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When Will Medicare’s Size Force Action?

August 14, 2006

22 Boardroom
Vanessa Sochat

Wellington Management Company, LLP


©2005 Wellington Management Company, LLP. All rights reserved.
When Will Medicare’s Size Force Action?
Answer – Within 3-6 years

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Medicare Overview

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Four Main Questions

Why is Medicare spending growing?

How big will spending get?

How will the government really act?

What is the most likely future scenario?

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Medicare Is Eating Up The Economy
Total Expenditures as a Percentage of GDP
7
6
5
4
3
2
1
0
70 76 82 88 94 00 06 12 18 24 30
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What Is Feeding This Spending Monster?
Demographics

Costs of technology

Prescription drug benefit

Inefficiencies

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Enrollment Is Increasing
Total Medicare Enrollment (Mil)
80

70

60
1.74% Annualized Growth Rate
50

40

30

20
80 85 90 95 00 05 10 15 20 25 30
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Less People Are Dying, and The Birth
Rate Is Decreasing
Growth of Birth and Death Rates (%)
3
Growth in Birth Rates
2 Growth in Death Rates

-1

-2
97 98 99 00 01 02 03 04
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Total Costs Per Capita
Medicare Cost Per Capita ($)
20,000
Annualized Spending/
16,000 Capita Growth Rate
Estimates
12,000 Low 5.13%
Intermediate 7.31%
8,000
High 9.46%

4,000 Prescription Drug Benefit


January, 2006
0
70 75 80 85 90 95 00 05 10 15
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The Government Is Financing This
Spending
Medicare Spending as a % of Federal Government Spending
16
Linear Regression
14
Spending as a % of Federal Spending
12
10
8
6
4
2
0
66 71 76 81 86 91 96 01 06 11
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Beneficiaries Are Contributing More
Premiums of the HI Trust Fund – Part A ($)
300

250

200

150

100

50

0
70 80 90 96 98 00 02 04 06 08 10 12 14

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We Are Depleting Our Funds
Income and Expenditures of Medicare
1,000
MEDICARE COSTS (billions) Income (billions)
800           Today     2009      2015 Expenditures (billions)
Total Income           446.7       561.83    780.1
HI           210.2       245.7      320.3 Assets at End of Year (billions)
600 SMI           236.5       316.13    459.8

Total Expenditures     432.9       537.5      818.2
HI           200.5       242.2      362.5
400 SMI           232.4       295.3      455.7

Balance Total           13.8        24.33     ­38.1
200 HI
SMI
          9.7          3.5         ­42.2
          4.1          20.83        4.1

-200
70 75 80 85 90 95 00 05 10 15
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Is The Government Proactive? A Quiz
Looking at 12 attempts to reduce spending from
1965 to 2006:

• How many attempts reduced spending?


1 — (represented by a negative growth rate)

• How many attempts increased spending?


5 — (represented by an increase in the growth rate)

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What Do We See In The Crystal Ball?

Prescription Bush submits remedial Total Expenditures


Drug Benefit legislation to Congress Exceed Income

2005 2007 2009 2011 2013 2015 2017

2006 2008 2010 2012 2014 2016 2018

2008 HI Expenditures Depletion of HI Depletion of HI Trust


Elections Exceed Income Trust Fund HIGH Fund INTERMEDIATE

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What Can We Rule Out?
Corrective action in 2008

Reduction of benefits for low to middle income


beneficiaries

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What Can We Rule In?
Higher taxes/premiums

More investment in cost efficiencies, outsourcing,


import generic drugs

More pressure from the government to drug


companies and health care providers (private
health insurance and medical savings accounts)

Change in age of eligibility


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The Government Has Leverage To
Control Drug Prices

Medicare Spending on Drugs as a % of Total Drug Spending


35
30
25
20
15
10
5
0
65 71 77 83 89 95 01 07 13
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This Is An Easy Way For The Government
To Get Money

25
Pharmaceutical vs S&P 500 Net Profit Margins
Average Pharm Net Margin
20 Average S&P 500 Net Margin

15

10

0
96 97 98 99 00 01 02 03 04 05 06
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Who Will Be In Office?
It doesn’t really matter

The White House is up for grabs

• Democrats will claim more seats, but there will be


no significant majority
— Tackling big issues (Medicare) a challenge

• If Democrats control Congress, possibilities include


— Lower Medicare drug prices & HMO payments
— Tougher drug safety law ®
Conclusions
Bush submits remedial legislation to Congress, 2007
Small House and Senate majorities make passing
anything very difficult
We hit murky water in 2009
Between 2009 and 2012 we will see drug price
negotiation
Benefits won’t be taken away from lower to middle
income beneficiaries
So richer beneficiaries will pay their way by 2012
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What Are the Larger Implications?
The Government looks for easy places to get
money:
• Beneficiaries
• Drug Companies
• Itself

Healthcare investing gets tougher

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