$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

Paying for the Boomer’s Healthcare: SHOW ME THE MONEY!

4th Annual Health Policy ForumSt. Louis, MissouriOctober 19, 2006

Signature

Healthcare Foundation

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ PAY ME NOWPAY ME NOW $ $ $ $ $ $ $ $ $ $ $ OR PAY ME LATEROR PAY ME LATER $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ISSUES INISSUES IN $ $ $ $ $ $ $ $ $ HEALTH CARE SPENDINGHEALTH CARE SPENDING $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

BoomerJohn Rother

DirectorPolicy & Strategy

BoomerJohn Rother

DirectorPolicy & Strategy

Changing Demographics

over 65under 65

1906

Age 65+ population 4% of nation

Changing Demographics

over 65under 65

TODAY

Age 65+ population has tripled

(12%)

Changing Demographics

over 65under 65

2030

Age 65+ population will double again

Boomer

Percentage of Total Population Age 50+

% Age 50+

% Age 65+

% Age 85+0%

5%

10%

15%

20%

25%

30%

35%

40%

% Age 50+

% Age 65+

% Age 85+

Source: U.S. Census Bureau, middle series projections and historical data, U.S.

People over 65

1900-1 in 252006-1 in 82030-1 in 5

50+

65+

85+

2006

We are here

As a result of size and longevity, MORE boomers will draw entitlements LONGER

Will these changes have a profound, “unsustainable” impact on the federal budget by pushing a rapid growth in federal spending for health and retirement benefits for older Americans?

Standard measure to gauge size and growth of entitlement spending is its ratio in any year to the Gross Domestic Product (GDP)

How do we measureentitlement spending?

For any path of spending and revenues to be sustainable, the resulting debt must eventually grow no faster than the economy.

How do we define “unsustainable”?

Congressional Budget Office, The Long-Term Budgetary pressures and Policy Options, March 1997

What are the categories of entitlements?

The top 10 . . .

Figure 4. The 10 Largest Federal Entitlement Spending Programs as Percent of GDP, 1962-2016

0%

2%

4%

6%

8%

10%

12%

14%

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Medicare

Food stamps

SSI

Unemployment compensation

Federal retirement

Medicaid

Social Security

Source: Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2007 to 2016 , Appendix F, Historical Budget Data

Projected

The Categories of Entitlements

VeteransFamily SupportEarned Income Tax Credit

Figure 3. Ten Largest Spending Entitlements in Billions of 2005 Dollars and as Percent of All Spending Entitlements, 2005

$517

$325

$186

$103

$48

$39

$35

$33

$32

$25

38.5%

24.2%

13.8%

7.7%

3.6%

2.9%

2.6%

2.5%

2.4%

1.9%

$0 $100 $200 $300 $400 $500 $600

Social Security

Medicare

Medicaid

Federal retirement (civ. and mil.)

Earned Income Tax Credit

SSI

Veterans/ benefits

Unemployment compensation

Food stamps

Family support

Source: Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2007 to 2016, Appendix F, Historical Budget Data

2005 Entitlement Spending

Social Security

Medicare

Medicaid

Federal Retirement – civilian and military

Earned Income Tax Credit

SSI

Veterans Benefits

Unemployment Compensation

Food Stamps

Family Support

Figure 6. Ten Largest Tax Entitlements in Billions of 2005 Dollars and as Percent of All Tax Entitlements, 2005

$102.8

$78.6

$72.6

$57.8

$46.6

$46.2

$39.0

$38.0

$26.0

$25.0

19.3%

14.8%

13.6%

10.9%

8.7%

8.7%

7.3%

7.1%

4.9%

4.7%

$0.0 $20.0 $40.0 $60.0 $80.0 $100.0 $120.0

Exclusion of contributions to employerprovided pensions

Exclusion of employer provided healthinsurance

Mortgage interest deduction

Reduced rates of tax on dividends andcapital gains

Child tax credit

Deduction of state and local taxes

Earned income tax credit

Exclusion of capital gains at death

Deduction of charitable contributions

Exclusion of investment income on lifeinsurance

Source: U. S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2006-2010 .

2005 Tax Expenditures

Employer-provided Health Insurance

The hidden health entitlement

15%

Demography misses much of the story.

What are the driversof entitlement spending?

Figure 8. Types of Entitlements as Percent of GDP, 1962-2016

0%

1%

2%

3%

4%

5%

6%

7%

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Retirement

Health

Safety Net

Other

Source: Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2007 to 2016, Appendix F , Historical Budget Data

Projected

No entitlement growth in 25 yrs

Figure 8. Types of Entitlements as Percent of GDP, 1962-2016

0%

1%

2%

3%

4%

5%

6%

7%

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Retirement

Health

Safety Net

Other

Source: Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2007 to 2016, Appendix F , Historical Budget Data

. . . With one exception, Medicare

Projected

Interestingly, it does not . . .

Does aging explain the rapidgrowth in federal health spending?

Figure 10. Mean Expenditures Per Person for Acute and Long-Term Care From Age 65 Until Death, by Age at Death

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

65 70 75 80 85 90 95 100 >101Age at Death

Exp

end

itu

res

per

per

son

($)

All services

Medicare-covered services plus cost-sharing

Nursing home care

Home care

Prescription drugs

Other services

Spillman and Lubitz, "The Effect of Longevity on Spending for Acute and Long-Term Care," New England Journal of Medicine , Vol. 342 (19) 1409-15, 2000.

Per person Medicare expenditures do not rise with age

Mean Expenditures Per Person for Acute and Long-Term Care From Age 65 Until Death by Age at Death

Medicare

$0

$200

$400

$600

$800

1993 1998 2002 2004 2006 2014

Costs for total Medicare programCosts for total Medicare programB

illio

ns

Overall Medicare Costs

Projections

Source: CMS, National Health Accounts

Costs for National Health ExpendituresCosts for National Health Expenditures

$0

$600

$1,200

$1,800

$2,400

$3,000

$3,600

1993 1998 2002 2004 2006 2014

Bill

ions

Overall Medicare Costs compared to Overall Health CostsSource: CMS, National Health Accounts

Projections

Costs for total Medicare programCosts for total Medicare program

Is the rise in national health spending due to health entitlements?

No . . .

Figure 11. Average Annual Change in Per Enrollee Medicare Spending and Private Health Insurance Premiums (for Common Benefits), 1969-2004

10.1%

15.2%

14.4%

6.2%

7.2%

4.1%

5.8%

12.7%

15.7%

12.0%

10.6%

7.9%

3.5%

8.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004

Year

Ave

rag

e A

nn

ual

Ch

ang

e in

Per

En

roll

ee S

pen

din

g MedicarePrivate Health Insurance

Note: Annual change is calculated from previous year. Common benefits refers to benefits commonly covered by Medicare and Private Health Insurance. These benefits are hospital services, physician and clinical services, other professional services and durable medical products.Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, Table 13 at http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf.

Medicare spending increased less than private sector

✔✔✔

✔✔

What’s driving up health costs??

Healthcareby service sectors . . .

If costs rose equally in every sector, the distribution of increases by sector of total National Health Expenditures 1995 to 2004 would look like this: Hospital Care

Physician and Clinical Services

Dental Services

Other Prof. Services

Home Health Care

Other Non-Durable Medical Products

Rx Drugs

Durable Medical Equipment

Nursing Home Care

Other Personal Health Care

Admin. & Net Cost of Priv. HealthInsurancePublic Health Activity

Research

Structures & Equipment

Health cost increases in 10 years (1995-04) due to 4 major sectors:

4.3%

14.9%

0.9%

4.8%

3.5%

9.1%

2.9%

2.4% 4.3%

0.8%2.8%1.5%

26.8%

20.9%

Hospital Care

Physician and Clinical Services

Dental Services

Other Prof. Services

Home Health Care

Other Non-Durable Medical Products

Rx Drugs

Durable Medical Equipment

Nursing Home Care

Other Personal Health Care

Admin. & Net Cost of Priv. HealthInsurancePublic Health Activity

Research

Structures & Equipment

Sou

rce:

Cal

cula

tions

by

PP

I AA

RP

usi

ng C

ente

rs fo

r M

edic

are

& M

edic

aid

Ser

vice

s,

Offi

ce o

f the

Act

uary

, CY

196

0-20

04 N

atio

nal H

ealth

Exp

endi

ture

Dat

a

Hospital CareHospital Care

Rx DrugsRx Drugs

Physician &Physician &Clinical Clinical ServicesServices

Administration &Administration &Net Cost of Private InsNet Cost of Private Ins

27%

21%15%

9%

What’s driving up health costs??

Economic, demographic, and technological factors . . .

Analysis of Cost Growth 2000-04

0%

20%

40%

60%

80%

100%

Growth in Health Care Expenditures So

urc

e:

Na

tion

al H

ea

lth E

xpe

nd

iture

s A

cco

un

ts:

De

finiti

on

s, S

ou

rce

s, a

nd

Me

tho

ds

use

d in

th

e N

HE

A 2

00

4,

CM

S

GeneralInflation

Medical Inflationabove general inflation

Population Growth

Intensity, Volume, Technological Change& other residual factors

Intensity and volume . . .

What’s driving up health costs??

End-of-Life Variation in Care

0

1

2

3

4

5

6

7

MedicareSpending

SpecialistVisits

HospitalDays

% Admitsto ICU

Minneapolis, MNOrange Co., CAMiami, FLPortland, OR

Rati

o t

o M

inn

eapolis

Geography & the Debate Over Medicare Reform, Health Affairs 13 Feb 2003 Wennberg, Fisher, Skinner

........

..

Crucial to get control of the management of chronic care . . .

What’s driving up health costs??

Percent of Population

100%

20

40

60

80

20% 40% 60% 80% 100%0%

10% of costs for70% of people

30% of costs for 1% of people

% H

ealt

h C

are

Dolla

rs

Spent

Chronic Care Management Key to a Large Segment of Cost

A back-of-the-envelope representation . . .

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

None 1 chronic 3+ chronic 3+ chronic,& disabled

50-6465-7475-8485+

Highest healthcare costs comewith multiple conditions, not age

Sou

rce:

Par

tner

ship

for

Sol

utio

ns, J

ohns

Hop

kins

U

nive

rsity

ana

lysi

s of

Med

ical

Exp

endi

ture

Pan

el

Sur

vey

1996

, unp

ublis

hed

data

, Aug

ust 2

001.

Average healthcare expenditures for non-institutionalized population, by age and severity of chronic conditions, disability, and functional limitations

with functional limits

•First, that does nothing to contain costs.

•Second, in terms of Medicare, the patients are already bearing about as large a burden as possible.

What about more beneficiary cost-sharing??

Average Medicare out-of-pocketcosts take 23% of income

30%24%

34%

23%

29%

0% 10% 20% 30% 40%

Percent of IncomeFigures for non-institutionalized Medicare beneficiaries only. “Out-of-Pocket” includes payments for Medicare cost-sharing, Part B & private insurance premiums, physician balance billing, and goods & services not covered by Medicare. It excludes cost of home care and long-term nursing home care. S

ourc

e:

AA

RP P

ublic

Polic

y Inst

itute

pro

ject

ions

usi

ng

Medic

are

Benefits

Model, v

5.3

06

.

Under 135% Poverty

People in “Fair” or “Poor” health

Women

85+ only

ALL 65+

Average Out-of-Pocket Health Care Spending 2004

Looking at one of the four big cost growth areas – prescription drugs . . .

Pharmaceutical prices are rising at more than double the rate of inflation

Are we sure expenditures are used wisely?

40%

0%

10%

20%

30%

40%

Cumulative Rise 2000 thru 2005

Average Manufacturers’ Price Increases far outpacing Inflation

Yea

rs r

efer

to c

hang

e fr

om p

revi

ous

year

. Sou

rce:

AA

RP

Pub

lic P

olic

y In

stitu

te

Ave

rag

e P

erce

nt

Ch

ang

e

Inflation 17%

40%

$13

$31

$30

$20

$0

$20

$40

$60

$80

$100

Out of Every $100

Distribution of Gross Revenues for U.S. Drug Companies by Expense Type

Net Profit

Taxes & Other Costs

Cost of Production

Research & Development

Marketing, Advertising, & Administrative Costs

Source: Compiled by the PRIME Institute, University of Minnesota from data found in DHHS, CMS, Jan 2003, and

from Bloomberg, analysts models, & corporate annual reports. Presented by AARP Rx Watchdog Forum February 2005

$6

Looking at the Medicare spending for physician payments 2000-2005 . . .

What about physician services?

Costs for physician FFS up an average of almost 10% per year

2000-2005

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005

Med

icare

Spend

ing (

dolla

rs in b

illio

ns)

Sourc

e 2

00

6 A

nnual R

eport

of

the B

oard

of

Tru

stees

of

the M

edic

are

Tru

st F

unds

NOTE: Dollars do not include beneficiary co-pays

With healthcare growth unchecked (and small Social Security fixes ignored), here is the picture:

And what happens if we continue, business as usual?

Figure 1. Spending for Total and Largest Three Entitlements as Percent of GDP, 1962-2050

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

2049

Total entitlement spending

Largest 3 entitlements

Source: Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2007 to 2016, January, 2006, Appendix F, Historical Budget Data; The Long-Term Budget Outlook , December, 2005, Supplemental Data (Intermediate projections)

ProjectionsActual

Tomorrow?

Today

Predicting Entitlement Spending

Looking at the Hospital Trust Fund alone, here is the projected cash flow . . .

Cash Flow of the HI Trust Fund

$0

$100

$200

$300

$400

1970 1980 1990 1995 2000 2006 2008 2010 2012 2014

Income

Expenditures

Projected

Source: Office of the Chief Actuary -SUMMARY OF THE 2005 ANNUAL REPORTS From the Social Security and Medicare Boards of Trustees

Actual

Will exceed income in 2012

And here is the projected Hospital Trust Fund balance . . .

0%

50%

100%

150%

200%

250%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

HI Trust Fund ASSETSAs a percentage of annual expenditures

SOURCE: 2005 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund

ProjectedActual

What are needed steps to reform both public and private health care?

Leadership Solutions

Foster widespread, inter-operable H.I.T. Fund prevention Manage, coordinate (and pay for)

quality chronic care Pursue comparative-effectiveness

research for pharmaceuticals and for technology, other evidence-based medicine

Target escalating Rx drug pricing

Reduce costs, improve quality:

Leadership Solutions

Reform payment to reward excellence –e.g. Pay for Performance

Target waste and unnecessary care (misuse, overuse)

Reduce toll of errors Work toward universal coverage Provide patients with decision tools Promote lifelong healthy behavior

Reduce costs, improve quality:

Pay me now, or pay me later!

Either we take steps now to aggressively reform healthcare, even if there are short-term investment costs

Or, we will pay more in the long-run, as taxpayers, as patients, and as providers

Either we take steps now to aggressively reform healthcare, even if there are short-term investment costs

Or, we will pay more in the long-run, as taxpayers, as patients, or as providers suffering reduced resources and income

Pay me now, or pay me later!

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ PAY ME NOWPAY ME NOW $ $ $ $ $ $ $ $ $ $ $ OR PAY ME LATEROR PAY ME LATER $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ISSUES INISSUES IN $ $ $ $ $ $ $ $ $ HEALTH CARE SPENDINGHEALTH CARE SPENDING $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $