Improving Health Care Cost Projections for the Medicare Population Summary of a Workshop (2010) / Chapter Skim
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Appendix A: Predicting Medicare Cost Growth--John N. Friedman
Appendix A: Predicting Medicare Cost Growth--John N. Friedman
Pages 83-106
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From page 83... ...
INTRODUCTION Health care spending is projected to be just over $2.6 trillion in 2010, accounting for 17.7 percent of GDP. This burden is split almost equally between private payers and the government, making the $912 billion price tag the largest single item of the federal budget and outpacing even the cost of Social Security.
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From page 84... ...
But the sheer speed of past cost growth that demands a policy intervention has simultaneously rendered moot the most direct and widely used forecast strategy of projecting forward past growth. In order to solve this forecasting problem, both the academic literature and relevant government agencies have devoted considerable time, creative energy, and resources to developing models of Medicare cost growth.
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From page 85... ...
First, current forecasting methods tend to obscure the real consequences of the underlying assumptions driving the models. For instance, many extrapolation models build in an exogenous slowdown in long-run cost growth to prevent the health care costs from consuming all of GDP.
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From page 86... ...
In addition, it is likely to be political pressure from high tax rates, rather than consumer pressure from reduced nonhealth care spending, that eventually drives reform. Such politics of health care policy seem an important yet underresearched factor in health care cost growth forecasting.
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From page 87... ...
applied sophisticated timeseries methods to project Medicare cost growth. That paper and others also use the empirical fluctuations in past cost growth to estimate the uncertainty in cost projections, as recommended by Tuljapurkar and Boe (1998)
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From page 88... ...
Assuming that technological growth remains constant over 75 years, however, is a very strong assumption. In the case of Medicare cost forecasting, as the projection window grows, the extrapolation method also runs into the fundamental issue of Medicare cost-growth forecasting, which is that projected costs would grow so quickly that total spending on Medicare would grow to an infeasible share of GDP.
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From page 89... ...
For instance, suppose one wanted to understand the impact of the growth of the elderly population on Medicare cost growth. One would simply vary the demographic projections in the Xt + control variables, comparing the projected cost growth under a high versus low population growth scenario.
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From page 90... ...
Instead of estimating the full transition matrix, microsimulation models often break down the transition from year to year into several steps. For instance, the model might first estimate the probabilities of demographic and socioeconomic transitions, such as income, unemployment, and divorce, as a function of past demographic and socioeconomic variables and past health status.
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From page 91... ...
analyzed the impacts of chronic disease among the elderly, and Goldman and colleagues (2005) considered the impact of improved health status among the elderly on Medicare costs, arguing that the 10 most prominent innovations are more likely to raise costs than to lower them.
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From page 92... ...
Instead, microsimulation models automatically correct for the offsetting effect on heart attacks. Similarly, one could model the simultaneous impact of many different health care reforms or technological innovations by simply changing multiple elements of the transition matrix at once.
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From page 93... ...
models provide a diametric alternative for Medicare cost growth forecasting. This approach directly models the key economic relationships in health care cost growth: demand for health care, supply of health care, and technological growth.
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From page 94... ...
Discussion CGE models present the only approach in the literature that takes seriously the economic relationships involved in health care spending. If health care cost growth will slow one day as a result of natural economic factors, then this type of model is the only current option for predicting such a change.
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From page 95... ...
Similarly, these models cannot allow for changes in the institutional environment, since the model assumes away all but the most basic features of the health care market. POLICy APPLICATIONS I have now discussed a range of methods developed in the literature for projecting Medicare cost growth.
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From page 96... ...
Medicare costs have never grown slower than GDP + 1 over any extended period, although regressions isolating permanent drivers of cost, such as technological growth, tended to produce estimates between 0.8 and 1.5 above GDP. Furthermore, the GDP + 1 assumption remains consistent, with continued growth in nonhealth care spending throughout the 75-year window, and is thus not obviously too large.
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From page 97... ...
Thus, the projections assume future unspecified cost savings on top of an optimistic baseline, giving doubly the impression that less must be done to actually bring Medicare cost growth in check. While CBO typically provides a scenario that includes realistic policy updates, OACT does not (or at least does not publicize it as CBO does)
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From page 98... ...
CBO applies two brakes to the otherwise unchecked forecast growth of Medicare. First, CBO assumes that unspecified policy changes would reduce Medicare cost growth by one-fourth of the reduction in non-Medicare growth.
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From page 99... ...
. As a result, the VA maintains a microsimulation model crafted explicitly toward projecting the health care costs of veterans.
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From page 100... ...
If current trends continue, Medicare spending (net of premiums) would exceed 30 percent by the end of the 75-year projection window.
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From page 101... ...
show that the costs of treating heart attacks has fallen by roughly 1 percent annually, even as the quality of treatment has improved. Yet despite the almost universal agreement of the importance of technology, none of the modeling strategies outlined above, either in the academic literature or the policy world, makes any attempt to actually forecast technological growth and its implications for Medicare costs beyond simple extrapolation.
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From page 102... ...
Many researchers have followed the macroeconomics literature and treated technological growth as a residual remaining after controlling for other factors (i.e., the Solow residual)
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From page 103... ...
However, most CGE models do not model the government sector, so they do not account for the tax burden of rising health care costs. There is some evidence of such political limitations of health care cost growth.
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From page 104... ...
Still, the particular political history of the United States may imply that these political pressures would appear instead much sooner if tax preferences forbid a return to the top tax rates of the pre-Reagan era. CONCLUSION The problem of forecasting Medicare cost growth is an important yet difficult endeavor.
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From page 105... ...
. Disability forecasts and future Medicare costs.
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From page 106... ...
. Technology as a "major driver" of health care costs: A cointegration analysis of the Newhouse conjecture.
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