Why the Federal Government Spends so Much on Medicare

Medicare is going broke. Everyone agrees. Spending is rising at almost 8% a year, and the annual budget is now over half a trillion dollars. The program’s cost has more than doubled over the past 10 years.

How did we get to this point? Is Medicare yet another example of government inefficiency? What can we learn from the private sector about how to run it right?

The answer is nothing. When it comes to spending, the private sector is no different. If anything, Medicare does a slightly better job of controlling costs.

A few statistics tell the story.

During the decade between 1998 and 2008, spending per person under private health insurance rose by an average of 7.1% a year. Spending for each Medicare beneficiary rose by less - 6.8%. And much of the Medicare rise was caused by the addition of the drug benefit in 2006. If you take that out, spending rose by only 4.9%.

Looked at another way, the total increase in spending per Medicare beneficiary between 2000 and 2008 was about 85%. And unlike Medicare, this coverage has been steadily shrinking in generosity.

But, overall Medicare costs increased by a much larger amount over the past decade – about 125%. Why is that? The answer is that the program now covers many more people. In 2000, 39.7 people received Medicare. In 2010, the number was 46.6 million. That’s an increase of over 17%.

What makes both Medicare and private insurance so expensive? It is the relentless rise in underlying health care costs. Health spending now represents 17.6% of America’s gross domestic product. In 2000, the figure was just 13.6%. That’s $8,086 per person versus $4,704, a rise of over 70%.

So, Medicare is not a study in government inefficiency. To the contrary, its budget woes closely track those of the private sector. In fact, when it comes to efficiency, it comes out ahead.

Medicare’s costs are driven by forces beyond its control. The number of elderly is growing rapidly, and health care inflation continues unabated.

The lesson of recent history is clear. We won’t find a solution for Medicare costs in the private sector. The only effective strategy is to address the underlying forces. Since the demographic trends won’t change, that means making some tough choices about how to limit spending.

That won’t be easy. Spending less will require sacrifices. Solutions will be complex and will require difficult trade-offs.

Simple responses, like blaming government inefficiency, will get us nowhere.

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