Friday, April 22, 2011

Small Percentage Of Medicare Beneficiaries Account For Most Of Its Costs: Maybe Medicare Needs To Be Split Into Two

The 2010 Medicare Trustees report says that Medicare spent $502 billion in total benefits for 46.3 million beneficiaries, which averages out to $10,842 per beneficiary. The average cost number can be refined further into low, medium and high cost populations.

A recent blog post by Keith Hennessey about Medicare stated:
  • 70/10 rule: 10% of the seniors account for 70% of the costs. The healthiest 50% of seniors account for only 4% of the costs.
Using Hennessey's cost breakdown and assuming I understand his and the Trustees numbers, I came up with the following breakdown of average Medicare costs by three population segments; low, medium and high average Medicare costs groups.

There are:
  1. The 10 percent, 4.63 million, that receive 70 percent of Medicare benefits, $351.4 billion.

  2. The 50 percent, 23.15 million, that receive 4 percent of Medicare benefits, $20.08 billion.

  3. The 40 percent, 18.52 million, that receive the remaining 26 percent of Medicare benefits, $130.52 billion.
The $502 billion in benefits for the 46.3 million enrollees breaks out as follows:
  1. The 10 percent group receive an average Medicare benefit of $75,896.

  2. The 50 percent group receive an average Medicare benefit of $867.

  3. The residual 40 percent group receive an average Medicare benefit of $7,048.
The high 10 percent group costs Medicare $351 billion out of $502 billion. Also, notice that the average cost for the 40 and 50 percent groups separately is below the overall average and combined is $3614, a third of the entire Medicare cost average per beneficiary.

While I do not have numbers in front of me, I would not be surprised if that within the high cost 10 percent group, a small portion, maybe the top quarter or top ten percent of this high cost group accounted for most of this group's spending.

When data exhibits the characteristic of a small percentage of the population causing most of the effect, the data usually follows power law rules, aka Pareto distribution and aka Zipf's law. Power distributions tend to have scalability, like fractals, and exhibit similar characteristics at different granulation levels. For example, the 10 percent-70 percent rule likely not only applies to the whole population but also to the high cost 10 percent itself. The top 1-2 percent likely receive 70 percent of the total benefit that the top 10 percent receives.

In other words, the top 1 or 2 percent of Medicare beneficiaries likely account for half its costs (70 percent of 70 percent) and the other 98 - 99 percent of the members for the remaining half of the total cost.

A small percentage of Medicare recipients, probably less than 1 or 2 million, account for a disproportionate and substantial share of Medicare costs.

Too bad Medicare does not release information about why so few beneficiaries cost the program so much money. The biggest bang for the cost saving buck would be to try to find medical delivery systems and medical processes to reduce the cost of this high benefits group. Too much effort in the new health care legislation and in the President's rhetoric has been to treat the medical cost problem as a universal health care delivery problem. In reality, the very high cost of a few appear to be breaking the budget of the entire program.

With more information, Medicare could probably be split into two programs. A low cost program that the US and seniors can afford, that is likely amenable to vouchers and privatization, and a high cost program for a small percentage of the population that needs a major effort to control its costs.

The US has done similar things before for catastrophic insurance, terrorism insurance, flood insurance, etc.


  1. Not sure I like the sound of privatization and vouchers, but this is an outstanding article. Obviously dragging those 2-5% grannies and grandpas into the woods to die alone isn't an option, but the public definitely deserve to know why it cost over 100k annually to care for these citizens. My blind assumption is that this is the end-of-life care cost, but that still doesn't explain why it's quite that expensive. I'd love to say spare no expense to extend an American life, but I don't think I'd be comfortable being turned into a million dollar man to tack on another ten years or so of life. Maybe I'll feel differently when I get there, though...

  2. If we can identify what procedures and age groups spend the bulk of the money, we can offer volunteer cost-effective options where seniors get a kick-back if they choose the cost effective option for their medicare plan. Both cost effective and non-cost effective alternatives should have measurable metrics of success so seniors can intelligently choose.