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EXECUTIVE SUMMARY

The elderly today, on average, are somewhat better off in terms of income than previous generations of elderly. However, the same data suggest large numbers of elderly, including older women and racial and ethnic minorities are still in deep trouble. The data also suggest that the retirees of the 21st century, on average, will not be better off. Any advantage that the elderly may have by entering retirement with higher incomes than a decade ago will quickly be lost as health and long term care costs absorb ever larger proportions of that income.

Measured against a number of indicators of income, health and long term care costs are, on average, absorbing ever larger percentages of elderly income. For elderly persons entering retirement in any given year, they face a continual erosion of their income as health care costs rise more than one and one-half times faster than their income. Elderly out-of-pocket costs have risen from 12.3 percent of elderly income in 1977 to 18.2 percent of income in 1988. (See Figure E.1) All indications are that this trend of costs outpacing income will continue into the foreseeable future and that health costs are likely to reach 20 percent of elderly income by the early 1990s.

For the average senior citizen receiving Social Security, it is taking more and more of their Social Security checks to cover health and long term care costs. In 1977, the average senior citizen used just under three months worth of checks to cover his or her out-of-pocket health care costs. (See Figure E.2) By 1988, it took the average senior citizen four and one-half months worth of checks to cover those health costs.

As for other health cost indicators, the Medicare Part A hospital deductible jumped from $124 to $540 over four times the level in 1977 and twice the one-half month Social Security payment for 1988. Medical price increases for the past seven years are also much higher than increases in several indicators of elderly income. Between 1983 and 1989, medical prices increases rose twice as fast as did the average monthly Social Security payment and the Consumer Price Index for Urban Wage Earners (CPI-W), the basis for setting Social Security COLAS.

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FIGURE E.1 – ELDERLY OUT-OF-POCKET (CONSUMER)
HEALTH CARE COSTS EXPRESSED AS NUMBER OF
MONTHS OF SOCIAL SECURITY PAYMENTS (Average
Monthly Benefits (Current-payment Status) for Retired
Workers) FOR 1977, 1980, 1984, 1987 AND 1988.

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Looking ahead, the President's 1991 Budget proposes a permanent increase in the Part B premium by tying it to increases in overall Part B costs, increases that are almost always higher than Social Security COLAs. Under his best case where he gets all of his other Part B cuts, the premium would rise an average of 9.6 percent annually as compared to average Social Security COLAs of 3.7 percent. If Medicare Part B is not cut as he proposes, the premium would rise an average of 10.0 percent annually. In both cases, the elderly lose ground. Another source of concern is over the access and quality consequences for the elderly if the President does get his other Medicare Part B and Part A cuts.

FIGURE 2.2 - ELDERLY OUT-OP-POCKET (CONSUMER)
HEALTH CARE COSTS AS A PERCENTAGE OP
ELDERLY INCOME FOR 1977, 1980, 1984, 1987 AND
1988.

Elderly Out-of-Pocket Health Costs As A Percent of Elderly Mean Income

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While elderly mean income has experienced some growth in the 1980s, other groups have much higher incomes which have grown faster. For example, mean incomes for physicians, a primary source of health care for older Americans, has grown much faster. Starting from a level of $89,900 in 1981, average physician net annual income rose to $144,700 in 1988. During the same period, elderly mean annual income went from a level of $8,738 in 1981 to $13,131 in 1988 and is only one-eleventh the level of physician net income.

As this analysis clearly documents, the elderly, as well as any other group of people with relatively fixed incomes and substantial health care costs, have a problem now and are likely to have a bigger problem in the future. Though the problem is acute for all low and middle income elderly, it is particularly acute for those living in the "high risk zone," a place where incomes are limited and health care costs may be high.

Unless there is a significant cost containment intervention on behalf of beneficiaries, there is every reason to believe that future is likely to look much like the past where health care costs grow everywhere from one and one-half to two times faster than both general inflation and elderly income. Unless policies change, there will continue to be no significant cost containment effort to restrain out-of-pocket costs for Medicare beneficiaries and to restrain out-of-pocket costs for the uninsured and for those not represented by employers and unions.

While federal and state governments and employers and unions continue cost containment efforts, what is missing and desperately needed is a coordinated cost containment approach that restrains cost for all payers, whether they be government, employers, or individuals. To be successful, a coordinated strategy must be applied fairly so that health care providers receive reasonable payment for their services. It must be applied with great care to ensure that health and long term care quality and accessibility do not suffer.

INTRODUCTION

Today almost everyone agrees that health and long term care costs are rising faster than is our ability to pay those costs. Much of the attention has been focused on federal expenditures over the last decade. During that same period, less attention was focused on costs paid by the elderly and other consumers Recently, more attention has been focused on the impact of rising health care costs for both employers and employees.

America's elderly are in a fairly unique situation. Those costs not covered by Medicare or Medicaid are rising much more rapidly than is their income. However, the elderly are also at risk as federal and state governments try to rein in their Medicare and Medicaid costs. To date, Congress has turned back attempts to greatly increase the elderly's share of Medicare costs. However, the Medicare Part B premium, a frequent target for major increase, has been increased more than the annual adjustment in Social Security payments. The Part B premium has been tied to increases in Part B costs in recent years rather than increases in Social Security cost-of-living-adjustments (COLAs) as in past years.

The President's 1991 budget proposes to permanently tie the premium to the more rapidly rising Part B costs.

In the case of employer-based retiree benefits, employers are facing similar cost pressures for these costs as for their active worker benefits. Again older retirees who were counting on private retiree benefits to help pick up some of their health benefit costs are increasingly at risk as employers try to constrain their rising health insurance costs. This problem is exacerbated as private pensions either have no cost-of-living-adjustments (COLAs) or have adjustments running less than inflation. Under the President's 1991 budget, most Federal and military retirees would face a freeze in the 1991 COLA and a limit on future COLAs to the Consumer Price Index minus one percent.

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