Medicare Payment Models: Past, present, and Future

When Medicare was first implemented in 1966 nearly half of all Americans 65 and older were without health insurance. Fifty years later only 2% lack health insurance. The difference, of course, is Medicare. Medicare now covers 55 million people, about 17% of the U.S. population, and is the single largest purchaser of personal health care. But despite this success the rising costs of health care in general, and Medicare in particular, have become a growing concern. Medicare policies are important not only because of the large numbers of beneficiaries, payers, and providers directly affected, but also because they affect private-sector policies as well. Analyses of these policies and their consequences are complicated not only by the effects of an aging population with changing cost drivers (e.g. less smoking, more obesity), but also by different Medicare payment models. For example, the average age of the Medicare population will initially decrease as the baby-boom generation reaches eligibility, but then increase with that generation. Because younger beneficiaries have lower costs, these changes will affect cost trends and patterns that need to be interpreted within the larger context of demographic shifts. As noted below, when you consider that total Medicare outlays in 2015 totaled just under $650 billion, and that the number of people age 65 and older in the U.S. will roughly double between 2010 (when the Affordable Care Act was passed) and 2050, the significance of the Medicare payment system cannot be overestimated.