Medicare is the primary source of health insurance for elderly and disabled Americans, and so is by far the largest payer in the American health care system. Medicare spending in 1999 was around $213 billion, or about $5,400 per beneficiary, accounting for about 12 percent of the federal budget, 2.3 percent of GDP, and 20 percent of all health care costs (Congressional Budget Office, 2000; Medicare Payment Advisory Commission, 2000). The numbers seem destined to grow rapidly in the years ahead. Real Medicare spending per beneficiary has increased by 4.7 percent per year between 1980 and 1999. As Figure 1 shows, most experts expect that future growth rates will be similar as a result of continuing cost-increasing changes in medical technology. These medical treatment changes have undoubtedly contributed to the marked improvements in the health of the elderly since the program was created in the mid-1960s: life expectancy at 65 has increased by three years over this time, and functional impairments have declined. In part as a result of rising life expectancy, but mainly as a result of the aging of the baby boom, the number of Medicare beneficiaries is expected to rise from around 39 million (14 percent of the U.S. population) today to around 77 million (22 percent) by 2030 (U.S. Health Care Financing Administration, 2000a). For all of these reasons, Medicare spending is expected to increase substantially in the absence of reform, by some estimates rising to around 5 or 6 percent of GDP and one-third of the federal budget by 2030 (Congressional Budget Office, 1998; U.S. Health Care Financing Administration, 2000a, b).
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