Medicare Cost Projections Are Down Stunningly in 2015 Report

As long as we're on the subject of annual trustees reports, the 2015 Medicare report was released today too. And if the Social Security report was slightly good news, the Medicare report is, once again, spectacularly good news. Here's the 75-year spending projection from ten years ago vs. today:

Ten years ago, Medicare was a runaway freight train. Spending was projected to increase indefinitely, rising to 13 percent of GDP by 2080. This year, spending is projected to slow down around 2040, and reaches only 6 percent of GDP by 2090.

Six percent! That's half what we thought a mere decade ago. If that isn't spectacular, I don't know what is.

The 2005 projection was based on past performance, which showed costs rising ceaselessly every year. That turned out to be wrong. This year's projection is also based on past performance, which shows that costs have flattened substantially since 2008. Will it turn out to be wrong too? Come back in 2025 and I'll tell you.

In any case, this illustrates the big difference between cost projections for Social Security and Medicare. Social Security is basically just arithmetic. We know how many people are going to retire, we know how long they're going to live, and we know how much we're going to pay them. Do the math and you know how much the program will cost us. It can change a bit over time, as projections of things like GDP growth or immigration rates change, but that happens at the speed of molasses. There are very few surprises with Social Security.

Medicare has all that, but it also has one more thing: the actual cost of medical care. And that's little more than an educated guess when you start projecting more than a decade ahead. Will costs skyrocket as expensive new therapies multiply? Or will costs plummet after someone invents self-sustaining nanobots that get injected at birth and keep us healthy forever at virtually no cost? I don't know. No one knows.

Beyond that, it's always foolish to assume that costs will rise forever just because they have in the past. Medicare is a political program, and at some point the public will decide that it's not willing to fund it at higher levels. It's not as if it's on autopilot, after all. We live in a democracy, and after lots of yelling and fighting, we'll eventually do something about rising medical costs if we simply don't think the additional spending is worth it.

Still, the news for now is pretty good. I happen to think the slowdown in medical costs is real, and will continue for some time (though not at the extremely low rates of the past few years). For more on this, see here, here, and here. Others think it's a temporary blip due to the recession, and big increases will return in a few years. We'll see.