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Medicaid's Spending Growth Is Slowing Fast, But Not So Medicare's

By John Reichard, CQ HealthBeat Editor

July 11, 2006 -- Administration officials said Tuesday that their midyear review of federal spending patterns shows a sharp slowdown in the growth of federal spending on the Medicaid program. But Medicare spending is growing more quickly than they estimated at the start of the year, despite lowered estimates of the cost of the Medicare drug benefit, officials said.

The increases in Medicare Part A spending for hospital care and Part B spending for doctor and hospital outpatient care show the need to revise spending in those segments of the Medicare program, said Centers for Medicare and Medicaid Services (CMS) Administrator Mark B. McClellan in an afternoon telephone press briefing.

Annual federal outlays for Medicaid rose at a yearly clip of 12 percent in fiscal years 2000–2002 but will rise just 1.8 percent in fiscal 2006 compared with fiscal 2005, according to CMS fact sheets released after the briefing. The projected increase in fiscal 2007 compared with fiscal 2006 is 4.6 percent.

While Medicaid spending for prescription drugs has shifted in part to the federal government under the new Medicare drug benefit, even if that spending were still included in the Medicaid numbers, Medicaid spending in fiscal 2006 would rise only 5.5 percent compared with fiscal 2005, CMS said.

CMS said the slowdown stems from various factors including waivers and other joint efforts by states and the federal government that result in greater use of private health plans. The agency also said greater use of home- and community-based care rather than nursing home care is reining in spending growth.

In addition, greater use of generic drugs by state Medicaid programs and multistate purchasing pools is contributing to the slowdown, CMS said. Improved economic conditions also have slowed the rate of enrollment growth, the agency said. Among the last factors it listed—but perhaps not the least—were administration efforts to keep states from pumping up the amount of state Medicaid money that is matched by the federal government. Critics say those state tactics are no more than accounting gimmicks.

Federal Medicaid expenditures for inpatient hospital care actually are projected to drop by 0.1 percent between fiscal 2005 and fiscal 2006. While expenditures for nursing home payments grew at a 9.6 percent clip between fiscal 2001 and fiscal 2002, that rate of annual growth is projected to slip to 5.4 percent in fiscal 2006 and 4.7 percent in fiscal 2007.

A budget savings measure (PL 109-171) President Bush signed into law in February also is projected to help slow Medicaid spending growth, CMS said. The measure gives states greater power to redesign their programs.

In fiscal 2006, 16 states are projecting that they will have lower Medicaid expenditures than in fiscal 2005, the agency noted.

The administration said it has lowered its five-year estimate of the cost of Medicare's Part D program—the new drug benefit—by $34 billion compared with its estimate at the start of the year. But its five-year estimates for Part A are $17 billion higher. The higher projection "highlights the need for appropriate incremental reforms now," CMS said.

The agency noted that President Bush's fiscal 2007 budget "proposed a limited reduction in payment growth rates for hospitals and skilled nursing facilities and performance-based payment reforms to promote quality care with fewer costly complications and unnecessary services."

But Part B outlays were a particular focus of McClellan's. He noted that the five-year estimate of Part B costs is now $30 billion higher than it was at the start of the year, an increase that he said reflects growing use of both physician-related services and hospital outpatient services in Medicare's fee-for-service program. "Overall, Part B spending increased by 11 percent in 2005," CMS said. The main reason "is increases in the volume and intensity of physician and outpatient hospital services."

The analysis noted that the Part B premium is now projected to rise 11.2 percent in 2007, to a monthly sum of $98.40. If Congress spends the estimated $13 billion five-year cost of erasing a planned 5 percent cut in physician payments next year, the premium increase will be higher, McClellan said.

Asked if the higher Part B figures weaken the case for erasing the cut, McClellan said "it does highlight the fact that we can't just keep pumping more money into a payment system that is not sustainable."

McClellan said the Part B numbers show the need to make changes to reward physicians for more efficient, higher-quality care.

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