The importance of predictable unpredictability in long-term financing of Medicare

Predictable Unpredictability: The Problem with Basing Medicare Policy on Long-Term Financial Forecasting

By Sherry A. Glied, and Abigail Zaylor
The Commonwealth Fund, July 13, 2015

Conclusion: Uncertainty Is Inherent in Medicare Policymaking

Predicting health care costs 20 or 30 — let alone 50 or 75 — years into the future is an inexact science, at best. The costs of providing care depend on future innovations in technology, the value of such innovations to beneficiaries and to taxpayers, and the supply of and demand for health care services. As the Part D experience and the recent cost slowdown suggest, projections of the rate of future technological change are hard to make even in the short run.

The aging of the baby boomers and rising health care costs will plausibly increase the share of GDP devoted to Medicare, but nothing is certain. As we have shown, changes made in the program over the past decade meant that despite substantial expansions of benefits, the financial outlook for the program remained quite stable. The experience of the past 15 years suggests that there is room for considerable optimism about the ability of our nation to afford the Medicare program into the future.

Long-term forecasting uncertainty should make policymakers and beneficiaries cautious about dramatic changes to the program in the near term. The range of error around forecasts of Medicare costs rises as the forecast window lengthens. This suggests that policymakers should focus on the immediate policy window, taking steps to reduce the current burden of Medicare costs by containing spending today. Medicare expenditure policy changes, such as changes in payment rates or methods, can and have taken effect very quickly. Similarly, revenue changes to pay these expenditures occur in real time. Future policymakers are likely to have as much opportunity and much more information than current policymakers to make optimal decisions about Medicare’s future costs.

The challenges of forecasting Medicare costs provide an additional rationale for paying retiree costs through social insurance rather than a defined-contribution system. Individuals simply cannot anticipate what health care is likely to cost after they retire, and they cannot know how much to save against the prospect of these costs. If talented professional actuaries have difficulty making forecasts, then individuals will surely struggle to project what services they will need in the future. As a society, we can decide through the political process to alter policy or payment practices—and we have done so in the past—but such alterations are well beyond the power of any beneficiary.



By Don McCanne, MD

For decades we have been hearing from politicians that Medicare is going broke, especially when looking at long-term predictions. Yet as the years roll by, the predictions are continually revised downward in the short term, demonstrating that the doom and gloom of past predictions were not warranted. Yet since long-term forecasting is uncertain, should we be considering major policy changes in Medicare financing? Specifically, should we consider converting Medicare from a social insurance program to a defined-contribution program as politicians are now suggesting?

Well, no. What we want is is for people to be able to access health care without impairing their personal financial security. The defined-contribution, premium support (voucher) model being proposed is designed to slow federal contributions to the Medicare program by shifting more costs to the beneficiaries. That may help politicians balance the federal budget, but it would increase the risk of financial insecurity for the beneficiaries - the opposite of our goal. Also it would add to the administrative waste that already characterizes our system since it would shift us from the administratively-efficient traditional Medicare program to a system of a market of private plans with all of their wasteful administrative excesses and inequities.

The uncertainty of long-term predictions does not mean that we should ignore the future. In fact, this uncertainty should provide us with greater motivation to establish a more stable infrastructure for health care financing. The obvious would be to establish our own public monopsony - a single payer national health program, an improved Medicare that covers everyone. Although unpredictability is predictable, at least a single payer infrastructure  would ensure all of us access and affordability as future needs and resources are confronted.