Healthcare Business News
Merrill Goozner, Modern Healthcare editing

Curbing healthcare spending

The slowdown is real and should impact federal cost-cutting debate

By Merrill Goozner
Posted: January 12, 2013 - 12:01 am ET

It's too soon to pop the Champagne corks on healthcare spending. But the latest evidence suggests the slowdown is real and not just recession-related.

The headline number reported last week by the CMS actuaries showed overall healthcare spending grew by only 3.9% in 2011, no different than the previous two years. Healthcare's share of the overall economy remained at 17.9% for the third straight year.

Growth in the private sector was actually slower than the overall economy. With more employers raising copays and turning to high-deductible health plans, workers and their families, many with either no raises or ones well below inflation, are pulling back hard on the reins of discretionary care. Out-of-pocket spending grew by just 2.8% in 2011, even less than the limited 3.8% increase in spending on private insurance by employers.

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Government programs, on the other hand, grew slightly faster than the overall economy. But that isn't cause for alarm. There were 2.5% more seniors on Medicare, leading to a higher rate of spending on the elderly and the disabled (6.2% growth). That was partially offset by slower spending growth in state-run programs for the poor (just 2.5%).

Does this slightly faster than GDP growth in public programs justify political demands for major cuts in entitlement programs?

Hardly. In fact, the long-term trends in Medicare spending are looking better and better.

It's important to remember the CMS actuaries' annual reports are more than a year out of date. And while it is logical to think that an improving economy will drive healthcare spending higher, that's not what several new reports suggest is happening.

Some private analysts say healthcare spending in 2012 was even slower than 2011. More significantly, the Congressional Budget Office and the CMS Office of the Actuary (OACT)—the official arbiters of federal budget projections—are significantly reducing their estimates for future spending on healthcare, especially in the nation's Medicare program, based on recent trends.

The CBO now projects Medicare spending will actually shrink by 0.3% per beneficiary over the next decade when compared to the overall growth in the economy. And that latest estimate includes the assumption that Congress will permanently restore physician pay to current levels—the so-called “doc fix.” The OACT is only slightly more pessimistic, saying there will be no change in spending per beneficiary growth. In other words, the actuaries believe Medicare spending will remain stable as a share of the overall economy, a major improvement from previous projections.

In a rational political environment, this should influence the federal policy debate. Yet during the first week of the new Congress, Republican legislators in the House spent hours railing against the Patient Protection and Affordable Care Act's provision that sets up an Independent Payment Advisory Board, whose recommendations for cuts in Medicare go into effect only if the program's costs per beneficiary grow faster than GDP + 1%. During the debt-ceiling negotiations that will take place over the next several months, the administration may refloat its proposal to cut that to GDP + 0.5%

But if the current projections by the CBO are put in its baseline—and why wouldn't they?—an “entitlement cut” to GDP + 0.5% would actually be an increase!

The Obama administration issued a report last week that credited the Affordable Care Act for the slowdown in spending, especially its cuts to providers and insurers, its efforts to curb fraud and abuse and its nascent moves on payment and delivery-system reform.

Skeptics abound, especially on the other side of the aisle. But that doesn't matter. When the official projections come out in the president's budget and from the CBO, politicians and deficit hawks pushing for deep cuts in entitlement programs will be facing a very different set of numbers than they've faced in the past.

Those new projections will show that providers' efforts at cutting costs are paying off. It's time they get credit for those efforts in Washington.

Merrill Goozner, Editor.

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