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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 E.2 - ELDERLY OUT-OF-POCKET (CONSUMER)
HEALTH CARE COSTS AS A PERCENTAGE OF
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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What follows is an assessment of the health cost pressures facing many Americans, but with a focus on elderly Americans a group with higher health care costs and less growth in their income. This assessment could equally be applied to any other group whose income fails to match inflation and whose health is poorer. For those elderly relying primarily on Social Security, their income grows at about the rate of regular inflation. Those elderly who rely on pensions for all or part of their income are in no better position. For their pensions, they generally get no inflation adjustments or only get inflation adjustments equal to or less than regular inflation.

The problem arises from the fact that health care costs generally rise much faster than other costs of living and than cost-of-living-adjustments for elderly income. When the House Select Committee on Aging conducted its study in 1989 of elderly health care costs, the results documented the rising impact of health care costs on America's elderly. Over the late 1970s through the late 1980s, health care costs rose from 12.3 percent of income in 1977 to 18.2 percent of income in 1988. Preliminary projections are that this percentage will rise to over 20 percent in the early 1990s with or without the Medicare Catastrophic Coverage Act.

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