LTC Bullet:  Facing Facts on Medicare and LTC Financing 

Tuesday, May 23, 2006 

Seattle-- 

LTC Comment:  Advocates of government-financed health care muster every imaginable argument that Medicaid and Medicare are in less financial trouble than they truly are.  Another such effort debunked, after the ***news.*** 

*** MEDICAID COMMISSION.  Steve Moses's "LTC Embed" reports from the LTC policy front at the sixth Medicaid Commission meeting in Dallas last week are available to Center for Long-Term Care Reform members in The Zone at http://www.centerltc.com/members/ltc_embed_reports.htm.  His overview of the meeting and the status quo of Medicaid LTC policy, which we expected to publish this week as an LTC Bullet, will instead come out in the July issue of Health Care News, a national newspaper published by the Heartland Institute (http://www.heartland.org/). *** 

*** NOT YET A CENTER MEMBER?  No access to The Zone?  That's easily remedied.  Simply contact Damon at 206-283-7036 or damon@centerltc.com.  He can sign you up and have you in The Zone today.  Individual dues are $150 per year; corporate memberships are negotiable.  Thanks for your support. *** 

 

LTC BULLET:  FACING FACTS ON MEDICARE AND LTC FINANCING 

LTC Comment:  For many years, the Concord Coalition has warned that unfunded liabilities in America's social insurance programs, unless fixed soon, will cause huge economic problems in the future.  Recently, a Census Bureau report that cited evidence of declining disability among the elderly was interpreted by some analysts to suggest that Medicare, and by inference Medicaid long-term care, face less fiscal danger than previously believed.  That Pollyannaish viewpoint is eloquently dismissed in the following article by Richard Jackson, republished with permission from Facing Facts, a quarterly newsletter published by the Concord Coalition.  Read this excellent resource online at http://www.concordcoalition.org/facing-facts/2006/FacingFacts-060515.pdf?emc=intellicontact&m=2595021&v=1003173080&l=2.  Subscribe at http://concordcoalition.org/email-signup.html.  

Tip for LTC providers, insurers, and reverse mortgage lenders:  If you ever thought future demand for your services might decline as health and disability rates of the elderly improve, this article disproves that concern.  Good news about aging goes hand in hand with good news about health and financial services for the elderly . . . if, but only if, public policy turns away from government financing and toward private financing of acute and long-term care.  Here's more evidence of that fact. 

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Richard Jackson, "The Improving Health of the Elderly:  No Magic Bullet for Medicare," Facing Facts Quarterly, Vol. 2, No. 2, Spring 2006, pps. 2-3. 

A recent Census Bureau report, 65+ in the United States: 2005, is attracting considerable attention for its finding that the incidence of chronic disability among the elderly has been declining for at least two decades.  A number of media stories have interpreted this welcome news to mean that the future cost of government health-care spending on the elderly may be less than anticipated.  "Census Bureau Foresees No Crisis Over Aging Generation's Health," a front-page article in the New York Times declared on March 10.   

The notion that improvements in the health of the elderly can magically solve the problem of rising government health-care expenditures is not new.  In recent years, some academic demographers, using the same data highlighted in the Census report, have tried to argue that the declining incidence of elder disability will reduce future Medicare spending well beneath what the trustees currently project. 

The good news about declining rates of disability appears to be real.  Unfortunately, the conclusion that this trend will lead to slower than projected health-care spending growth rests on a stunning series of mistaken assumptions and logical fallacies.  The truth is that major reform may be needed merely to keep future costs from vastly exceeding current projections.  

Magic bullets are always seductive, especially when they seem to promise that we can avoid cuts in popular senior entitlement programs.  Before politicians latch onto this one, let's set the record straight. 

Mistaken Assumptions 

The facts are as follows.  According to the Census Bureau study, the share of Americans aged 65 and over "with a substantial limitation in a major life activity" fell from 26.2 percent in 1982 to 19.7 percent in 1999.  The Census Bureau also reports that the share of elders in nursing homes declined over the same period.  Although a variety of factors contributed to falling nursing home residency, including the more widespread availability of subsidized home-care services, the decline in disability may have played a role.   

While these findings appear sound, the upbeat conclusions based on them are not.  The notion that declining rates of elderly disability will improve the long-term health-care cost outlook rests on three mistaken assumptions:  first, that the decline will necessarily continue; second, that a declining incidence of disability automatically reduces health-care spending; and third, that this reduction (if indeed it exists) will cut future spending beneath current projections.  

The first assumption ignores one of the most fundamental distinctions in demographic analysis-that between lifecycle and cohort trends.  Just because disability is declining among today's elderly does not mean that it will be declining among tomorrow's, who belong to a different generation with different lifetime experiences.  The best indicator of the health of 70 year olds twenty-five years from now is not the health of 70 year olds today, but the health of 45 year olds.  And here the trends are anything but encouraging.  In fact, due in part to the growing epidemic of obesity, disability rates have risen sharply since the early 1980s among adults in their thirties and forties.  If this trend continues, many experts warn that the recent decline in disability among the elderly could be reversed as Boomers begin to cross the threshold of old age. 

The second assumption, however plausible at first glance, violates the most basic rule of logical inference-namely, that correlation is not causation.  Think about it.  Just because Americans who own jacuzzis tend to pay above-average taxes doesn't mean that if fewer people buy jacuzzis tax revenue will decline.  By the same token, just because disabled elders tend to consume more health-care services than nondisabled elders doesn't mean that if fewer elderly become disabled health-care spending will decline.  

For one thing, the disabled are not homogenous.  Some consume much less health care than others, and the decline in elderly disability may be concentrated among this less expensive group.  Recent research suggests that this is what is happening.  According to a 2003 Urban Institute study, most of the decline in elderly disability since the early 1980s has been concentrated at "the lower end of disability" among elders residing in the community.  Meanwhile, the average level of disability among the more severely disabled elderly, whether in the community or a nursing home, actually rose. 

For another thing, less disability may or may not mean less morbidity.  People are classified as "disabled" if they are unable to perform at least one basic "activity of daily living"  (such as bathing or dressing) or one "instrumental activity of daily living" (such as shopping or managing money).  Even as the share of elderly with such limitations declines, the share with expensive medical conditions could be constant or rising.  In other words, Grandma may be getting around better but still be seeing the doctor as often as before.  

Once again, there is evidence that this is what is happening.  Even as disability rates among the U.S. elderly have fallen over the past two decades, the share of elders with serious chronic conditions, from arthritis and diabetes to hypertension and heart disease, has risen. (See the table on the following page [table omitted from this LTC Bullet version, see the original online].)  Researchers have also documented the same divergent trends-falling disability and rising chronic morbidity-in a number of other developed countries.   

If falling disability really did portend slower future cost growth, we might expect it to have moderated past cost growth as well.  After all, the trend has been underway for at least two decades, and perhaps much longer.  But in fact, since Medicare was founded, real spending per beneficiary has risen at the blistering average annual rate of 5 percent.  The rate over shorter periods has varied significantly around this long-term trend.  But so far, every period of slower growth has been followed by a renewed spending surge-even as measured disability has steadily declined.   

Looking at the record, one can easily imagine a causal relationship between changes in rates of disability and health-care costs that is exactly the reverse of what the disability optimists assume.  Indeed, perhaps the consumption of a high and rising volume of health-care services is the very reason that the elderly have become less disabled.  

It is certainly possible that the decline in elderly disability really has saved money, and that without it health-care spending on the elderly would have grown still more rapidly than it has.  But even supposing this to be true, it does not follow that a continuation of these savings would cut future costs beneath current projections.  

This brings us to the third mistaken assumption.  In the near term, the trustees' Medicare projections are based on an extrapolation of historical trends in Medicare spending-which means that they implicitly factor in a continuing decline in disability.  Beyond the next decade, the trustees project that the growth in real spending per beneficiary will decelerate, eventually falling to just 2 percent per year, or about the rate of GDP growth.  If real per beneficiary spending continues to rise at its historical rate of 5 percent, Medicare's cost would grow to 15 percent of GDP by 2040, nearly double what the trustees project.  The official projections thus not only take into account the existing trend toward better health for older Americans, they assume vast additional savings. 

A Fantasy 

Experts have long debated whether health spans will rise along with life spans as the population ages.  One school of thought (the "compression of morbidity" theorists) believes they will-and that, eventually, we may see the ills of old age relegated to a brief period of declining vigor at the very end of life.  Another school (the "failure of success" theorists) argues that the principal effect of modern medical science has been to increase the number of "marginal survivors" in the population, and that as life spans rise so too will rates of chronic morbidity.  

Although a final verdict is not yet possible, the preliminary evidence suggests that both schools may be partially right.  On the one hand, the incidence of chronic morbidity among the elderly appears to be rising.  On the other hand, rates of disability are declining-which is another way of saying that the functional health of the elderly is improving. 

The latter development is certainly good news-and not just for older Americans personally.  The decline in rates of disability could have important economic and social benefits as well.  It may help ease the burden on family caregivers.  It could also allow work spans to grow along with life spans, which will be crucial for maintaining economic and living standard growth as the age wave rolls in.  

To this good news, however, we must add two caveats.  The first is that the recent improvements in the health of the elderly may not continue unless the worrisome rise in disability now underway among young and middle-aged adults is reversed.  The second is that, even if they do, it is a fantasy to think that they will have much impact on future costs.   

Medicare spending has risen inexorably over the past few decades, even as rates of disability have declined.  Obviously, there are other forces at work here-from the continuous introduction of new medical technologies to the rising average age of the elderly to cost-blind reimbursement.  "Good health," moreover, is not a fixed goal.  It is a subjective standard that rises over time as society becomes more affluent, less tolerant of bad health or risk, and more secular-that is, more apt to see happiness in the here and now as life's ultimate goal.  As this expanding concept of health interacts with medical advances, it is transforming the practice of health care.  While once it meant an occasional visit to the doctor, it is fast becoming a lifelong process of diagnostics and fine tuning in which any extra dollar spent is likely to confer some perceived benefit.  

Even in long-term care, where the prospects for savings may be greater, any positive impact from declining disability could easily be overwhelmed by other developments.  The demand for long-term care, after all, is highly sensitive to a host of socio-demographic factors, especially the number of family caregivers available to help each dependent elder.  Today's elders typically have several surviving children.  But when Boomers grow old in their turn, they will be much more likely to have only one child or no child-or to be never-married, widowed, or divorced.   

The Inevitable Trade Offs 

Politicians are naturally averse to unpleasant policy choices. As such, they are eager to hear that the Medicare problem is smaller than the official projections tell us. In fact, it is bigger, not smaller.  In the end, there will be no way around reforms that compel us to make trade offs between spending more on health care for the elderly and other priorities, from a more effective national defense to a cleaner environment to a better education for our kids.  [Table in the original omitted.  See online version at http://www.concordcoalition.org/facing-facts/2006/FacingFacts-060515.pdf?emc=intellicontact&m=2595021&v=1003173080&l=2.] 

Richard Jackson writes on public policy issues arising from the aging of America's and the world's population.  He is currently a Senior Fellow at the Center for Strategic and International Studies, where he directs the Global Aging Initiative, an Adjunct Fellow at the Hudson Institute, and a Senior Advisor to the Concord Coalition.  Jackson is the author of numerous policy studies, including The Graying of the Middle Kingdom:  The Demographics and Economics of Retirement Policy in China (CSIS and Prudential Foundation: 2004); The Aging Vulnerability Index (CSIS and Watson Wyatt Worldwide: 2003); and The Global Retirement Crisis (CSIS and Citigroup: 2002).  Jackson regularly speaks on long-term demographic and economic issues and is often quoted in the press.  He holds a B.A. in classics from SUNY at Albany and a Ph.D. in economic history from Yale University.  He lives in Alexandria, Virginia, with his wife Perrine and two children, Benjamin and Brian.