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?”
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.