Slowdown in Medicare Spending—Real or Imagined?

For reasons not entirely clear, Medicare spending since 2011 has fallen below Congressional Budget Office (CBO) estimates.

The New York Times (NYT) ran articles on September 4 and 9 suggesting Obamacare (ACA), Part D drug coverage, younger baby boomer enrollees, COVID-19 and the decline in cigarette smoking as reasons for the drop.

There are some who believe the CBO estimates are simply off.

“The type of measure used by most government and academic researchers suggests that if health costs stay at (the same) share of GDP … there is no “excess” cost growth because health costs now are growing no faster than GDP,” wrote Eugene Steuerle, an economist at the Urban Institute in a September 20 article,  on his site, The Government We Deserve. “That’s wacky!”

While not everyone shares Steuerle’s doubts, there is a difference of opinion on the likely drivers of the Medicaid spending reduction.

‘Competition Works’

John C. Goodman, the president and CEO of the Goodman Institute for Public Policy Research and co-publisher of Health Care News, leans heavily toward the emergence of Medicare Advantage plans as the primary causative factor.

“It appears that the Medicare Advantage program, where seniors enroll in plans that look like garden variety employer plans, control costs much better than traditional Medicare,” said Goodman. “The fact that half of all seniors are now enrolled in Medicare Advantage plans may explain why there has been a slowdown in Medicare costs over the past decade.”

David Cutler, an economics professor at Harvard University, says the competition introduced by reforms has improved the quality and reduced the cost of health care.

“The private plans have expanded case management care coordination and a strong emphasis on preventive care,” said Cutler. “Not only has care quality increased, but the private plans have demonstrated repeatedly an ability to provide standard Medicare benefits well below the cost of traditional Medicare. Competition works.”

Reason for Concern

Cutler says Medicare spending will likely continue to grow but at a slower rate. “We should always be worried about stuff we don’t fully understand or control,” said Cutler. “But I think the old era of very rapid cost increases relative to the economy may not apply any longer. We are better at targeting cost savings than we used to be. That’s good; it represents economic and medical progress.”

“CBO assumes the older growth rate will reassert itself,” said Cutler. “My guess is that they are too high in their cost forecast, but I stress the word ‘guess.’ Nobody knows what will happen in the future, so there is no way to say for sure that any single forecast will be off.”

Pitfalls of Past Performance

Focusing on past rather than future projections may be dangerous, says Robert E. Moffit, a senior research fellow in the Center for Health and Welfare Policy at The Heritage Foundation and co-editor of a book titled Modernizing Medicare.

“As your financial advisor warns, past performance is no guarantee of future results,” said Moffit. “To their credit, CBO analysts routinely warn that their health care projections are highly uncertain, given the dynamism of the health sector of the economy. Today’s policymakers, however, should not be focused on previous projections, but rather current projections of the CBO and especially the Medicare trustees.”

The CBO’s projections of future Medicare spending are more alarming, says Moffit.

“The current projections include a major acceleration of Medicare enrollment, especially over the next 10 years, accompanied by a doubling of Medicare spending from roughly $1 trillion to nearly $2 trillion, imposing higher financial burdens on beneficiaries and taxpayers alike, while aggravating record federal deficits and dangerous debt,” said Moffit.

“By 2040, Medicare spending will consume nearly 27 percent of all federal business and income taxes,” said Moffit. “So, any notion that Medicare’s financial issues are a thing of the past is akin to breaking diplomatic relations with reality.”

Medicare Payment Cuts Coming

There are more than a dozen reasons to be concerned about the future trajectory of Medicare spending, says Joseph Antos, a senior fellow in health care policy at the American Enterprise Institute.

“Twelve years of reports from the Medicare actuaries point out that current policy is not sustainable,” said Antos.

Thus far, the government’s plan to reduce Medicare spending is to cut the pay of doctors and health care systems, which will cause even more providers to stop accepting Medicare patients, says Antos.

“Automatic payment cuts under current law will lead to (the) unacceptable loss of access to care,” said Antos. “Congress has been deferring some of those cuts already, and there’s pressure from providers to provide more funds. That won’t lead to a more efficient delivery system, just more spending.  Medicare Advantage can lead to efficiencies, but [what] we pay [MA providers is] tied to traditional Medicare, so the savings to the taxpayer are reduced.”

COVID, Demographics, Part D

As for the reasons cited by the Times article, Antos says Medicare spending did fall during the COVID lockdown and seniors are healthier than in years past, helped by reduced smoking rates, but that doesn’t mean they will consume less health care.

“[R]ather than dying relatively young from lung cancer, more people will live longer and incur other medical expenses,” said Antos. “[Also], we do too many diagnostic tests, which can lead to unnecessary treatments. We’re still spending a greater share of GDP on health care than any other country. The recent lull should not be an excuse to add more benefits to Medicare, which is on an unsustainable fiscal path.”

Kevin Stone (kevin.s.stone@gmail.com) writes from Arlington, Texas.