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Will Medicare -- And the Public Option -- Bankrupt Us?


Sen. Chuck Schumer has done a good job tying the public option to Medicare. As the argument goes, Medicare works. People like it. It holds down costs better than the private sector. It's familiar to Americans. The public option is a bit like a Medicare option (though more in John Rockefeller's amendment than in Schumer's), and why shouldn't Americans have that?

The reply from Republicans has been swift and clean: Medicare is going to bankrupt us. The program is going broke. Its projected spending will swallow up the federal budget. To allow that once is an accident. To allow it twice is pure foolishness.

They have a point. Medicare is going broke. It will bankrupt us. Case closed! Except for one thing:

So will private-sector health care.

The story here is simple. You've heard it a thousand times. Health-care costs are growing more quickly than wages or GDP growth. Much more quickly, in fact. If that trend isn't arrested, there's only one outcome: Costs will overwhelm us. That's true for Medicare and true for the rest of the health-care system.

The relevant question, then, is not whether Medicare will bankrupt us, but will it do so more quickly than private health-care insurance? The answer here, too, is simple: no. Between 1970 and 2000, annual per-enrollee spending growth was 11.1 percent for private health insurance and 9.7 percent for Medicare. Between 2000 and 2004, Medicare's costs grew 6.7 percent per person while private health insurance costs grew by 9.5 percent.

Medicare's rate of spending will bankrupt us, but more slowly than private health insurance. Which would give us more time to figure out a fix.

Graph credit: Center on Budget and Policy Priorities.

By Ezra Klein  |  September 29, 2009; 4:11 PM ET
Categories:  Health Reform  
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Next: Schumer: 'We Don't Have 60 Votes.'


Sorry Ezra, its the wrong day for that. Today's argument is that Medicare doesn't pay doctors enough and we can't cut Medicare Advantage because of the great service it provides.

Posted by: endaround | September 29, 2009 4:28 PM | Report abuse

Ezra - You've left out a big part of the story here. So per capita spending in MEdicare has grown more slowly than in the private sector? Don't you think that is a direct result of the cost shifting that Medicare engages in -- underpaying providers and forcing the private sector to cross-subsidize? Didn't you post a chart that showed exactly this trend just last week? And didn't that chart show that in 2000 Medicare paid at 99% of cost and now it only pays at 91%?? Wouldnt't this perfectly explain why Medicare's spending growth is slower since 2000 - it's pushing more costs onto private insurance.

This cost shifting is not the same as cost control. A public plan that cost shifts in the same way as Medicare is hardly a solution.

Posted by: mbp3 | September 29, 2009 4:31 PM | Report abuse

I can be wrong here, but Liberals need to 'get over' the fight for Public Option. As is as Rasmussen Poll shows, barely 40 to 45% Americans support the reform in thecurrent form.

With the failure of both public options, Sen. Schumer defeat is for surely tough one to swallow; at least couple of GOP votes can come. But that is possible only if:
- Dems systematically overcome resistance from Seniors on Medicare Advantage (can AARP help here?);
- Obama still does some more public 'selling' and private 'arm twisting' of Congress folks.

Otherwise, this whole debate is dragging on and on with a possibility of getting nasty surprises. GOP is not going to sit quite with their hands on their laps.

Best course for Dems is to 'rally around' Baucus proposal (with additional help to lower middle class and other non-cost improvements like exchange enhancements), hold their noses and vote this sucker.

Tax, budget deficits, financial regulations, energy bills and foreign policy - agenda is too crowded and already Obama / Dem Congress is down with the payment of around 45% to 50% of time available till next Congressional election.

Indeed time is running out and America can ill afford to simply keep on discussing this issue till cows come home. Time to wrap up is now.

Posted by: umesh409 | September 29, 2009 4:35 PM | Report abuse

"The relevant question, then, is not whether Medicare will bankrupt us, but will it do so more quickly than private health-care insurance?" The answer is yes, if Medicare/Medicaid enrollment grows as it has done recently. In 1980, only 23.3% of the population received such coverage, whereas 29.0% received such entitlements in 2008 [US Census data].

Interestingly, the definition of "uninsured" has also changed during the same time period. A person is now considered uninsured if he has "only", for example, full-coverage insurance through the Indian Health Service or Department of Defense. These aren't tiny populations and cause a tilt in the data.

Posted by: rmgregory | September 29, 2009 4:38 PM | Report abuse

Ezra, I know you know the difference between "costs" and "reimbursements" because you've outlined it in a previous post. If you cut reimbursements enough…you will end up with large groups of healthcare providers who simply refuse to take Medicare.

Posted by: kingstu01 | September 29, 2009 4:40 PM | Report abuse

The disadvantage of using the popularity of Medicare as an argument for the public option is that it creates the notion that public option = free insurance, or at least heavily subsidized. Since the proposals are that the option would have to be self sustaining, except that enrollees would be eligible for the same subidies that they could receive for a private sector plan, the argument that a public option would bankrupt the government has no logic (not that that's going to stop anyone from making it, but just sayin')

Posted by: exgovgirl | September 29, 2009 5:00 PM | Report abuse

Yes and...

I guess it had to happen eventually.

Ezra, I have been a regular reader for over a year. I have almost always highly respected your opinions and pieces.

For the first time that I can ever remember, you have not lived up to your usual standard with this post- it is a real shame.

Post misleading stuff like this a few more times and I think you will have only yourself to blame.

It's your reputation to tarnish- sad.

Posted by: mcgreivy | September 29, 2009 5:34 PM | Report abuse


Next time be more balanced in your analysis. I know that you are a bleeding heart liberal, but let's be honest with the analysis.

Medicare doesn't control costs. It cost shifts to the private sector. There's plenty of academic / empirical evidence. You love those ivory tower economists, no? Stop being selective with your analysis.

Maybe you should go to graduate school.

Posted by: RandomWalk1 | September 29, 2009 5:59 PM | Report abuse

medicare is not free.

Part B can cost participants up to $300+ a month not to mention the Part B Deductible. Part A has a $1035 deductible ( i think that's the right number) but that is free. Part D does have premium costs depending on the carrier who offers it.

No matter how you put it, Medicare in any of its options is not free, nor should it be.

Schumer did a better job of trying to sell it than Rockefeller who was just oblivious to the facts. He was either misleading or dumb.

Posted by: visionbrkr | September 29, 2009 5:59 PM | Report abuse


Republican1: "Medicare costs too much."
Republican2: "Medicare doesn't spend enough."

logic fail

Posted by: zosima | September 29, 2009 6:11 PM | Report abuse

"So will private-sector health care."

This is verifiably wrong. Continued cost growth in the private sector will lead to fewer people with employer-based coverage, and an increase in the uninsured. We can be pretty sure that the private sector won't continue to provide coverage for employees if it will bankrupt them. And the data from the past decade supports that this trend has begun.

That isn't a good outcome either, obviously. But its a very different outcome with a different solution-- like federally regulated insurance based on affordability and value. The uninsured will be a lot less concerned about losing access to low-value care it they can afford insurance that covers only high-value care.

The point is Medicare is going to bankrupt us. Private insurance won't. Different end games with different solutions. I see the solution on the private insurance side. I don't see how Medicare doesn't bankrupt us.

Posted by: wisewon | September 29, 2009 6:16 PM | Report abuse

Wisewon –

I agree that private insurance will not bankrupt us since it will first protect itself by effectively ending insurance for most people or by creating insurance structures that effectively deny insurance to all but the most wealthy. What private insurance would do instead of leading to bankruptcy is eventually lead to loss of access to health care for most Americans, unless it is reformed drastically. That is the clear trend based on history.

I think I agree with your contention that we need federally regulated insurance based on value and affordability, presuming that you don’t mean creating insurance systems that achieve affordability through price rationing using deductibles or other structures that price access to health care out of reach for low income and for lower middle class people, and eventually for even upper middle class people.

I am making the assumption that you are talking about value and affordability in terms of eliminating medical care that is either ineffective or cost ineffective, in order to concentrate spending on care that is effective.

Given those assumptions, it appears you are endorsing an approach nearly identical to the Dutch system, which is based on use of private insurance exclusively, except for long term care which is paid by the state. The private insurance is closely regulated by the Dutch state, including risk equalization, price controls and benefit controls, prevention of cherry picking, required guaranteed issue, and subsidies for low income people to buy insurance.

Basically, the Dutch system is Wyden-Bennett on steroids.

There is an excellent description of the Dutch system in The New Republic:

Interestingly, the Dutch have the highest level of satisfaction with their health plan of any country in the world in polling.

I am not totally convinced that it will be any easier to implement the necessary cost controls through government regulation of insurance than directly through Medicare and Medicare-like plans, but if it is more palatable to centrists, and as such is more politically attainable, I am all for it.

Posted by: PatS2 | September 29, 2009 10:17 PM | Report abuse

wisewon has some very good points. Also if people will notice private insurance used to be PPO plans that were rich not more than 5-10 years ago. Now most plans are HMO based plans that started that way 2-5 years ago. Then HMO based plans with cost-sharing in network that is commonplace now. How long before HSA's are the only option that insurers offer? I'd expect we're 3-5 years from that and at the same time the reforms (assuming they pass) will add in changes in payment structure that should address costs as well. HSA's are what insurers do for their employees. In a roundabout way we're moving back to the indemnity days with cost of living increases in deductibles.

Posted by: visionbrkr | September 29, 2009 11:00 PM | Report abuse


There are a couple of models in Europe that I think serve as good examples including Germany and Switzerland.

I think its much more helpful to focus on Wyden-Bennett. This should have been the bill, it was a better than bill anything else proposed over the past two years. One of my major macro points is that Obama decided that the public option was going to be his issue with some political risk in this debate, rather than the decoupling of insurance from employers which is the major political hurdle with Wyden-Bennett. That was a huge mistake. My major lament with the public option is that its been a huge distraction, not politically likely, and most importantly, policy-wise, inferior to Wyden-Bennett.

I'm under no illusion that this route won't still be significantly challenging in constraining costs. There's still a long way to go. But as I wrote earlier, I see the path to the end. Not with Medicare. The same story plays out, with the two parties switching roles based on who's in power: ruling party proposes reasonable constraints on Medicare, minority power scares on "cutting Medicare," ruling party caves under political pressure. And this is when the ruling party actually has the courage to propose something in the first place, knowing how this is likely to play out. Not a recipe for success, and only the risk of true financial insolvency will change this dynamic. That's probably 15 to 25 trillion in additional debt-- not a recipe for success.

Posted by: wisewon | September 30, 2009 7:04 AM | Report abuse

PS I do think that targeted cost-sharing based on a) value-based determinations for interventions (e.g.cost-effective ones have little/no co-pay, with a couple of tiers higher) b) visits to health care providers based on quality metrics (e.g. best docs in one tier, average in middle/largest tier, worst docs in third tier), are critical to driving competition on price and quality. I'd be in favor of giving CREDITS to low-income people via an HSA to pay for these co-pays-- save the money for later in your life, or use now as you see fit.

There are good, creative ways of doing this to use price sensitivity the ways we want that also don't bankrupt citizens. Couple the above with universal vouchers on a sliding-scale and you see where I'm going. This would be part of Wyden-Bennett II. That's the path I'm talking about.

Posted by: wisewon | September 30, 2009 7:12 AM | Report abuse

From Uwe Reinhardt on the economic sustainablilty of Medicare:

"If economic sustainability," then exactly what do people have in mind with that phrase? During the past 4 decades or so, the long-run, smoothed average annual growth rate in real (inflation-adjusted) GDP per capita has been about 2%. Suppose that fell to only 1.5% for the next four decades. The current average real GDP per capita of about $40,000 would then grow to about $72,500 by 2050 in constant-dollar terms. Medicare now absorbs about 3% of GDP, leaving a non-Medicare real per capita GDP of $38,800. It was estimated by the CBO about a year ago that Medicare will absorb about 9% of GDP by 2050. Let’s make that 10%. At these numbers, the non-Medicare real GDP per capita available to today’s little critters who will run America in 2050 will still be close to 70% larger than is our current non-Medicare GDP per capita."

Posted by: lensch | September 30, 2009 8:43 AM | Report abuse

Here is some more data:

From MedPac: 98.6% of physicians will accept new Medicare patients. Also, there is no correlation between the amount a hospital receives from Medicare and the amounts they charge private insurers, i.e. hospitals with lots of Medicare patients do not "shift" more costs to private insurance than those with few Medicare patients.

From Pew: 59% of physicians support some kind of single payer health care plan. Could this be because Medicare quickly pays them and saves them money on adminstration and time spent fighting for themselves and their patients?

Posted by: lensch | September 30, 2009 9:53 AM | Report abuse

Wisewon --

Personally, I agree with you, with the caveat that Wyden-Bennett needs way more in the line of cost controls, way more in the line of controls on insurers, and to completely forget the idea of HSA's, which only work well for those in the top quintile of income. Maybe that's what you mean by Wyden-Bennett 2. Unfortunately, the same foes trying to crush the current bills are lining up against Wyden-Bennett as well, with the unions, who love employer health care, thrown in. That is the main reason why it is not under consideration now -- it has even LESS support than the admittedly flawed current plans.

I agree with you about the near impossibility of reform of Medicare. The Republicans, as David Frum points out, have let their eagerness to deal Obama a defeat destroy any future traction they might have had for Medicare reform. That has always been a problem for Democrats.

The only solution I can see in terms of cost control is to uncouple it from politics as much as possible, a goal shared by Obama and by many others close to the health care reform process in the administration. The trick is going to be to get politicians, on both sides of the aisle, to give up the power, and the huge largess of those lobbying for benefits under that power, to block reform.

Posted by: PatS2 | September 30, 2009 12:41 PM | Report abuse


I am a physician. We take Medicare as a public service in my group. The pay is horrible/break even. They pay quickly, but there is a lot of fraud as a result. Pete Stark's committee found 300 million dollars in fruad I believe (thats Million, not BILLION as the president seems to conceive the size of these numbers).

Second point, 59% of physicians do not support a one payer option. I question that poll. IBD has one schewed the other way, and it likely has flaws as well, but I know of very few physicians in my state who think this is a good approach. Don't put too many eggs in that basket.

Posted by: Egon3 | October 1, 2009 12:31 AM | Report abuse

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