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August 15, 2011

Medicare Spending Slows Sharply

Maggie Mahar

While our elected representatives wrangle over slicing entitlements, virtually no one seems to be paying attention to an eye-popping fact: Medicare reimbursements are no longer accelerating at a break neck-pace. The new numbers should be factored into any discussion about healthcare spending:  From 2000 through 2009, Medicare’s outlays climbed by an average of 9.7 percent a year. By contrast, since the beginning of 2010, Medicare spending has been rising by less than 4 percent a year. On this,  both Standard Poor’s Index Committee and the Congressional Budget Office (CBO) agree. (S&P tracks healthcare spending with the help of Milliman Inc., an independent actuarial and consulting firm.)

What explains the 18-month slow-down?  No one is entirely certain.  But at the end of July David Blitzer, the chairman of Standard &Poor’s Index Committee, told me: “I’m hesitant to say that this is a clear long-term trend.  But it’s more than a blip on the screen."     

Since then, I have talked to an analyst at the Congressional Budget Office who is involved in putting together numbers on Medicare payments for CBO’s Monthly Budget Review. He confirmed that they, too, have seen a dramatic slow-down in Medicare spending. 

When I asked, “Why?, he replied: “We have some theories.” 

Would he share those theories? 

“No,” he responded. “You would quote me.”

 This is true.

Probably he was reluctant to see his name in print because these days, news that Medicare spending is beginning to level off --without Draconian cuts--could create political waves in Washington.

Standard & Poor’s Blitzer was more forthcoming.  In the S&P report on healthcare spending released on July 21, he wrote: “many participants [in the healthcare system] have indicated that providers are trying to address health care reform and are looking for ways to control costs. If true, this combination certainly would be a contributory factor to the moderation in cost we have witnessed since early 2010.”

Zeke Emanuel, an oncologist and former special adviser for health policy to White House Office of Management and Budget director Peter Orszag, is certain that this is what is happening.  When I spoke to him last week, Emanuel, said:  “This is not mere chance: this is directly related to the initiation of health care reform.”  It is  not the result of reform, Emmanuel emphasized.  The reform measures that will rein in Medicare inflation have not yet been implemented.  But, he explained, providers are “anticipating the Affordable Care Act kicking in.”  They can’t wait until the end of 2013: “They have to act today.  Everywhere I go,” Emanuel, added, “medical schools and hospitals are asking me, ‘How can we cut our costs by 10 to 15 percent?’

“This is doable, since there is so much fat in the system” said Emanuel,  a doctor who is well aware of just how often unnecessary tests and procedures hike medical bills, while exposing patients to needless risks.  It is worth noting that Emanuel is far from cavalier about cutting Medicare benefits that could help patients.  A medical ethicist, he has recently been chosen to lead the medical ethics department at the University of Pennsylvania’s Perelman School of Medicine. But Emanuel understands that patients do not benefit from waste, and that today, our medical culture encourages health care providers to "do more," without always considering whether medical evidence justifies another test or treatment.

Meanwhile, thanks in part to the heathcare debate, combined with spiraling insurance premiums, the majority of Americans  realize that we cannot afford out of control healthcare spending. There is now a nationwide mandate to rein in health care inflation, not just in the public sector, but in the private sector.  “Either we get volume under control, or prices paid both by private insurers and by Medicare will drop,” says Emanuel. “Hospitals know this. They is why they want to make their systems more efficient.”   

The Numbers

As the S&P chart below reveals, Medicare’s outlays began to plunge at the beginning of 2010 (See the dotted line at the very bottom of the graph labeled “Medicare Index.”)  Spending by private insurers also fell, though the slow-down began later and was not nearly as dramatic. (See the solid line at the top of the graph labeled “commercial index.”) 

(Click to enlarge)

In the twelve months ending in May, overall spending by commercial health insurers climbed by 7.35 percent. By contrast, over the same span, Medicare claims rose at an annual rate of just 2.6 percent.

 S&P breaks down the spending: over the course of the year, Medicare’s reimbursements to hospitals crept up by only 1 percent, while payments to doctors and other professionals rose by 4.7 percent. 

The Congressional Budget Office confirms the trend. In June,  CBO ‘s Monthly Budget review showed  that over the 12 months ending in May, Medicare  spending was growing at an annual rate of 3.8% -- down from  recent annual increases that ranged from 4.7%  in 2010 to 15 percent in 2006.   

(CBO & S&P report different numbers because, inevitably, they use different methods to track healthcare spending. For the complete methodology, and supporting research for the S&P Healthcare Economic Indices click here. www.healthcareindices.standardandpoors.com  As for CBO, their analyst told me that they take their numbers from the Treasury Department’s monthly report on Receipts and Outlays.)

But what is important is not precise estimates of current outlays (which are open to later revision) but the trend over the past 1 ½ years.

For decades, Medicare’s outlays have grown far faster than GDP.  Now, it seems that Medicare is beginning to “break the curve” of healthcare inflation. It is easier to see the bend in S&P’s 12-month chart of moving averages below. The top line tracks reimbursements by private insurers; the bottom line reflects growth in Medicare payments, and the middle line blends the two, presenting a composite index of  public and private sector health care spending nationwide.

(Click to enlarge)

The turn in the Medicare curve does not mean that we should “rest on our laurels,” Emanuel observes. “This is still much to be done to improve the quality of Medicare and get the waste out of the system.” 

I would add this:  Fed Chairman Ben Bernanke recently warned that we can expect GDP growth to remain sluggish for the next two years. I would not expect to see the economy growing by more than 1 1/2 to  2 percent a year.  This means that we should aim to rein in Medicare inflation to 3 percent a year-- at the very  most.

I believe that the cuts built into the Affordable Care Act (ACA) will be able meet that goal as we slice overpayments to Medicare Advantage insurers, and trim annual increases in payments to hospitals, nursing homes and other institutional providers by 1% a year, for 10 years. In addition, under the ACA, financial carrots and sticks will encourage providers to deliver better care at a lower cost.


Still, the question lingers:  Why have Medicare’s reimbursements slowed so sharply in the past 18 months-- and, most importantly, will this trend continue?

We understand why private insurers are spending less on healthcare. As Naomi explained not long ago, in a recession, people with high co-pays and deductibles put off doctor’s visits and elective procedures. Others are losing their insurance as they lose their jobs, and simply cannot afford to pay for doctors’ visits out of pocket.  

But Medicare patients are not losing their insurance.  Since most are retired, the rise in unemployment has not had a major impact on their use of healthcare. Finally, their deductibles and co-pays are not that high. The vast majority have supplemental “wrap-around” insurance in the form of Medigap or Medicare Advantage plans that, in many cases, reduces co-pays to zero.

In part 2 of this post I will explore the multiple factors contributing to the moderation in Medicare spending. There are good reasons to believe that this is a trend that will last.

In addition, I’ll explain why aging boomers are not going to have a significant impact on Medicare spending in the next five to ten years. A recent article in  Health Affairs suggests that between now and 2013, Medicare spending will spike, in large part because so many aging boomers will be joining the system. This  is just not  true. Our fears that a horde of former hippies will suddenly descend on the nation, bankrupting both Medicare and Social Security, are greatly exaggerated.

Boomers will turn 65, just as they were born, slowly, over a period of many years.  As I explained on HealthBeat several years ago, we will not suddenly face a “tsunami” of greedy geezers.  There is no reason to expect that Medicare reimbursements will jump anytime in the near future. But, as I will discuss in Part 2, there are many reasons to believe that Medicare spending will continue to ease.


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