Medicare: The Fiscal Outlook Continues to Improve

Medicare is at the heart of the national debt issue. It is the entitlement program that is always projected to produce the greatest impact on our future budget deficits. It has been repeatedly argued here that healthcare costs are excessive and wasteful. Consequently, we should wait until savings have been wrung out of these costs before we decide what might be done in determining the future of Medicare. It is too early to define an affordable level of benefits.

Given the above stance, it seems appropriate to report occasionally on recent developments in medical costs and in cost projections. Let us begin with recent projection by the Congressional Budget Office (CBO) as reported in the New York Times.

"....the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year."

For the third straight year the CBO has had to lower its Medicare cost projection below that of the previous year.

"The slowdown has occurred in both government and overall health spending. From 2009 to 2011, total health spending grew at the lowest annual pace since the government started keeping records 52 years ago, a trend that seems to have continued last year. In the 2012 fiscal year, Medicare spending per beneficiary grew just 0.4 percent. The new Congressional Budget Office data said that overall Medicare outlays grew 3 percent in 2012, the slowest rate since 2000."

Two factors are at work in determining this decrease in costs: the financial crisis and its associated impact on consumer spending, and longer-term changes in the manner of healthcare delivery. Most who report on this issue believe that a significant fraction of the diminished rate of growth in costs is due to the latter factor. It seems the events surrounding the passage of the Affordable Care Act (Obamacare) and the terms of the new law have convinced the healthcare industry that it must change its ways of doing business. This article in Health Affairs provides a summary consistent with that point of view.

"We find that the 2007–09 recession, a one-time event, accounted for 37　percent of the slowdown between 2003 and 2012. A decline in private insurance coverage and cuts to some Medicare payment rates accounted for another 8　percent of the slowdown, leaving 55　percent of the spending slowdown unexplained. We conclude that a host of fundamental changes—including less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing, and greater provider efficiency—were responsible for the majority of the slowdown in spending growth. If these trends continue during 2013–22, public-sector health care spending will be as much as $770　billion less than predicted. Such lower levels of spending would have an enormous impact on the US economy and on government and household finances."

The Medicare Trustees issued their annual report recently. The New York Times provided analysis of the findings. The trustees are appropriately conservative and have previously included little if any savings from fundamental reform of healthcare delivery in their projections. While they project slightly lower programmatic spending in the near future, they attribute this to specific actions already taken by the administration.

"The Medicare trustees — four federal officials and two public representatives — said in their annual report that the ‘modest improvement’ in the outlook for Medicare’s long-term finances reflected lower projected spending for skilled nursing homes and private Medicare Advantage plans."

"The administration said the outlook for the Medicare trust fund was brighter because of the 2010 health care law. The law squeezed nearly $500 billion out of Medicare over 10 years, in part by trimming payments to many health care providers, including nursing homes and private health plans."

The changes observed and accounted for in the current projection provide an additional two years to get our house in order.

"Under current law, the administration said, Medicare’s hospital insurance trust fund will be exhausted in 2026...The administration said in its 2012 report that the Medicare trust fund would run out of money in 2024...."

A revealing graphic presentation of healthcare cost history is provided by the S&P Healthcare Economic Indices. From the latest report:

"The S&P Healthcare Economic Indices estimate the per capita change in revenues accrued each month by hospitals and professional services facilities for services provided to patients covered under traditional Medicare and commercial health insurance programs in the U.S. The annual growth rates are determined by calculating a percent change of the 12-month moving averages of the monthly index levels versus the same month of the prior year."

This chart is provided:

Note the general decrease in growth of expenditures after the financial crisis occurred. This was followed by an uneven but uniform decrease in the rate of growth. Note also that Medicare expenditures were relatively unaffected by the financial turmoil and have followed a simpler path of lowering growth rates, with most recent numbers hovering at the 1% level.

The fact that Medicare expenditures are growing more slowly than the economy is a rather dramatic accomplishment. One could claim that the program had become sustainable except for the fact that these are per capita expenditures and the number of people covered under Medicare is expected to grow by about 40% between now and 2025. There is a long way yet to go.

One of the fears expressed about Medicare is that the cost savings measures and the administrative requirements might drive doctors out of the program and leave patients in a worse position. An editorial in the New York Times addresses this issue.

"In the critics’ most dire scenarios, baby boomers nearing retirement age could find that their current doctors are no longer willing to treat them under Medicare and that other doctors are turning them down as well. Those concerns have always been greatly exaggerated. Now a new analysis by experts at the Department of Health and Human Services should demolish that mythology for good."

"The analysts looked at seven years of federal survey data and found that doctors are not fleeing Medicare in droves; in fact, the percentage of doctors accepting new Medicare patients actually rose to 90.7 percent in 2012 from 87.9 percent in 2005. They are not shunning Medicare patients for better-paying private patients, either; the percentage of doctors accepting new Medicare patients in recent years was slightly higher than the percentage accepting new privately insured patients."

The number of doctors exiting the Medicare program is small, but it does have a large effect on their patients.

"Roughly 9,500 practicing doctors have currently opted out of Medicare, according to the Centers for Medicare and Medicaid Services. If patients want to stay with these doctors, they have to pay the bills themselves; neither the doctor nor the patient can receive any payment from Medicare."

"The number of doctors opting out is tiny compared with the number of doctors, 735,000, who remain in Medicare. In addition, they are augmented by hundreds of thousands of nurse practitioners and other non-doctor providers."

Significant evolution is underway in our healthcare delivery systems. Until the outcome of these changes is clear, there can be no reliable projections of medical expenditures and budget deficits. While it is likely that some increase in charges or taxes will be required to maintain current benefit levels, it is too early to be able to respond intelligently to the problem.

We still have time to sit back and observe. Why not relax and do that, and enjoy whatever good news can be found.