate assumptions” which constitute the Trustees’ best estimate of future program income and outlays.

3

The estimated Medicare income includes the Trustees’ projection for HI income and staff’s estimates for SMI revenues which are based on the assumptions of no changes from the current SMI premium structure and a balance in the SMI trust fund that remains constant at the historical minimum level of around 20 percent of SMI costs.

4

While not affecting the overall Medicare income-outlay gap, holding SMI premiums at 25 percent of SMI costs would reduce required federal government transfers to the SMI program by 0.2 percent of GDP in 2010 and by 0.6 percent of GDP by 2070.

5

The Health Care Financing Administration periodically adjusts Medicare’s fee-for-service payments to reflect inflation or cost increases.

6

The Senate Finance Committee had initially proposed to raise the deductibles paid by high income Medicare recipients, but it recognized that there could be significant implementation problems associated with this alternative. The Senate subsequently focussed on the proposal of mean-testing payments for premiums. In particular, the Senate proposed that increased Medicare premiums should be paid by elderly individuals with annual incomes above $55,000 and couples with combined incomes above $75,000.

7

As part of the potential measures to address Medicare’s financial problems, the Senate proposed to raise the program’s eligibility age from 65 to 67.

United States: Selected Issues
Author: International Monetary Fund