By Lori Montgomery
Published: December 22
Throughout Medicare’s 46-year-old history, monitoring the cost of the
government health plan for the elderly has been a bit like the old joke: No one
asked if spending would jump. They only asked how high.
But in early 2010, the number crunchers at Medicare headquarters in Baltimore
saw something surprising: a sharp drop in the volume of doctor visits and other
outpatient services. Instead of growing at the usual 4 percent a year, the
number of claims was suddenly climbing by less than 2 percent. Was this a
one-time blip, or a fundamental shift in how seniors were receiving care?
At first, chief Medicare actuary Rick Foster thought it was a mistake,
perhaps a glitch in data collection. No other explanation made sense. Congress
had just passed far-reaching health-care legislation that mandated cuts in
Medicare spending. But the law was so new that rules for implementation had not
been written.
As spring wore into summer, the trend inexplicably held. Spending growth on
outpatient services, known as Part B, fell sharply.
“We thought, ‘Wow, what’s happening?’ ” Foster recalled in an interview.
“Part B cost growth has slowed down so much, we’re seeing virtually the lowest
rates ever.”
Budget analysts treat the news as a temporary aberration that is unlikely to
brighten a bleak outlook dominated by this fact: An average of 10,000 baby
boomers will turn 65 every day for the next 20 years, eventually doubling the
program’s enrollment. Annual Medicare spending is projected to reach nearly
$1 trillion by 2021, approaching a fifth of all federal outlays. If per-person
costs return to the usual rate of growth — and history suggests they will — the
program will rapidly become the biggest driver of the
national debt.
But the drop serves to highlight an often-overlooked truth: Medicare spending
per person is rising more slowly than spending in the private health sector.
And, because of the cuts that were part of last year’s Affordable Care Act, it is
expected to mirror overall growth in the economy for much of the next decade,
staying well below targets set by Congress.
“Medicare is not out of control,” said Robert Berenson, vice chairman of the
congressionally appointed Medicare Payment
Advisory Commission, which studies the program’s finances. “This bloated and
inefficient program is not bloated and inefficient.”
Instead, the immediate and inescapable problem is a demographic one: the
enormous wave of baby boomers who started enrolling this year. That concern
suggests different solutions, experts say, from those needed to cope with
runaway costs.
The politically charged debate over Medicare tends to proceed, however, as
though the solution lies entirely in squeezing more savings out of the program,
a goal that budget experts say will be difficult to reach. Not only are the
proposed remedies largely untested, but there is a fundamental ideological
divide over which ones to pursue.
President Obama and congressional Republicans agree that reining in Medicare
is critical to reducing deficit spending and, therefore, the government’s need
to borrow. But most Republicans say the Affordable Care Act won’t work and have
vowed to repeal it. Many favor ending Medicare as an open-ended benefit and
limiting spending for each beneficiary. Private insurance companies would
compete with traditional Medicare, with the hope that vying for clients would
push down costs, as some say has happened in the Medicare prescription drug
program.
But administration officials and many Democrats say this is the wrong time
for radical change. They point out that Medicare is doing a better job of
controlling costs than the private sector and argue for saving money by
less-drastic means. Ideas include raising the eligibility age for Medicare from
65 to 67, increasing premiums and co-payments for wealthier beneficiaries, and
managing services better for the elderly poor, whose enormous medical bills are
juggled between Medicare and Medicaid, driving up costs.
It is not clear that any of those options can produce sufficient savings to
deal with the demographics. Unless policymakers can cut spending below
Affordable Care Act targets, paying baby boomers’ projected hospital bills alone
would require a tax increase of nearly 1 percent of wages, or about $100 billion
next year.
“Either you have to renege on your commitment to provide affordable,
accessible health care to the elderly and the disabled or you have to raise more
money,” said Robert Reischauer, a former director of the nonpartisan Congressional Budget Office. “I think many of us would accept the fact that premiums and payroll tax payments probably have to go up.”
When the cash runs out
Contrary to a common misconception, seniors do not receive Medicare free of
charge.
Every part of the program costs something. Basic hospitalization coverage,
known as Part A, comes with a hefty deductible, which patients must pay before
the insurance kicks in. How about the Part B option, which covers doctor and
other outpatient services? That costs $100 a month; wealthier beneficiaries pay
an even higher premium.
Want a prescription drug plan, aka Part D? Add a minimum of $25 a month. And
because Medicare offers no catastrophic coverage — no limit on annual
out-of-pocket spending — most seniors buy “Medigap” coverage to help with the
deductibles and co-pays that Medicare doesn’t cover.
Many elderly people spend proportionately more for health care than working
people. Last year, out-of-pocket costs for parts B and D claimed 27 percent of
the average Social Security check, the largest source of income for most
retirees, according to the Kaiser Family
Foundation, which studies health-care costs.
Still, those payments come nowhere close to covering the program’s cost.
Premiums cover only about 25 percent of spending in parts B and D, with general
tax revenue picking up the rest.
Part A is financed by payroll taxes. But that revenue is not sufficient,
forcing the program to rely on a trust fund that is expected to run out as soon
as 2020.
Because of its complexity and its outsize role in the private health-care
system, Medicare presents a thornier budget problem than Social
Security or the
tax code, which rely on fairly straightforward formulas to control spending
or generate revenue. With Medicare, the primary mechanism for saving money is
lowering rates paid to doctors, hospitals and others. That cuts spending, but
some providers may go broke or abandon the program, threatening access to
care.
That happened after the last big round of budget cuts in 1997, and Congress
was forced to backtrack on some of the reductions. The Affordable Care Act
represents the first major effort to try again. In trade for millions of newly
insured patients who would gain coverage under the legislation, hospitals and
other providers agreed to accept nearly $500 billion in Medicare cuts over the
next decade and to test innovative ideas for reducing costs.
Temporary or permanent?
Soon after noticing the slowdown in Part B cost growth in early 2010, Foster
and his staff members began treating the suspicious blip as a statistic worthy
of serious study.
After soaring at an annual average rate of 9 percent from 2000 to 2009, total
Medicare costs increased by just 4.3 percent in 2010, according to the CBO. They
went up by only 3.8 percent in fiscal 2011 (excluding an extra payment made
early because Oct. 1 fell on a weekend). This fiscal year, annual spending isn’t
projected to grow at all, although it would rise slightly if Congress follows
through with legislation to prevent a sharp reduction in January in physician
payments.
For the rest of the decade, the CBO projects 6.3 percent annual growth, with
about half the increase resulting from the huge jump in enrollment and the other
half resulting from rising costs per person. If the Part B slowdown persists,
that number could fall. But analysts say policymakers should not count on
it.
“For now, we have no reason to believe that the slow growth rates in 2010 and
the first part of 2011 signal a permanently lower rate for Part B spending,”
said Foster, the Medicare actuary.
Theories about the slowdown abound. The most optimistic holds that it may be
a first sign of the industry improving efficiency in reaction to broad public
concern about health-care inflation. The most common posits that the weak
economy may have led people to limit the use of health services, perhaps to save
money — although analysts note that retirees with steady Social Security checks
and guaranteed health coverage should be better insulated from such pressures
than the general population. Puzzled CBO analysts mentioned the economic theory
in an August report but concluded that evidence for it “is not clear at this
point.”
In Washington, where Medicare is shaping up as a hot issue in the 2012
presidential campaign, nearly two years of unusually slow growth is hard to
ignore.
House
Budget Committee Chairman
Paul Ryan (R-Wis.) dismisses the slowdown as the inevitable byproduct of
“government price controls,” which he argues are ultimately unsustainable.
Ryan is the chief advocate for switching Medicare from an open-ended
entitlement program to a system of per-capita subsidies, with private insurance
plans competing to serve the vast Medicare market and, in theory, pushing the
system to provide more value for the dollar. Last week, he announced that he is
collaborating with Sen.
Ron Wyden (D-Ore.) to develop a bipartisan version of the idea, known as premium
support.
Ryan points to the Part D drug benefit, which Congress approved in 2003.
Program costs have been much lower than expected, mainly because private plans
have given people incentives to switch from more-costly brand-name drugs to
generics.
Skeptics note that Part D benefited from trends already sweeping the private
sector. Still, the voluntary shift may have been difficult to engineer by
government regulation. “There would have been complete outrage if Congress did
it,” said Mark McClellan, the federal health administrator who implemented Part
D.
The only other route to savings, Ryan said, would be cutting provider
payments beyond the targets in the Affordable Care Act — a sure path to
Medicare’s collapse, he said. Budget analysts throughout the government doubt
that even the legislation’s targets can be sustained past 2021. The act’s rates
will “eventually become inadequate to compensate providers for their costs of
treating beneficiaries,” the Medicare trustees wrote in their 2011 report.
Medicare “is going from 40 million people to 80 million people. You’re
doubling the consumers of the program. Spending is going to go up,” Ryan said.
“The question is: Is it going up in the stratosphere, where it bankrupts us? Or
is it going up in a way where our economy can manage it?”
‘Misaligned incentives’
Rep.
Chris Van Hollen (Md.) is the senior Democrat on the House Budget Committee and a veteran of this
year’s skirmishes over the national debt. He argues that Ryan’s approach would
jettison the nearly 50-year-old commitment to providing seniors with affordable
health care. Even if traditional Medicare were preserved as an option, he said,
limited subsidies would improve the federal budget by shifting costs to the
elderly.
“This is how they save money. Just to be clear,” Van Hollen said. “And let’s
just remember, the whole reason we have Medicare to begin with is that, in 1965,
the private health insurance market did not work for older people.”
Van Hollen considers the cost slowdown evidence that Medicare is on the right
track under the Affordable Care Act.
Jonathan Blum, a top Medicare official, echoed that view. He attributed much
of the drop in cost growth to Obama administration initiatives, including
the ACA. “When I look at the data,” he said, “it says to me the
strategies are working.”
To tame the federal debt, however, Van Hollen acknowledged that Medicare
must reduce costs further. He is exploring several options, including a limit on
out-of-pocket spending. That would eliminate the need for seniors to buy Medigap
policies, which cover catastrophic costs but also co-pays and deductibles —
encouraging unnecessary doctor visits.
“We recognize there are some misaligned incentives,” he said. “But we’re not
going to end the Medicare guarantee.”
Reischauer, the former CBO director, is one of the intellectual fathers of
premium support, the concept advocated by Ryan. It bears similarities to the
health insurance system that the Affordable Care Act will create for non-elderly
people, including a regulated insurance marketplace and limited federal
subsidies.
Reischauer said premium support is still a promising option for dealing with
exploding Medicare enrollment. But the best option, he said, may be to let the
Affordable Care Act take its course.
“Anything we’re talking about” — including premium support — “is going to
take a long time to bear significant fruit,” he said. “This is an opportunity,
if we stick with ACA policies, to get these more fundamental structural changes
embedded in the system” — and find out whether they’re going to work.