Medicare Isn’t Fixed

Published July 17, 2014

National Review Online

Medicare spending growth will be slow again in 2014 relative to historical standards, and some of the usual suspects are now crediting the Affordable Care Act — Obamacare — for the good news. For instance, a recent post at Vox suggests that the slowdown in Medicare spending can be attributed, in part, to the ACA’s provision penalizing hospitals for excessive readmissions of previously treated patients.

This is nonsense.

At the time of the ACA’s enactment in March 2010, the Congressional Budget Office estimated that the readmission provision would reduce Medicare spending by $0.3 billion in 2014, and only $7.1 billion over a decade. That’s about one tenth of 1 percent of total Medicare spending over that time period. There has been no information from any source since 2010 suggesting that the savings from the readmission provision has escalated into a major cost-cutting reform. In the context of overall Medicare spending, the readmissions provision is simply inconsequential.

The same can be said for the other supposed “delivery system” reforms driven through Medicare and contained in the ACA, such as Accountable Care Organizations and efforts to promote more “bundled” payments to providers of services. These reforms were all assessed by the CBO at the time of enactment and found to be insignificant items in budgetary terms. Moreover, the early experience with these changes indicates they are unlikely to dramatically alter the way health care is delivered to Medicare patients.

It is true that Medicare’s spending growth rate in 2014 will be modest. The CBO’s latest baseline projections show Medicare spending up only 4 percent in 2014 from 2013. Since 2008, Medicare spending has risen at an average annual rate of 4.8 percent — well below the growth rate experienced throughout most of the program’s history.

So, if it’s not the Medicare provisions in Obamacare, what explains the slowdown?

One thing unmentioned in the Vox story is that much of Medicare’s improved spending outlook can be attributed to lower expected costs for the Medicare drug benefit. In 2007, the CBO thought the drug benefit would cost $100 billion in 2014; it now looks like the program will cost about $70 billion this year. About 30 percent of the drop in Medicare’s per capita costs touted in the Vox story is attributable to the drug benefit, even though that benefit makes up only 12 percent of total Medicare spending. Of course, this is rarely mentioned since it doesn’t fit with the pro-Obamacare narrative. The drug benefit was enacted in 2003, under President Bush, and the program is built on consumer choice and competition, not the extensive regulatory control that characterizes the rest of Medicare.

It is also clear that Medicare, like the rest of the health system, has been heavily influenced in recent years by the larger economic landscape. Last year, in an annual look at historical and projection national health expenditures, the government’s official Medicare scorekeepers — the actuaries who work at the Centers for Medicare and Medicaid Services (CMS) — were reluctant to attribute the slowdown in spending that has occurred across the health system to anything other than the suppressed demand for health care that always accompanies an economic downturn.

Moreover, if anything is happening to slow health spending besides the slow recovery, it certainly cannot be attributable to the ACA. For one thing, the health spending slowdown can be traced back to 2003 — when Barack Obama was a state senator in Illinois and President Bush was still in office. According to the government’s official health-spending statistics, the rate of growth in per capita national health spending hit 7.8 percent in 2003, and then steadily fell until it reached 3.7 percent growth in 2008. The only significant public-policy change that occurred during this period was the large increase in enrollment in Health Savings Accounts (HSAs) that occurred after HSA liberalizations were enacted with the drug benefit in 2003.

ACA defenders are also now pointing to the recent long-term projections from the CBO to bolster their claim that the ACA has fixed Medicare. The CBO’s latest report shows Medicare spending rising from 3.0 percent of GDP today to 4.7 percent of GDP in 2040; last year, the agency projected Medicare spending would reach 5.0 percent of GDP in 2040.

There are two important things to note about these projections. First, while the CBO says Medicare’s spending will rise slightly less rapidly than projected one year ago, the overall fiscal picture, largely thanks to Medicare, remains dismal. Last year, the CBO projected that total debt would reach 100 percent of GDP in 2038. This year, the forecast shows debt reaching that level in 2036.

In addition, as the CBO notes in its report, the real effect of Obamacare on Medicare spending is not from supposed “delivery-system reforms” but from indiscriminate payment-rate reductions to hospitals and other providers of services. The ACA included something called the “productivity adjustment factor,” which lowers the inflation update built into the payments for facilities serving Medicare patients. In general, the reduction will equal about 1.1 percentage point every year, so that a 3.0 percent inflation increase under prior law has turned into a 1.9 percent increase under Obamacare. This one change dramatically lowers expected spending in Medicare.

But is it really a reform? As the CBO notes, this cut does not mean health-care costs will be lower. All it means is that Medicare is paying less for medical services. The cut is not calibrated to promote quality. All hospitals will be cut the same, no matter how well or badly they treat their patients. And the Medicare actuaries have made it clear in repeated reports that they are very skeptical this cut can be sustained, in large part because 15 percent of hospitals serving Medicare patients would lose so much money from the cut that they would likely be forced to stop admitting seniors into their facilities by the end of this decade.

Rapid Medicare spending growth is a primary reason the federal budget is already so deeply in the red today. Continued Medicare spending growth is a key factor in the CBO’s assessment that the budget is on an unsustainable trajectory over the long term.

Obamacare has not fixed this problem. All it has done is impose a simplistic, across-the-board payment-rate reduction that is partially obscuring how deep the hole really is.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute. 

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