Research Brief

Key Findings

  1. Medical innovations will improve health and extend life, but they will probably increase, not decrease, Medicare spending.
  2. Eliminating any one disease, with the possible exception of obesity, will not save Medicare money mainly because of valuable life extension.
  3. Better prevention could decrease costs and improve health, but the value of specific prevention efforts reflects both clinical outcomes and demographic trends.

Policymakers face the challenge of understanding and managing future Medicare spending. Under current projections, it will rise from 2.6 percent of gross domestic product today to 9.2 percent in 2050. Demographics will be a key factor: The first wave of baby boomers turns 65 in 2010. But what if some biomedical advance revolutionizes medical practice? What if a cure were found for one of the deadliest diseases? What if the health status of the elderly continues to improve? What if prevention efforts become more effective? Would such changes ease Medicare’s financing problems?

To answer such questions, a team of economists and physicians from the RAND Corporation, Stanford University, and the VA [Veterans Affairs] Greater Los Angeles Healthcare System explored how changes in medical technology, disease, and disability would affect health care spending for the population age 65 and older. Their key findings: Medical innovations will result in better health and longer life, but they will likely increase, not decrease, Medicare spending. Eliminating any one disease will not save a great deal of money, but reducing obesity might be an important exception. Also, prevention efforts focused on the most important risk factors for disease, especially those requiring costly treatments, could be very cost-effective.

Figure 1. Approach to Modeling the Future Health and Spending of the Elderly

Approach to Modeling the Future Health and Spending of the Elderly

SOURCE: Goldman et al., 2005, Exhibit 1, used by permission.

Health Care Spending Per Medicare Beneficiary (2005 dollars)
2000 2015 2030
Scenario A
Uses information about the health of younger cohorts
$10,929 $11,000 $11,206
Scenario B
Assumes new cohorts have the same health status as 1990 cohorts
$10,852 $10,725 $10,850
Scenario C
Assumes continued improvement in the health status of the elderly
$10,852 $10,459 $10,275

Figure 2. Total Medicare Spending Under the Three Scenarios, 2002-2030 (2005 dollars)

Total Medicare Spending Under the Three Scenarios, 2002-2030

SOURCE: Based on Exhibit 5 from Goldman et al., 2005.
NOTE: Dollar figures are inflated from 1999 to 2005 using the medical Consumer Price Index.

Modeling the Future

Economist Dana Goldman and his colleagues developed the Future Elderly Model (FEM), a demographic and economic model to predict future costs and health status for the elderly (see Figure 1). The model uses a representative sample of approximately 100,000 Medicare beneficiaries age 65 and over drawn from the Medicare Current Beneficiary Surveys, national surveys that ask Medicare beneficiaries about chronic conditions, use of health care services, medical care spending, and health insurance coverage. Each beneficiary in the sample is linked to Medicare claims records to track actual medical care use and costs over time.

The model begins with the health status of the sample in the current year; estimates the medical services they will use; and simulates the change in their health and functional outcomes, including death, over the course of the year. One of the important innovations of this model is its incorporation of information about the health of younger cohorts that will eventually age into Medicare. Specifically, a new set of 65-year-olds is added every year through 2030, and their health is also predicted based on the health of younger cohorts as described in the National Health Interview Study, another national survey. Rolling the model forward year after year makes it possible to predict medical costs and health status far into the future.

The research team used FEM to explore how future Medicare costs might be affected by health status trends, medical innovations, reduction of chronic diseases, and the number of elderly who are obese.

Effects of Health Status on Medicare Spending

The health of the population over age 65 has been improving since the early 1980s. But recent increases in chronic disease, obesity, and disability suggest that future Medicare beneficiaries might be less healthy than current ones. To understand the net effect of these trends on Medicare spending, the research team used the model to estimate the health of future Medicare beneficiaries under three sets of assumptions.

  • In scenario A, the research team forecast the health of new beneficiaries using all the information available, including the health of younger cohorts. This is the scenario the team deemed most credible.
  • In scenario B, the team assumed that entering cohorts would have the same constellation of diseases and disabilities as the healthy cohorts from the 1990s; this scenario ignores information about disease and disability in younger cohorts.
  • In scenario C, the team assumed continued improvement in the health status of the entire elderly population and of the entering cohort; this scenario has the most favorable assumptions for Medicare spending.

The team found that lower disability rates do translate into lower health care costs per beneficiary (see Table 1). Under Scenario A, in which the estimate uses information about the health status of younger cohorts, spending is projected to be $11,206 per beneficiary in 2030. In the more optimistic Scenario C, spending per beneficiary is 8 percent lower at $10,275.

However, total Medicare spending under these three sets of assumptions does not differ very much. As Figure 2 shows, by 2030, Scenario A and Scenario B differ by only 2 percent per year. Even under the most optimistic assumptions (Scenario C), the cost savings are only 6 percent.

The reason is simple: Cumulative Medicare spending is relatively unaffected by the health status of new beneficiaries because healthier people live longer. Thus they have more years in which to accumulate costs.

There is another reason that lower disability rates do not translate into lower overall Medicare spending. FEM was used to examine relative spending on the disabled over time. During the period 1992 through 2000, medical spending grew most rapidly among the least disabled community-dwelling elderly. Thus, reducing disability rates will not result in substantial Medicare savings, not only because beneficiaries who live longer have more time to accumulate medical costs, but also because spending increases are greater among less-disabled beneficiaries.

Effects of Technological Innovation on Medicare Spending

The discussion above assumes that the practice of medicine will not change significantly in the coming decades. But what if it did? How might technological innovation affect future Medicare spending?

To identify technologies to examine, the analysts conducted a systematic literature review and then elicited consensus from panels of distinguished experts in cardiovascular disease, cancer and the biology of aging, and neurologic disease — the three clinical domains in which innovations were judged to have the greatest potential effect on health status and costs. The team chose to analyze the 10 technologies that the experts thought were most likely to be widely adopted (see the sidebar).

The team assessed how each innovation affected spending and life years saved over the period 2002-2030, assuming that each innovation was fully adopted by 2002. Table 2 highlights the researchers’ key findings. Several striking patterns emerge.

Table 2. The Effects of Selected Medical Technologies on Spending and Life Years

Technology Annual Treatment Cost, 2030 (billions of 2005 dollars) Percentage Increase in Health Care Spending in 2030 Cost Per Additional Life Year (2005 dollars)
Antiaging compounds (healthy) 93.1 13.8 11,245
Cancer vaccines 1.0 0.4 23,330
Treatment of acute stroke 5.6 0.4 28,024
Antiaging compounds (unhealthy) 93.8 70.4 38,105
Telomerase inhibitors 8.2 0.5 79,170
Alzheimer’s prevention 62.8 8.0 102,774
ICDs 26.5 3.7 131,892
Diabetes prevention 26.4 3.2 188,316
Anti-angiogenesis 66.4 8.0 638,141
LVADs 18.2 2.3 654,968
Pacemakers for atrial fibrillation 17.4 2.3 1,795,846

Some Technologies Will Be Extremely Expensive. For example, intraventricular cardioverter defibrillators (ICDs) are very effective for patients with life-threatening arrhythmias. A recent coverage decision expands prophylactic ICD use to patients at high risk of sudden death from ischemic cardiomyopathy. But if use is expanded to patients with other heart problems, then costs could rise very quickly. The research team simulated the effects of expanding ICD use to half of elderly patients with new cases of heart failure or heart attack. This would result in approximately 374,000 procedures annually in 2015 and 550,000 in 2030, and total treatment costs of $14 billion and $27 billion, respectively. The cost per additional year of life would be about $132,000.

Some Technologies Improve Health but at a Very High Price. For example, anti-angiogenesis, pacemakers for atrial fibrillation, and left ventricular assist devices (LVADs) are all costly relative to their known health benefits. If these technologies are broadly applied, costs per additional life year would be very high.

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