The Coming Health Crisis: Who Will Pay for Care for the Aged in the 21st Century?

This book examines how future demands for acute and chronic medical care services by the population over 65 years of age are being shaped by current demographic, economic and health trends, and how both public policy and individual behavior must be adjusted to ensure that these demands are adequately met. Wolfe argues that we will not be able to rely in the future, as we do now, mainly on intergenerational transfers to finance health care for the aged; instead, he believes that self-financing mechanisms must be fostered to increase the likelihood that elderly persons receive the care they need.

The general lines of the analysis may be summarized as follows. First, the characteristics of the aged population that are expected to raise the demand for medical care services rapidly over the next fifty years are assessed, with special attention focused on changes in the health status of this population. Current demand projections depend critically on whether mortality improvements at older ages will "rectangularize" the aggregate survival curve while simultaneously "compressing" the duration of morbidity and disability spells; they also depend on the extent to which aged health care spending continues to be concentrated in the last year of life. After sifting the conflicting evidence on these scores, Wolfe concludes that significant increases in the demand for health care by aged persons, especially long-term care services, are indeed likely to occur. Next, the issue of financing these services is taken up. The declining rate of growth in the payroll tax base that threatens transfers from current workers to beneficiaries in pay-as-you-go financed insurance programs such as Medicare Part A is detailed. Attention then turns to the potential for shifting a portion of the burden of financing aged health care back to individuals through self-financing mechanisms. In this latter context, the author explores adverse selection and moral hazard problems that must be overcome for private (acute and chronic) insurance coverage of retired elderly persons to expand. He then reviews the options for financing the future health care demands of the aged. In the case of acute care, the inventory or menu of policy choices includes finding new revenues for public programs, prefunding public programs, increasing beneficiary cost-sharing as well as rationing; in the case of long-term care services, it includes changing the structure of Medicaid, mandating insurance coverage, integrating public programs and family care, and stimulating the use of various innovative saving/insurance devices such as social/health maintenance organizations, continuing care retirement communities, IRAs, and home equity conversions. Recommendations derived from the analysis are then set out, with new insurance arrangements touted as the most promising means of meeting the coming "health crisis."

The volume covers terrain that is quite familiar to economists working in the aging and health fields, and these specialists will not find in it a great deal that is new. The target audience of nonspecialists, however, will find Wolfe's nimble delineation of the relevant policy issues as well as his concise summary of the recent literature bearing on those issues very useful indeed. Specialists and nonspecialists alike should consider placing the book on their supplemental reading lists, and it will make a valuable addition to such lists both in various courses in economics and those in social gerontology and health administration.

These strengths must be weighed against several shortcomings in the scope and depth of Wolfe's analysis. One is Wolfe's treatment of the health care demands of the entire population of aged persons over 65 years of age as essentially homogenous in nature. To be sure, he acknowledges the heterogeneity of this population in terms of economic and health characteristics, but these variations do not play a prominent role in the appraisal of different policy options. In particular, the absence of sufficient attention to the target efficiencies of policies aimed at different subgroups of this population, e.g., those 65-74 years versus the "oldest old" over 85 years of age, detracts somewhat from the value of his policy recommendations. Another, more serious limitation, is Wolfe's failure to devote much attention to cost containment efforts designed to restrain resource consumption in the health sector. Although there is brief discussion of Medicare's Prospective Payment System, there is no reference at all to the 1989 Physician Payment Reform legislation that not only overhauled Medicare's Part B physician reimbursement policies, but also mandated that the new Agency for Health Care Policy and Research conduct extensive appraisals of the effectiveness (and economic worth) of medical interventions and then disseminate guidelines based on these appraisals to medical practitioners. The new Agency's effectiveness research potentially may have a significant impact on the issue of financing health care for the aged, because more systematic review of what medical treatments actually work is expected to dampen the growth in per capita spending, and the formulation of practice guidelines is expected to reduce the variation of that spending across markets, medical specialists, and patients. Finally, Wolfe fails to highlight many useful insights about aging and health trends emerging from the recent literature on technical economics. My biggest disappointment in this regard is that some really imaginative work that he himself has done on related topics such as perceived longevity, health depreciation, and labor market withdrawal played no apparent role whatsoever in his policy-related analysis.