Healthcare Business News

Slower growth in forecast

CBO sees decelerating healthcare spending

By Melanie Evans
Posted: February 9, 2013 - 12:01 am ET

Federal healthcare spending on Medicare and Medicaid will grow slower than previously believed over the next decade, making it a lot cheaper to restore physician pay to current levels.

But healthcare still will grow substantially faster than the rest of the economy, according to the latest projections from the Congressional Budget Office, which is certain to keep the issue of skyrocketing medical costs a major concern for Washington policymakers.

An independent analysis by the Economic Policy Institute showed that federal spending on healthcare will grow just 3 percentage points per year faster than gross domestic product, on average, between 2012 and 2022, down from the 3.5 percentage points faster projected last August.

The healthcare slowdown will only be temporary, according to the CBO analysis. A recession-induced falloff in demand for hospitals, drugs, physicians and other services will reverse itself in the latter half of this decade. Still, total Medicare spending through 2022 will be $137 billion less than the agency's economists projected six months ago.

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The best news for policymakers in the CBO projections was its estimate that the cost of restoring physician pay to current levels—the law mandates annual cuts in pay that cumulatively would result in a 25% pay cut—will cost $138 billion over the next 10 years. That's down 40% from the August 2012 projection of $245 billion.

“The effect on Medicare (and on the deficit) of making such a change would depend on whether lawmakers offset the effects of the change, as they often have done in the past, with other changes to reduce deficits,” the CBO noted. Most recently, Congress cut payments to hospitals and dialysis services to offset the $30 billion cost of delaying the doctor pay cut by one year.

Paul Ginsburg, an economist and president of the Center for Studying Health System Change, said the less costly projection could make it easier for Congress to agree on a permanent “doc fix.”

Medicare spending increased 3% last year, the CBO said, and will increase 4% this year. But the slowdown won't last, according to the projections, which show a rebound in Medicare spending growth to 7% per year, of which just 3% can be attributed to new enrollees, said John Holahan, outgoing director of the Urban Institute Health Policy Center, who reviewed the budget analysis calculations.

Jonathan Skinner, a health economist and Dartmouth College professor, called the projected growth still “pretty impressive.”

Rising spending on Medicare and Medicaid and the cost of new health insurance subsidies under the Patient Protection and Affordable Care Act are among the primary reasons for escalating deficits later in the decade, the CBO said.

Whether Medicare spending returns to its robust growth path depends on what prompted the decline in recent years, which still isn't clear to economists, Holahan said. The economic downturn may have prompted Medicare enrollees to drop or forego supplemental insurance or scale back spending on services with co-pays, he said.

Another possibility is that hospital and physician efforts to improve efficiency may be a major contributor to the slowdown. If that turns out to be the case, the slower spending may become an enduring phenomenon.

Medicaid spending during the same period is also projected to be lower than believed last August, by about $236 billion, largely because of an estimated 1 million fewer enrollees during the next decade. The CBO credited some of the drop in enrollment to better forecasting methods and higher projections for the number of those privately insured by an employer.

Nationally, health spending slowed sharply with the recession and continued through 2011 to grow at historically low rates—3.9% per year since 2009—according to the most recent CMS estimate, which was released in January.

Medicare spending growth decelerated in 2010 to 4.3%, according to the CMS, but picked up again in 2011 and grew 6.2%. Enrollment growth held steady at 2.5% each year, but spending per enrollee grew 1.8% in 2010 and accelerated in 2011, increasing 3.6%. Projections for 2012 and beyond are not yet available.

—with Rich Daly

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