Medicare’s Finances Are Getting Better

National Journal
Sam Baker
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Sam Baker
July 28, 2014, 10:58 a.m.

Maybe Medi­care spend­ing won’t break the bank, after all — or at least not as quickly as we thought.

Medi­care’s trust­ees said Monday they think the re­cent slow­down in health care spend­ing might con­tin­ue, which would save the sys­tem bil­lions of dol­lars. Spend­ing cuts in Obama­care would save even more money, they said.

The trust­ees are re­quired by law to is­sue a re­port every year about Medi­care’s fin­ances, in­clud­ing the date at which they ex­pect the pro­gram’s trust fund — which pays for hos­pit­al stays — to be­come in­solv­ent. His­tor­ic­ally, it hasn’t been a very sunny doc­u­ment.

But the latest re­port, re­leased Monday, is more op­tim­ist­ic.The trust­ees now ex­pect Medi­care’s trust fund to stay solvent un­til 2030, four years longer than their last es­tim­ate. It’s the third year in a row that the trust­ees have ad­ded more time to the trust fund, and their op­tim­ism about the slower growth in health care costs is even more sig­ni­fic­ant.

But not all health care ex­perts share the trust­ees’ con­fid­ence. Medi­care’s in­de­pend­ent ac­tu­ar­ies said the re­port’s as­sump­tions are “clearly un­real­ist­ic,” in part be­cause it as­sumes that Con­gress will al­low Obama­care’s cuts to take ef­fect.

Here’s what you need to know about the latest es­tim­ates:

Medi­care’s cost out­look is im­prov­ing

Over the past few years, health care spend­ing has been grow­ing a lot slower than it did in the past. This is a big deal be­cause it means every­one’s health care budget — in­clud­ing the fed­er­al gov­ern­ment’s — will go fur­ther.

For a while, no one wanted to get too ex­cited about the spend­ing slow­down, be­cause health care ex­perts as­sumed it was a res­ult of the broad­er eco­nom­ic crash of 2008. So the as­sump­tion was that as the eco­nomy im­proved, health care spend­ing would re­sume its out-of-con­trol growth. But now the eco­nomy is im­prov­ing, and health care costs are still grow­ing slowly. On Monday, the Medi­care trust­ees seemed cau­tiously op­tim­ist­ic that this trend would con­tin­ue.

“The Trust­ees are hope­ful that U.S. health care prac­tices are in the pro­cess of be­com­ing more ef­fi­cient as pro­viders an­ti­cip­ate a fu­ture in which the rap­id cost growth rates of pre­vi­ous dec­ades, in both the pub­lic and private sec­tors, do not re­turn,” the latest re­port says.

Obama­care is help­ing

Obama­care’s cuts to Medi­care spend­ing are at least part of the reas­on the trust­ees are more op­tim­ist­ic. The Af­ford­able Care Act calls for big cuts in Medi­care’s pay­ments to doc­tors, hos­pit­als, and oth­er health care pro­viders, and it also in­cludes meas­ures that aim to make the health care sys­tem more ef­fi­cient.

The trust­ees have pre­vi­ously said the health care law ex­ten­ded the life of Medi­care’s trust fund, and they said Monday that Obama­care’s cuts will “add sub­stan­tial fur­ther sav­ings” on top of the slower growth caused by oth­er eco­nom­ic factors.

But that’s as­sum­ing Con­gress lets the law’s cuts hap­pen as sched­uled — an as­sump­tion the trust­ees have hes­it­ated to make be­fore.

A lot of this de­pends on Con­gress

Pre­dict­ing Medi­care spend­ing is no easy task. It re­quires a lot of as­sump­tions about the eco­nomy and the price of health care, and also about Con­gress. The trust­ees have to guess what Con­gress will do with Medi­care rates, and wheth­er it will let sched­uled cuts take ef­fect.

This year, for the first time, the trust­ees are as­sum­ing that the biggest sched­uled cut to Medi­care spend­ing won’t hap­pen. Medi­care’s pay­ment for­mula calls for massive cuts every year to doc­tors’ pay — they’re around 25 per­cent now, more than doc­tors could ab­sorb. Every year, though, Con­gress delays the sched­uled cut. The Medi­care trust­ees as­sumed that Con­gress will keep block­ing the re­duc­tion in doc­tors’ pay, so the sav­ings from a 25 per­cent cut will nev­er ac­tu­ally ap­pear.

But the trust­ees as­sumed that Con­gress won’t block most of Obama­care’s Medi­care cuts. If those cuts are al­lowed to take ef­fect, the trust­ees said, Medi­care spend­ing will grow to about 6.9 per­cent of the total eco­nomy by 2088. If Con­gress blocks the Af­ford­able Care Act’s cuts, Medi­care would in­stead eat up about 8.4 per­cent of the eco­nomy in­stead.

Medi­care is still crazy ex­pens­ive

The latest trust­ees’ re­port is more op­tim­ist­ic than past find­ings, but it still shows Medi­care eat­ing up a big­ger and big­ger piece of the total U.S. budget every year. The pro­gram is on an un­sus­tain­able path, the trust­ees said — it’s just not quite as un­sus­tain­able as it was be­fore.

“Not­with­stand­ing re­cent fa­vor­able de­vel­op­ments “¦ Medi­care still faces a sub­stan­tial fin­an­cial short­fall that will need to be ad­dressed with fur­ther le­gis­la­tion,” the trust­ees said.

The slow­down in Medi­care spend­ing is usu­ally meas­ured in terms of per-per­son costs. But even when those costs stay un­changed, the re­tire­ment of the baby-boom gen­er­a­tion will mean an in­flux of new be­ne­fi­ciar­ies and a new strain on Medi­care’s fin­ances.

Medi­care’s ac­tu­ar­ies said Monday that the trust­ees were too op­tim­ist­ic, par­tic­u­larly in as­sum­ing that Con­gress would let Obama­care’s spend­ing cuts take ef­fect.

The trust­ees’ as­sump­tions should not “be in­ter­preted as the most likely ex­pect­a­tion of ac­tu­al Medi­care fin­an­cial op­er­a­tions in the fu­ture but rather as il­lus­tra­tions of the very fa­vor­able im­pact of per­man­ently slower growth in health care costs, if such slower growth can be achieved,” the ac­tu­ary said.

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