Health Care for the Elderly

H ealth care expenditures on the elderly have outpaced the gross domestic product (GDP) by 3.5 to 4.0 percent per year in recent decades. 1 This differential is partly attributable to demographic change, with the number of elderly growing about 1.0 percent per year faster than the rest of the population. By far the more important factor, however, is the rapid growth of age/sex-specific consumption of health care by the elderly. 2 If the trends of the past decade or two continue until 2020, the elderly's health care consumption in that year will be approximately $25,000 per person (in 1995 dollars), compared with $9,200 in 1995. 3 If the current public/private shares remain unchanged (a bit less than two-thirds public, a bit more than one-third private), an enormous increase in taxes will be necessary, and the elderly still will be left with less income for other goods and services than they had in 1995. Without a dramatic change in health care costs, income, or both, health spending on the elderly in 2020 is likely to be two to three times the income available for all other goods and services. 4 • AGE/SEX-SPECIFIC EXPENDITURES. A more detailed picture of the rate of growth of age/sex-specific expenditures (Exhibit 1) shows the average annual percentage rate of change between 1987 and 1995 of Medi-care payments in constant dollars. The calculations were made by single years of age from a 5 percent sample of Medicare patients and then smoothed with a five-term moving average to reduce the effects of sampling variability. 5 The rate of change tended to be greater at older ages and somewhat greater for women than for men. On average , the rate of increase was between 4 percent and 5 percent per year in constant dollars. During that same period real GDP per capita grew at only 1.2 percent per year. It is this gap that is at the heart of the " Medicare problem. " And because the private share of health care expenditures looms so large in the total financial needs of the elderly, it has major implications for the earnings-replacement problem as well. Why did age/sex-specific expenditures increase so rapidly during a period when reimbursement rates for physicians and hospitals were being held under tight rein? It was not because physician fees for specific interventions were growing rapidly; they were not. It was not because hospital admission …