Medicare Cost Slowdown Could Close US Budget Gap

Wednesday, 20 Mar 2013 10:18 AM

By Peter Orszag

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New evidence that the slowdown in healthcare costs over the past five years is happening not only because of a weak economy comes from the Economic Report of the President, released last week by the President’s Council of Economic Advisers. If the slowdown were to continue in the future, the report shows, Medicare spending would basically remain flat as a share of the economy.

Nevertheless, new data suggest Medicare spending growth may be picking up a bit. So it’s important to take more aggressive action to improve value in healthcare.

The Economic Report of the President examines changes in healthcare spending and unemployment rates across states, and concludes on that basis that the recession accounts for only 18 percent of the slowdown in spending growth since 2007. (A similar analysis for Medicare alone, which is mentioned only in a footnote in the report, shows an even smaller contribution from the recession, which is not surprising since Medicare beneficiaries tend to be better protected against economic fluctuations than the population as a whole.)

The report then goes on to examine some of the structural shifts that could explain why health costs are decelerating, including the movement away from fee-for-service payments and toward greater care coordination.

Fewer Readmissions

As one example of progress, the report highlights a noticeable decline over the past few years in the hospital readmission rate (that is, the share of discharged patients who are readmitted within 30 days). This decline, the report argues, is probably due, at least partly, to the Partnership for Patients program, a public-private effort involving 3,700 U.S. hospitals to improve the quality of care provided to patients, including after they have been discharged. Declines in readmission rates have been larger at hospitals that are part of this partnership than at other hospitals.

What are the consequences if the slower growth continues? Official projections, which do not fully incorporate the recent slowdown, suggest that spending on Medicare will rise from 3.7 percent of gross domestic product (GDP) in 2011 to 6.7 percent in 2085.

In contrast, the Economic Report of the President shows in an illustrative calculation that it will rise only to 3.8 percent of GDP by 2085 — not much higher than it is today — if the per-beneficiary growth rate we have seen in the past five years keeps going.

If this happens, in other words, a major part of our long- term budget problem would disappear. And the nation’s long-term fiscal gap would narrow by almost a third, according to a recent study by the economists William Gale of the Brookings Institution and Alan Auerbach of the University of California, Berkeley.

So is it possible to keep the trend going? On this, we have somewhat conflicting news. A recent report from the Altarum Institute found that slow growth is continuing at the national level, with total healthcare spending rising slightly more than 4 percent in nominal terms from January 2012 to January 2013. On the other hand, incoming Medicare data suggest spending is speeding up a bit.

The Medicare data this year are complicated because the 2012 figures were artificially depressed by the calendar (the start of the 2012 fiscal year, on Oct. 1, 2011, fell on a weekend, so some payments were shifted back to fiscal year 2011.)

Adjusting for these timing details, spending per beneficiary fell slightly in 2012. In the first five months of fiscal year 2013, by contrast, the adjusted spending per beneficiary figures show an increase of more than 2.5 percent. That is still very low by historical standards, but noticeably higher than in 2012. At this point, it is unclear what is driving the acceleration.

Since continuation of the recent slowdown would almost eliminate the projected increase in Medicare spending as a share of the economy, it’s crucial that we monitor closely the pickup in spending growth. And as I have emphasized previously, there is plenty more we can do to improve value and constrain cost growth in healthcare.

Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc., and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.

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