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Medicare Trustee Robert Reischauer

Medicare trustees' report finds 'cautious optimism'

By Darius Tahir
Posted: July 28, 2014 - 2:00 pm ET

(Story updated with comment Monday, July 28 at 7:55 p.m. ET.)

The Medicare trustees say there are reasons for “cautious optimism” about Medicare's financial outlook, and that Obamacare deserves at least some credit for that.

The depletion date for the Part A hospital insurance trust fund is now projected at 2030, compared with last year's projection of 2026, and initial projections show unchanged Part B premiums in 2015, the trustees said in their annual report Monday. The 2030 date is consistent with a recent estimate from the Congressional Budget Office. Two years ago the trustees projected that the Part A trust fund would be depleted in 2024.

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The new report indicated that the outlook for Medicare improved largely because of lower-than-expected hospital spending and savings resulting from the Patient Protection and Affordable Care Act. The law reduced payments to providers and Medicare Advantage insurers and encouraged them to deliver care more cost-effectively. Some experts say the sluggish economy and continued high unemployment also dampened healthcare spending, but the economy doesn't affect Medicare beneficiaries as much as other consumers in their use of healthcare services.

The more optimistic projections come with a slight change in creating the models, the trustees said. Previous reports have assumed that physician pay cuts from the sustainable growth-rate formula would occur. But this year's report has a baseline projection that assumes Congress will replace the cuts with 0.6% raises a year, starting in 2015. That makes the new projections more solid because they are based on the more realistic assumption of a modest physician pay hike rather than the previous unrealistic assumption of a big pay cut.

Trustee Robert Reischauer noted during the presentation of the report Monday that Medicare is still “fiscally unsustainable over the long run.”

“Some might be tempted to conclude that Medicare is healing its maladies on its own,” but that's “not (a) prudent conclusion,” the former CBO director said. Under these projections, spending will still grow faster than workers' earnings and the gross domestic product. Medicare spending is scheduled to rise from 3.5% of GDP to 5.5% by 2040. A big part of that increase is due to the entry of the huge baby boom generation into Medicare.

Outside experts largely agreed with Reischauer. Cori Uccello, the senior health fellow for the American Academy of Actuaries, said the report's message is that the program “shows serious long-term sustainability and solvency challenges.”

Paul Van de Water, a senior fellow at the liberal Center on Budget and Policy Priorities, took a somewhat more positive tone. “Even though Medicare faces long-term challenges, there's every sign that these cost savings can be achieved without fundamentally transforming Medicare through measures like premium support,” he said. Possible solutions, he said, include lowering payments to drug companies, targeting fraud, waste and abuse, changing cost-sharing policies, and increasing premiums for more-affluent beneficiaries.

President Barack Obama has proposed increasing Part B premiums for higher-income seniors but that has gone nowhere in Congress.

Charles Blahous, the only Republican-appointed trustee, said some of the projections can't necessarily be relied on too heavily because the Part A trust fund is relatively small so even small changes can “nudge” the depletion date by years. It's still volatile, he noted.

The trustees addressed the questions of how much of the spending moderation can be attributed to the Affordable Care Act and how long the slow growth will last.

On the first question, Blahous said that “debate isn't one the trustees will settle.” At least some of the slowdown is attributable to the healthcare reform law, but it's unclear how much, the trustees report said.

The report makes clear that the Affordable Care Act is expected to be a major part of cost containment in the future. It includes an “illustrative alternative” scenario in which Congress overrides the cost-saving actions in the law's Independent Payment Advisory Board. In that scenario, Medicare costs rise to 6% of GDP in 2040, and 8.4% in 2088, as compared to 5.6% and 6.9%, respectively, in their projected baseline.

On the second question, Reischauer said the report projects slow Medicare spending growth for the next couple of years. “That's probably a safe assumption with respect to the private sector as well,” he added. He attributed the spending slowdown in the private sector to the growth of high-deductible health plans and plans with narrow provider networks.

Joe Antos, a healthcare scholar at the conservative American Enterprise Institute, questioned the trustees' assumption of a 0.6% spending increase on physician payment. To maintain that moderate level over the long term, “you have to have a fundamental change in how we pay for services,” he said. He favors a move towards capitated payment.

The trustees' report will provide fodder for both Democrats, who want to keep Medicare's structure largely as it is, and Republicans, who argue that the popular program needs to be turned into more of a voucher model to keep it financially sustainable.

Follow Darius Tahir on Twitter: @dariustahir

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