Framing the issue
• Medicare already is struggling financially and adding the boomers to the mix will only serve to magnify its challenges.
• Many boomers are not financially prepared for retirement, meaning they may struggle to pay their portion of Medicare costs and any long-term care that is needed.
• Health care reform may come to the rescue if the new clinical and payment models being tested prove to raise efficiency and reduce costs.
The members of the baby boom generation — 76 million strong and aging into retirement quickly — carry the potential to financially rescue or destroy the Medicare program.
The $574 billion government payer already is under pressure in multiple ways, and adding the baby boomers to the mix only magnifies the challenge of keeping the program solvent for future generations.
The trust fund backing the hospital portion of Medicare Part A is forecast by federal actuaries to run out of money in 2026. At the same time, Medicare's physician reimbursement, which flows through Part B, is in flux due to the seemingly endless debate over the sustainable growth rate index. The convoluted physician payment formula has been modified on an annual basis 16 times over the past 11 years, forestalling massive payments. At press time, various congressional committees were eyeballing a long-term solution to the SGR mess. One of the biggest stumbling blocks: how to pay for it. The Congressional Budget Office estimates that repealing the SGR would cost $116 billion over 10 years. Officials from hospitals and other segments of the health care field worry that their payments could be at risk to cover the cost.
More broadly, attention to deficit reduction continues to put Medicare payments in the crosshairs. The deficit is estimated to tally $514 billion in 2014. Meanwhile, Medicare spent $139.7 billion on hospital inpatient care in 2012, according to the Medicare trustees' report.
Despite the fact that the Affordable Care Act trims hospital payments by $155 billion over 10 years — largely from Medicare, although other programs are included — federal budget-cutters have sought to extract even more savings from Medicare, and that trend shows no sign of abating.
Beyond outright cuts to Medicare payments, the ACA and other policy initiatives seek to inject different ideas of paying for care into the system. Bundled payments, accountable care constructs and other programs are being tested to see if they can improve Medicare's value proposition.
The jury is still out on how effective these programs will be, however. RAND Corp. last month issued a report that had assessed 10 years' worth of demonstrations under various value-based initiatives.
"Although the past decade has witnessed a fair amount of experimentation with performance-based payment models ... we still know very little about how best to design and implement VBP programs to achieve stated goals and what constitutes a successful program," the researchers concluded.
Nonetheless, with an estimated 3 million boomers a year reaching age 65 through 2026, policymakers have to continue to reassess how Medicare is run and financed.
"We have to improve what we have and we also have to come up with more efficient models," says Phillip Polakoff, M.D., senior managing director and chief medical executive at FTI Consulting. "The cost of care, the frequency of care and the quality of care are all being challenged. This is a major issue."
Baby boomers are expected to max out as a percentage of the retirement age population by 2029. At that point, the number of Americans 65 and older is expected to be 71 million — 58 percent higher than in 2013 — and 61 million of them will be boomers.
As the percentage of older Americans climbs, it follows that the relative size of the population 65 and younger will shrink, with proportionally fewer income-earners paying into Medicare compared with beneficiaries.
"The next generation that's supporting the older people can't afford it," Polakoff says.
Neither can the boomers. The trend in health care, in general, is to shift more costs onto the patients, but many baby boomers' retirement portfolios were decimated by the downturn in stock prices during the Great Recession, and haven't recovered.
On top of that, many boomers have no idea how much they should have saved to support their intended lifestyle after retirement, and medical expenses often aren't taken into account, says Liz Davidson, CEO of education firm Financial Finesse. "I think there's this fear to find out the truth," Davidson says.
That also means that many boomers who eventually need long-term nursing home care may not have the money when the time comes, creating a financial threat to Medicaid programs, which fund a significant chunk of such care [see story on Page 38].
"There's no question that the influx of the baby boomers remains a significant challenge," says health policy consultant William Scanlon. In a financial cost analysis of Medicare, "you've got the issue of the per capita costs, and then you've got the demographics driving those per capitas," Scanlan says. "The net result is the total spending. What we're worried about is the share of spending as a percentage of our economy."
The trustees that oversee most parts of the program expect Medicare spending as a share of the gross domestic product to rise to 6.1 percent by 2040 from its current 3.6 percent, not including the Medicare Advantage program.
Getting a grip on how big a challenge the boomers might pose is not easy or, perhaps, even possible. "It's a complicated story in a lot of ways," says Jack Hoadley, speaking in his role as a research professor in Georgetown University's Health Policy Institute. [He is a member of the Medicare Payment Advisory Commission].
Broadly, the biggest uncertainty concerns the effort to change the way health care is delivered and paid for. "We are making some fundamental changes to the system for the better, and we have the potential to make more of those changes," Hoadley says.
All the variables make it difficult to figure out what will happen with the program. "When you look at the dynamics, it is a little complicated to think about how it plays out," Hoadley says.
For example, the initial effect of the boomers may be to shift the program's population toward the younger side of the spectrum. "They should actually bring the average per-person cost down a bit," Hoadley says. But later, they will drag the average per-person cost back up, he adds.
Despite the uncertainty surrounding the Medicare program's ability to absorb the baby boom generation, some experts are optimistic things could turn out well.
"Before you can really judge the financial viability of Medicare, you have to think about how successful a lot of today's experiments with [accountable] care organizations will be over time," Hoadley says, encouraing patience. "There are a lot of good ideas out there, a lot of good ideas in play."
A long-term — and bleaker — problem
The members of the baby boom generation were among the first to be given control of their employer-sponsored defined contribution plans, and helped to pioneer online investing.
Though seen as a triumph of individuals over institutions and something anyone can do — remember the E*trade monkey? — boomers have not done a good job of managing their retirement funds. That spells trouble for any plans to shift more of Medicare program costs onto beneficiaries, as well as for Medicaid programs, which funded more than $80 billion worth of care for seniors in 2010.
"There's a presumption that baby boomers are prepared to retire. That's not, in fact, the case for most of them," says Howard Bedlin, vice president of public policy and advocacy for the National Council on Aging. "They haven't really saved. There have been big changes in terms of their pensions. They're probably going to struggle."
Meanwhile, funding of nursing home care poses one of the biggest financial threats to state Medicaid programs and to boomers in retirement; yet, it appears that this fact has not hit home. A long-term care insurance program with fairly generous terms has been a failure for the most part.
The Partnership for Long-term Care insurance program, offered optionally through states, is designed to ease the stress on Medicaid. In states that have adopted the program, residents who purchase private long-term care insurance would qualify for Medicaid long-term care insurance benefits before draining their assets to the usual low levels. The cushion generally would be equal to the benefits they've received.
But a study of the program published in the Journal of Health Economics found that the intended users of the programs — the middle class — largely shunned the opportunity. Only the wealthy responded in a noteworthy fashion, says Jeff Prince, co-author of the study and associate professor of business economics for Indiana University Kelley School of Business.
Adoption of the program by a state boosts the use of long-term care insurance by less than 1 percent among those ages 50 to 69, according to the study.
The problem is a large one. "Long-term care expenses now are at 1 percent of GDP, which is an enormous figure," Prince says.
It's estimated that half of Americans will need long-term care at some point in their lives, but only 10 percent of people 50 or older have coverage, he says.
"As of now, the potential situation is that all these people will spend down their assets on long-term care until they qualify for Medicaid, and then the government is going to have a very large bill on its hands," Prince says. — Paul Barr
There are seven key points to focus on in the effort to salvage the Medicare program and the health care system in general, says Phillip Polakoff, M.D., senior managing director and chief medical executive for FTI Consulting.
1 | Make a commitment to scientific medical research into the aging process.
2 | Increase the supply of medical professionals.
3 | Ensure that personal health is a greater priority.
4 | Use more home-based care.
5 | Better align acute and long-term care.
6 | Establish a more humane and cost-effective approach to death and dying.
7 | Have the political will to sustain those endeavors.
About the series
This is the third installment in Hospitals & Health Networks' yearlong series examining the many ways the nation's roughly 75 million baby boomers will affect the U.S. health care system as they move into old age. The Medicare program, which is at the heart of many of the changes taking place in the industry, will swell in coming years as the boomers hit retirement age. While that will stress Medicare's financial viability, the transition to more efficient models of care may come fast enough to avoid disaster. The series will include articles in the magazine and in our e-newsletter, H&HN Daily. Here's the complete lineup:
The boomer challenge
The financial impact
New care models
Staffing and management
Innovation in facilities and care design