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COMMENT: Victor Fuchs, Economics (650) 326-7639

Technology, longer lives leading to higher national health bills

Here is a question to try on your smartest friends:

If you have clogged arteries and the cost of treating them goes down, will you and your insurance provider pay more or less for health care?

The answer, according to Stanford health economist Victor Fuchs, is probably more. "You will pay less for the particular treatment in this case, but chances are the procedure will be performed on more patients, and they and you will live longer, healthier lives, racking up more health care bills."

Health care for the elderly could consume 10 percent of the nation's gross domestic product by 2020 if present trends continue, Fuchs says. That is more than double the share the elderly consumed on health care in 1995, which means that Americans will have less money to spend on other goods and services.

Fuchs makes this point in a working paper just published by the National Bureau of Economic Research. The paper uses data from the Health Care Financing Administration, the Census Bureau and other sources to estimate the amount of health care and other goods and services consumed by Americans 65 and older. Those estimates for the last two decades, made with assistance from Deborah Kerwin-Peck, are used to project future consumption patterns.

Many stories have been written about the aging of the postwar baby-boom generation and the looming costs associated with their retirement. What is less well understood, Fuchs says, is that another factor is driving up health care costs much faster: Age-specific expenditures have been rising, so that the health care costs of the average 73-year-old, for example, today are considerably higher than they were for the average 73-year-old 20 years ago. Even though some new treatments for ailments cost less than older ones, the total costs of sustaining health for a year are increasing for the elderly.

A number of studies are under way to try to pinpoint the many factors driving health care costs and quality, but health economists already generally agree, Fuchs said, that new medical technology is the primary reason Americans over 65 are spending more on health care.

Newer methods of diagnosis and treatments with new drugs or surgical procedures have improved the general health of older people and lengthened their lives, especially those of men, he said. People are not working longer, however, and so there are more years of retirement (and health care) to finance.

The number of years that men at age 65 could be expected not to work after retiring rose from 11.7 in 1975 to 13.7 in 1995. Women also showed an increase in the number of years they are not working for pay after retiring -- from 17.3 in 1975 to 17.8 in 1995, he said.

For most people, health care becomes a bigger share of the budget with age, Fuchs said. National data indicate that health care expenses are three times as great for the average person over age 65 as for those who are younger than 65, and persons 85 and older spend nearly three times as much on health services and drugs as people age 65 to 74.

"Declining health after age 65 results in substantial increases in the use of prescription drugs, hospital admissions, repair or replacement of parts of the body, rehabilitation and physical therapy and assistance with daily living," he said.

The experience of other countries suggests that the U.S. government might be able to slow the rise in costs for elderly health care by cutting back on the training of specialists, who tend to develop new treatments, he said. "But does the U.S. want to do that? Technological innovations have contributed to longer and especially better quality of life for many older Americans."

Some research indicates that medical innovations have also reduced the cost of treating a given ailment, such as a clogged artery. But it would be a "grave mistake," Fuchs said, to assume that such cost-effectiveness leads to smaller total health care bills for individuals or for the nation as a whole.

"The experience in medical care to date (and in many other industries such as personal computers) is that total expenditures increase even as cost per unit goes down," he wrote. "Paradoxically, good health can often lead to greater health care utilization by the elderly. Those in good health may be deemed better candidates for expensive surgical procedures that would be regarded as medically inappropriate for persons of similar age who are in poor health."

Because most people are healthier at later ages than in the past, they could work longer to help pay the costs, he said. If not, they should consider saving more income in their working years to finance longer retirements and greater health care expenses.

Existing public policies discourage people over 65 from working for wages and discourage employers from hiring older workers, Fuchs said. He suggested that policymakers consider modifying some of these policies to encourage people to save more for retirement during their working years and to work longer than they do now.

The two main economic problems of old age -- earnings replacement and health care payment -- should be considered together, he said, because they are linked in people's lives and in the national economy.

Right now, he said, low-income elderly "frequently must choose between expensive prescription drugs and an adequate diet. For middle-income elderly, the choice may be between more expensive medi-gap insurance and an airplane trip to a grandchild's graduation." As health care costs grow, more trade-offs can be expected.

Difficult trade-offs are also made with public funds spent on the elderly, he said, because the same tax receipts could be used to finance Social Security retirement benefits, which can be spent any way the recipient chooses, or on Medicare programs, which can be spent only on health care. If no policies change, health care will consume the greater amount of tax dollars within a few years.

About 63 percent of the health care cost for those 65 and older is borne by taxpayers -- primarily younger workers who pay payroll taxes for Medicare and Medicaid. About 37 percent is paid for with private funds, usually patients' personal funds, Fuchs said. The private expense includes the cost of supplemental health insurance plans.

Fuchs said he believes that government financing of elderly health care encourages people to spend more on health care than they would if they paid for it out of pocket from higher Social Security or pension checks. However, he is not suggesting ending government financing of health care. Compulsory national health insurance for the elderly leads to a more equitable distribution of health care resources, he said, and may be better than cash for the group as a whole. If those who voluntarily bought private insurance consumed more health care than those who did not, the market for elderly health insurance would tend to break down, he said.

For a copy of the working paper, Number 6642, titled "Provide, Provide: The Economics of Aging," contact the National Bureau of Economic Research at (617) 868-3900 or through the web at The paper will be included in a forthcoming book, Medicare Reform: Issues and Answers, edited by Thomas Saving, University of Chicago Press.


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