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Taming Medicare costs: What are the options?

The US spends twice as much per person on health care as other advanced economies, and Medicare is one of the biggest culprits. But here's why cutting its costs won't be easy.

By Staff writer / April 2, 2013

Medicare recipients exercise from their chairs at Active Day, a day-care facility in Hingham, Mass. Congress is wrestling with how to rein in medical costs for seniors.

Melanie Stetson Freeman/Staff


For a quick glimpse of America's health-care challenge, consider this: The nation spent $8,233 per person on medical care in 2010 – more than twice the average of other advanced economies, including Germany, Britain, Canada, and Japan.

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  • Growing strain of entitlements
  • Medicare facts

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America doesn't have bad health care, judging by life expectancies that are on par with other nations, but it does have notably expensive health care.

And a lot of the payment burden rests on the US government, through entitlement programs including Medicare for seniors and Medicaid for the poor. If this problem isn't addressed as baby boomers retire, it's a recipe for deep trouble for taxpayers and the US economy.

Medical costs are high and rising for reasons that go beyond the demographics of an aging nation. At the individual level, doctors and patients together are opting for a greater volume of health-care services. Some of that, economists say, reflects people buying improved health care as their incomes rise. Some reflects wasteful decisions that don't improve health outcomes.

And beyond the number of patients treated and the volume of care each receives, researchers see another factor: Hospitals and doctors in the United States have a pricing power that they simply lack in other nations.

"The reason the US spends so much more per capita and as a percentage of GDP than other countries is not because we do that many more services.... It's because our prices are higher than anybody else's," says Robert Berenson, a health-care expert at the Urban Institute in Washington. "Physicians' incomes are at the high end.... Nursing income is at the high end. Hospital executive salaries are way over the high end."

Health care at all levels, from a consumer's co-payment to the billions spent by government, now accounts for 18 percent of gross domestic product – almost $1 in every $5. That's up from 7 percent of GDP in 1970. Several in-depth studies have concluded that as much as one-third of overall US health-care spending – and possibly of Medicare spending – is wasteful and does nothing to improve the quality of care.

That doesn't mean it's easy to cut costs 30 percent or more.

"There is no silver bullet" solution, says Elliott Fisher, a health policy expert at Geisel School of Medicine at Dartmouth College in Hanover, N.H. But "solving the fiscal crisis that is posed by rising health-care costs is incredibly important."

To a large degree, all the budgetary bluster and hand-wringing by politicians this year boils down to a simple but vexing question: How should the US reform these programs that millions rely on, so that benefits are provided without breaking the nation's bank?

Yes, the fiscal debates also include important attention to tax reform and spending on everything from defense to farm subsidies. But entitlements, particularly in health care, are the elephant in the room.


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