Increases in Spending per Beneficiary
Real growth in Medicare spending per beneficiary has averaged about 4 percent per year between 1996 and 2006, roughly 2 percentage points greater than real per capita growth in GDP. For the Medicare Trustees Report, the Medicare actuaries assume that the annual growth rate of Medicare spending per beneficiary during the period between 25 and 75 years from now will decrease to equal the growth rate of GDP per capita plus an average of 1 percentage point. In addition to this so-called "intermediate" assumption, these actuaries also consider a "low-cost" assumption, in which annual Medicare spending growth equals per capita GDP growth and a "high-cost" assumption, in which annual Medicare spending growth equals per capita GDP growth plus 2 percentage points.
One way to evaluate the affordability of these projected increases in Medicare spending is to consider the effect of applying this growth rate to overall medical spending in the United States and examine the resulting growth in consumption of all other goods and services in the future economy (that is, nonmedical consumption). One study estimated that applying the intermediate assumption of long-term medical spending growth, equal to the growth rate of per capita GDP plus 1 percentage point, would still result in positive real growth in the level of nonmedical consumption over the next 75 years. However, the high-cost assumption of long-term medical spending growth, equal to the growth rate of per capita GDP plus 2 percentage points (and, as noted above, roughly equal to the growth rate of Medicare spending in recent history), would cause the level of real nonmedical consumption to increase only until year 2040 and decrease thereafter. During the period between 2010 and 2040, an average of over 60 percent of the annual increase in income would be allocated toward health care spending.
Research suggests that most of the increase in medical spending over time has been driven by the advent of new technologies. New technologies make available new treatments, some of which are more effective than others. Research also suggests that the increased medical spending has, on average, resulted in improvements in health with additional value exceeding the additional costs. For instance, the real cost of treating heart attacks increased by about $10,000 for Medicare beneficiaries between 1984 and 1998, driven by technological advances such as catheterization and angioplasty. Life expectancy for heart-attack patients increased by about 1 year during this same period. Although it is difficult to measure the value of human life and it is not clear that this relationship is causal, an estimate of the value of these added health benefits is about $70,000, far in excess of the added costs.
Economists have suggested that an increase in medical spending over time is not necessarily problematic, in and of itself, so long as the marginal benefits exceed the marginal costs. A simple cross-national comparison of the fraction of GDP devoted to health care spending suggests that the United States is a high-expense outlier relative to other developed countries. However, it is plausible that the marginal benefits of improved health are dependent on income, so that as a country's GDP increases, it may be rational for that country to devote a relatively higher share of its GDP to health care. This perspective suggests that it may make sense for the United States to spend more than other countries because it has higher per capita income and health care can be a valued use of those higher resources.