Drug Benefit Costs 1 Percent of GDP by 2030 (If CBO is Right)
Jeff Lemieux
6/25/2003

Both the House and Senate Drug bills will permanently raise Medicare spending.  Even without a new drug benefit, Centrists.Org estimates that Medicare spending will grow from 2.2 percent of GDP in 2000 to 5.6 percent by 2030.  Based on CBO's preliminary estimate of S.1, Centrists.Org projects that the drug benefit would raise Medicare spending by about 1 percent of GDP in 2030, to 6.6 percent.  The cost of the House bill would probably be similar.  However, both bills could end up costing significantly more, as Congress may decide to add funds to smooth over political or workability problems.  Neither bill shows significant promise for long-term competitive reforms that could slow cost growth, although that potential does exist.

Most people know that the Congressional Budget Office (CBO) estimates both the House and Senate Medicare bills will cost approximately $400 billion over CBO's 10-year estimating period.

What people may not know is that CBO is likely to project that in both the House and Senate plans, the growth in Medicare spending will assume a permanently higher trend.  So the cost impact of these bills is more than a one-time bump.  It is a permanent acceleration of spending growth.

Centrists.Org's 30-year budget baseline shows Medicare spending growing from 2.2 percent of GDP in 2000 to 5.6 percent in 2030, after the boom generation has retired and joined the rolls.  Assuming passage of the Senate drug benefit, and assuming the CBO cost estimate is accurate, Medicare spending would grow to 6.6 percent of GDP instead.  Centrists.Org's long-term projections simply extend the CBO estimate, using standard economic and demographic assumptions.

However, CBO's estimate could easily be understated, because both House and Senate bills contain political compromises and structural problems which will likely result in higher-than-expected costs in the future.  It is not unreasonable to presume that either bill could cost twice as much as CBO currently predicts.

The Senate Medicare drug bill contains a few small, cost-saving Medicare reforms.  For example, it would raise the Part B deductible slightly, and the savings are included in the CBO estimate.  The House bill also has some small savings provisions, plus a tentative movement toward a federal employees-style competitive premium calculation system late in the decade.  However, because the competitive system -- which has the potential for significant cost savings over time -- is phased-in so late in the 10-year budget window, we don't know if CBO will assume any slowing in the long-term trend growth of Medicare spending. 

It is reasonable to assume that the competitive system was mostly an afterthought, intended to pacify fiscal conservatives.  The House Republican leadership's heart doesn't seem to be in it, and to an outside observer, the signal is:  Don't expect real cost savings anytime soon.

Both the House and Senate bills attempt to create a new program for private health plans known as Preferred Provider Organizations or PPOs.  If PPOs became widespread in Medicare, and if Medicare's faltering HMO program reverses course and attracts HMOs back into partnership with the government, then the conditions for a future competitive system -- with private plans competing with a government-run Medicare plan unshackled from Congressional micromanagement -- would be in place.

However, at this time, the PPO and HMO programs are so tenuous, and the prospect of a future competitive system is so remote, that Centrists.Org assumes the best estimate of the drug bills is to simply continue the basic CBO estimate beyond the 10-year budget period, using baseline economic and demographic assumptions.

Congress has much more work to do before cost estimators will be confident competitive systems will be in place in the future to slow the growth of Medicare spending.

Links:
Centrists.Org No-BS Politically Realistic Budget Baseline (updated 6/22/2003 for probable enactment of a Medicare drug benefit)

Will the Senate's Medicare PPO Program Work?  (June 11, 2003)

CentristPolicyNetwork.Org CBO's Blurry Medicare Estimates (June 20, 2003)