Medicare and the Economics of an Aging Population

Written By Nicholas Djoulia

Hi Everyone. In this post, we'll examine how Medicare is financed, why healthcare costs for seniors keep rising, and what policy levers exist to address it.

Structure of Medicare

Medicare is a health insurance program that serves as the primary source of health coverage for Americans 65 years of age or older. But what do you know about the different parts of Medicare and how the program is funded? Who does Medicare serve? And how does rising healthcare spending affect Medicare? Let’s dig into how Medicare works. Different Parts of Medicare Have Different Sources of Funding. Medicare is divided into four different parts. Hospital insurance (Part A) is funded mostly through a payroll tax. Medical insurance (Part B) comes from two primary sources: premiums and federal revenue. Medicare Advantage (Part C) and prescription drug coverage (Part D) were created in 2003 under the Medicare Modernization Act. Medicare Advantage plans allow enrollees to receive their Medicare benefits through private insurance companies. Part D helps Medicare beneficiaries pay for prescription drugs. Medicare drug plans are run by private insurance companies.

Why Costs Keep Climbing

What causes health care spending to increase? Health care spending has grown each year for the past several decades at a rate that outpaces the growth of our economy. There are a few drivers of this growth. First, Americans are living longer and have access to medical technology that can keep them alive. However, these treatments don’t always come cheap. Specialty drugs, for example, can carry eye-popping price tags. While doctors and nurses help people live longer by treating illnesses like cancer and diabetes, they also developed treatments that allow people with debilitating diseases and chronic conditions to live longer. But taking care of these conditions isn’t cheap, either. Insuring millions of doctors, hospitals, and other health care providers across the country also comes with its challenges. Every insurer has different billing methods and rates, which creates administrative costs that countries with universal healthcare systems do not have.

When Will the Medicare Trust Fund Run Out of Money?

Just as Social Security has an estimate for when the program will become insolvent, Medicare’s Trustees estimate when the Medicare Hospital Insurance Trust Fund will not be able to pay full benefits. Parts B and D aren’t in the same situation as Part A because they don’t rely on a trust fund that could run out of money. Part B is funded by general revenue and premiums. The premiums have increased year over year, while Part D is funded by premiums as well.

Drug Pricing as a Flashpoint

One of the most consequential recent policy shifts has been allowing Medicare to negotiate prices directly with pharmaceutical manufacturers for select high-cost drugs, a power the program was historically barred from exercising. Recently Congress gave Medicare the ability to negotiate drug prices with pharmaceutical companies. Previously, Medicare wasn’t able to negotiate for lower drug prices. While this allows Medicare to get medications for lower costs, some argue this will stifle research and development into new drugs.

What’s at Stake for Seniors and Communities

Health care drives economic growth, and Medicare is no different. Hospitals, clinics, and local healthcare workers rely on Medicare beneficiaries as a source of income. If there aren’t enough residents in the area enrolled in Medicare to pay bills, clinics may close their doors. While the program is intended to benefit seniors, the entire community relies on Medicare.

References

Nicholas Djoulia
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Social Security's Solvency Crisis