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Why Has Medicare Spending Slowed?

By January 8, 2015Commentary

In 2009 the Congressional Budget Office projected that Medicare spending in 2014 would be $706 billion.  The current estimate is that it will actually have been $580 billion.  A brief from the Kaiser Family Foundation explores reasons for the difference.  (KFF Brief)   Several major pieces of legislation between 2009 and 2014, including the reform act, have contained provisions related to the cost of the Medicare program, largely reducing provider reimbursement and payments to the Medicare Advantage health plans.  The slower growth appears in all categories of care and seems to be more related to less utilization than lower unit prices.  About half the savings, $69 billion, is due to specific legislative provisions in the reform law, passed in 2010, and the Budget Control Act, passed in 2011, according to the CBO’s own revised projections for 2014 spending.  Part A, which largely covers inpatient care, was responsible for $58 billion of the shortfall, Part B, which covers most outpatient services, for about $51 billion and Part D, the drug benefit, for $16 billion.  So where did the other $61 billion in lower spending come from?  The Kaiser authors first identify $16 billion that they believe comes from the hospital readmission program ($1 billion), home health reimbursement changes and greater detection of home health fraud ($10 billion), and general enhanced fraud and abuse efforts ($5 billion).  Next they identify two areas in which spending actually was higher than originally projected.  First, Medicare enrollment is 2 million people higher than CBO thought it would be, adding $19 billion in more spending.  Second, more beneficiaries than anticipated enrolled in Medicare Advantage, which Kaiser says costs more than if they were in traditional Medicare (this assumption is likely outdated, as MA enrollees now appear to have a health status and health needs which are the same as or perhaps worse than the fee-for-service population), adding $4 billion in spending.  Third, some benefits were expanded, costing $4 billion.  So now we have a net about $78 billion that is accounted for (the report authors math is very hard to follow).  The authors suggest that the remaining $48 billion may be due to other provisions in the reform law, like quality improvement requirements; or that the reimbursement reductions have also reduced utilization; that better coverage for pre-Medicare patients may have an impact on their spending when they enroll in Medicare, that the recession may have impacted even Medicare spending, or that broader health trends may be spilling over to Medicare, like evidence-based medicine.  As taxpayers we should all be happy that the spending is lower than projections and hope that it continues on this trend.  As the Medicare Payment Advisory Commission has pointed out, the biggest danger is that the Medicare reimbursement levels begin to affect patient access.

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