Introduction
Social Security, Medicare, and Medicaid are three vital entitlement programs in the United States that provide people with important economic security against the financial risk associated with retirement, disability, and medical expenses. In 2006, the Federal Government spent $1.1 trillion on these entitlement programs; this amount is projected to grow to $1.5 trillion by 2012. In the absence of reforms to either raise more revenue or restrain future spending, excess growth in entitlement spending will need to be offset by reductions in discretionary spending, putting significant pressure on other important programs. As history has shown, there is no uncontroversial way to reform these entitlement programs. Reforms to increase tax revenue will have negative effects on the economy. At the same time, it is crucial that any spending reforms preserve the protection against financial risk that these programs provide. Thus, improving the efficiency of these programs is crucial to slowing the growth of entitlement spending.
This chapter focuses on Medicare. It begins with a brief overview of the program and then examines the main reasons for the projected financial pressures facing Medicare. It concludes with a discussion of ways to improve the efficiency of Medicare spending and thus the long-term financial outlook of this important program. The key points in this chapter are:
1. The projected long-term growth in entitlement spending, including Medicare, is unsustainable because of the pressures it places on future Federal budgets and by implication, on the economy.
2. Medicare spending is growing quickly, primarily because of the demographic shift to an older society and the increases in per-beneficiary medical spending driven largely by new technologies.
3. Rewarding providers for supplying higher quality care and improving incentives for patients to choose higher value care can both increase the efficiency and slow the growth of Medicare spending.