How Would Social Security Changes Affect Medicare Costs and Seniors Out-of-Pocket Spending?

Transcription

1 How Would Social Security Changes Affect Medicare Costs and Seniors Out-of-Pocket Spending? Melissa M. Favreault The Urban Institute 17 th Annual Joint Meeting of the Retirement Research Consortium August 6-7, 2015 Washington, DC The NBER Retirement Research Center, the Center for Retirement Research at Boston College (CRR), and the University of Michigan Retirement Research Center (MRRC) gratefully acknowledge financial support from the Social Security Administration (SSA) for this conference. The findings and conclusions are solely those of the authors and do not represent the views of SSA, the National Institute on Aging, any agency of the federal government, the CRR, or the Urban Institute. Favreault gratefully acknowledges funding from the National Institute on Aging (R01AG034417, Principal Investigator: Michael E. Chernew) for the larger model on which this work is based. Michael Chernew, Thomas G. McGuire and Laura A. Hatfield, all from the Department of Health Care Policy at Harvard University Medical School, provided much of the theoretical and empirical framework that underlies these analyses. A panel of technical advisors provided additional input into the model specification. The panel included Todd Caldis and Liming Cai of the Centers for Medicare and Medicaid Services, Paul Fronstin of the Employee Benefits Research Institute, Joseph Newhouse of Harvard University, and Robert Reischauer and Stephen Zuckerman of the Urban Institute. All errors are solely those of the authors.

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3 Introduction Under current law, Medicare cost shares are expected to increase faster than incomes for Social Security beneficiaries (Johnson and Mommaerts 2010). Some hypothesize that as beneficiaries pay more for health care, they may ultimately demand less of it, with important implications for the long-range sustainability of the Medicare program and beneficiaries economic well-being. For example, Part B premiums, which are today deducted directly from Social Security payments, were less than 2.6 percent of the average Social Security benefit in By 2014, this had increased to closer to 8.3 percent. Adding in Part D premiums, the average Medicare beneficiary can at present expect to pay close to 10.8 percent of his or her Social Security benefit on Medicare premiums. Since 2007, higher-income beneficiaries have begun to pay more through Medicare s income-related premium. These provisions currently affect about 5 percent of Medicare beneficiaries, and this share is expected to increase modestly in coming decades (Cubanski, Neuman, Jacobson, and Smith 2014). 1 Further, Medicare s benefit package is incomplete. Most Medicare beneficiaries purchase supplemental insurance to cover some of these gaps (Medicare Payment Advisory Commission 2015). Beneficiaries pay premiums for this coverage and make out-of-pocket payments to providers, including in the form of deductibles and copayments. This point-of-service (nonpremium) spending varies greatly by age, disability status, insurance type, and income. McArdle, Stark, Levinson, and Neuman (2012) point out that Medicare is not as highly subsidized as typical large-employer health insurance plans that cover many working-age adults. 2 We explore how Social Security adequacy and income adequacy more broadly are likely to shift as Medicare continues to require larger income shares from most retirees using baseline assumptions (Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 2014, Shatto and Clemens 2014). We then examine the effects of alternate cost growth trajectories on these patterns. Although health care 1 Starting in 2018, these cost shares for higher income beneficiaries will increase further as a result of recent legislation. 2 At the same time that Medicare premiums and cost shares represent an increasing, substantial share of income, the program still offers older and disabled adults in the U.S. extensive protection at subsidized rates. Although historically payroll taxes have comprised most of Medicare s income and financing has expanded to include revenue from taxation of Social Security benefits and an additional Medicare tax, Medicare receives general revenue transfers (Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 2014). Such subsidies have likely limited income effects within Medicare to date (McGuire 2014).

4 spending growth has slowed markedly in recent years, the future trajectory remains uncertain, with important implications for families and the nation s fiscal health (Auerbach, Gale, and Harris 2014, Cutler and Sahni 2013, Elmendorf 2013). We next examine the effects of changes to Social Security to improve long range fiscal balance. For all the options, we look at outcomes at various points in time, over two- and threeyear periods, and also from age 65 to death. These longer-range analyses contribute to growing literatures on lifetime health care costs (Alemayehu and Warner 2004, Bhattacharya and Lakdawalla 2006, Gaudette, Tysinger, Cassil, and Goldman 2015, Rettenmaier 2012, Spillman and Lubitz 2000) and the persistence of high spending (Garber, MaCurdy, and McClellan 1998, Pauly and Zeng 2004, Riley 2007). Methods and data We integrate a sophisticated model of beneficiary insurance choice and spending, including income effects and demand response, into the Urban Institute s Dynamic Simulation of Income Model (DYNASIM). An appendix to our forthcoming paper describes this model in detail (Hatfield, Chernew, Favreault, and McGuire forthcoming). 3 DYNASIM has the capacity to project total retirement incomes and capture changes to Social Security, taking into account ongoing changes in the composition of the Medicare and Social Security beneficiary populations. We calibrate many of the model s projections to the intermediate demographic and economic assumptions of the 2014 Social Security Trustees Report (Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds 2014). The model incorporates an extensive array of socioeconomic differentials and takes into account interdependencies between outcomes (for details, see Smith, Favreault, and Johnson 2014). Results Our baseline projections show that Medicare significantly protects beneficiaries, especially those who survive to very old age. The program s financing structure is highly progressive. Nonetheless, older adults with relatively low incomes pay much larger shares of 3 At this model s heart is a technology parameter that reflects innovations in medical care. Demand for innovations can be dampened when families devote large shares of income toward health costs. We estimate model parameters using data from the 2007 through 2009 Medicare Current Beneficiary Survey (MCBS) and draw key conceptual parameters from the literature.

5 their income on health services than those with higher incomes. We project this burden to increase steadily in coming decades. High costs are not uncommon and are frequently persistent. Faster cost growth would further increase the burdens on lower-income families. Similarly, Social Security benefit reductions that affected lower-income households would leave many families paying very large shares of their remaining income on health. Shifts toward lower-cost providers would provide limited offsets to the increased costs for some families. Policymakers should be cognizant of the pressure that such scenarios could exert on families as well as government coffers. References: Alemayehu, Berhanu, and Kenneth E. Warner The Lifetime Distribution of Health Care Costs. Health Services Research 39(3): Auerbach, Alan J., William G. Gale, and Benjamin H. Harris Federal Health Spending and the Budget Outlook: Some Alternative Scenarios. The Future of U.S. Health Care Spending Conference. Engelberg Center for Health Reform at Brookings. Bhattacharya, Jay and Darius Lakdawalla Does Medicare Benefit the Poor? Journal of Public Economics 90: Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Cubanski, Juliette, Tricia Neuman, Gretchen Jacobson, and Karen E. Smith Raising Medicare Premiums for Higher-Income Beneficiaries: Assessing the Implications. Issue Brief. Kaiser Family Foundation. Cutler, David M. and Nikhil R. Sahni If Slow Rate of Health Care Spending Growth Persists, Projections May Be Off by $770 Billion. Health Affairs 32(5): Ehrlich, Isaac and Yong Yin Equilibrium Health Spending and Population Aging in a Model of Endogenous Growth: Will the GDP Share of Health Spending Keep Rising? Working Paper Cambridge, MA: National Bureau of Economic Research. Elmendorf, Douglas W Comment on Is This Time Different? The Slowdown in Healthcare Spending. Presentation to the Brookings Panel on Economic Activity.

6 Garber, Alan M., Thomas E. MaCurdy, Mark B. McClellan Persistence of Medicare Expenditures among Elderly Beneficiaries. In Alan M. Garber, editor, Frontiers in Health Policy Research, volume 1. p Gaudette, É., B. Tysinger, A. Cassil, and D. Goldman Health and Health Care of Medicare Beneficiaries in Los Angeles and Washington, DC: USC Leonard D. Schaeffer Center for Health Policy and Economics, Center for Health Policy at Brookings. Hatfield, Laura, Michael Chernew, Melissa Favreault, and Thomas G. McGuire. Forthcoming. Long-term health care spending growth will burden low-income Medicare beneficiaries. Johnson, Richard W. and Corina Mommaerts Will Health Care Costs Bankrupt Aging Boomers? Washington, DC: The Urban Institute. McArdle, Frank, Ian Stark, Zachary Levinson, and Tricia Neuman How does the benefit value of Medicare compare to the benefit value of typical large employer plans? A 2012 update. Issue Brief , The Henry J. Kaiser Family Foundation. McGuire, Thomas G A Note on Income Effects and Health Care Cost Growth in Medicare. Forum for Health Economics and Policy 17(1). Medicare Payment Advisory Commission. 2015a. Health Care Spending and the Medicare Program. Data Book. Washington, DC: Medicare Payment Advisory Commission. Pauly, Mark V., and Yuhui Zeng Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance. In David M. Cutler and Alan M. Garber, editors, Frontiers in Health Policy Research, Volume 7. MIT Press. Rettenmaier, Andrew J The distribution of lifetime Medicare benefits, taxes and premiums: Evidence from individual level data. Journal of Public Economics, 96 (9-10): Riley, Gerald F Long-Term Trends in the Concentration of Medicare Spending. Health Affairs 26(3): Shatto John D. and M. Kent Clemens Projected Medicare Expenditures under Current Law, the Projected Baseline, and an Illustrative Alternative Scenario. Baltimore, MD: Department of Health and Human Services, Centers for Medicare & Medicaid Services, Office of the Actuary. Memorandum dated July 28. Smith, K. E., M. M. Favreault, and R. W. Johnson Projecting Financial-, Health- and Disability-Related Measures in the Dynamic Simulation of Income Model (DYNASIM3). Spillman, B. C., and J. Lubitz The Effect of Longevity on Spending for Acute and Longterm Care. New England Journal of Medicine 342(19):