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Medicare Trustees on the Fence on Future of Health Care Costs

By Rebecca Adams, CQ HealthBeat Associate Editor

June 20, 2013 -- It's a question that continues to intrigue health economists and policy experts: Will the recent slower-than-expected growth in national health care spending continue? Medicare trustees cautioned lawmakers that the trend could go either way.

Robert Reischauer, a Medicare and Social Security trust fund public trustee and former Congressional Budget Office director, told the House Ways and Means Health Subcommittee he sees "reasons to be cautiously optimistic about the future course of health care spending but also reasons not to be complacent or to think that whatever bend might have been put in the cost curve will be sustained without further actions."

The spending projections Reischauer and fellow trustee Charles P. Blahous used to produce the May 31 Medicare trustees report enabled them to estimate that the program's hospital insurance trust fund will be insolvent in 2026, two years later than projected last year.

Reischauer, who the two trustees agreed would focus on the trends in health care costs that their report outlined, noted that the national spending growth rates of the past few years are the lowest recorded in more than half a century.

The Medicare trustees made some assumptions in their report about future spending growth. One of the first steps in calculating long-term Medicare spending is to figure out what national spending growth will be in the overall health care sector. The Medicare trustees assumed that per capita health care cost growth will average 1 percent more than per-capita growth in the Gross Domestic Product every year over a 75-year period.

They also assumed that the rate of growth would decline over time as medical care takes up more and more of the economy.

"We do not expect medical care spending to grow to the point where our economy is devoted to nothing other than health care," said Blahous in his testimony. "We should not expect that in the future we will all be homeless, naked and starving but with impeccable health care."

But long-term projections are notoriously uncertain, and it's difficult to know for certain how long the lower-than-usual spending growth will last.

From 1980 to 1990, spending grew by an annual average of more than 10 percent per person. In the decades since then, spending growth fell. It grew an average of 5.6 percent from 1990 to 2000, when managed care plans were holding down costs. In the past five years, average spending growth has plummeted even more. In 2011, the latest year that full data are available, growth was 3.2 percent.

The growth in Medicare was particularly low. Per capita Medicare spending in fiscal 2012 grew by less than half a percent.

Future Spending Growth a Toss Up

Reischauer gave lawmakers a list of reasons why the low growth might continue, and why it might not.

One major reason spending was less than expected is that the economic downturn caused people, particularly those with employer-sponsored insurance and Medicaid, to be reluctant to spend their money on out-of-pocket medical costs. Another is that policymakers cut Medicare and Medicaid spending as part of the health care law (PL 111-148, PL 111-152) and state laws. And there haven't been a lot of technological breakthroughs or expensive cures in the past few years to push up costs. Instead, people have turned to lower-cost treatments, such as generic drugs.

But that could change, Reischauer said, if the economy improves significantly or some new medical technologies, perhaps based on new knowledge about the role of genes in disease, are produced.

And part of the health care law could drive up prices because as more people get coverage starting in January, the demand for medical services will rise. If there are shortages of providers, that could allow medical professionals to demand higher rates from insurers.

IPAB Impact Probed

Reps. Tom Price, R-Ga., and Adrian Smith, R-Neb., asked about the role of cuts in the health care law and the impact that the Independent Payment Advisory Board (IPAB) might have in the future.

Blahous said that trustees have a "great diversity of views" on whether the health care cuts or IPAB might actually restrain spending as much as some projections predict.

Former Centers for Medicare and Medicaid Services chief actuary Rick Foster has predicted in the past that Congress will block some of those cuts, much as they have for scheduled Medicare reductions in physicians' payments.

One other thing Reischauer said might lead to higher spending for privately-insured people is that the consolidation of medical providers "might boost the pace of future spending growth."

The health care law calls for providers to work together and coordinate patients' care. The downside is that sometimes the easiest way to do that is for a hospital to buy a physicians' practice or another provider group, and that can give the consolidated providers more negotiating power with commercial insurers.

That doesn't really affect Medicare, said another health policy expert who did not testify at the hearing, Chapin White of the Center for Studying Health System Change. White said in an interview that in the past decade or more, "providers have been beating up on health plans" in negotiations over rates. But now, said White, "the pendulum is at the extreme end. Plans are going to get their act together and start being more aggressive. Consolidation is a huge problem but if commercial plans can't solve that problem, they won't continue to exist."

Reischauer said during the hearing that the concern that Congress has expressed to providers about high costs, through cuts in the health care law and signals that lawmakers want more efficient care, may be causing medical professionals to curb overspending and look for ways to save money.

"I think it is perfectly plausible that over the course of next 10, 20 years that we will hit the projected numbers that are in the [trustees'] report but as I said in my text, this presumes that there will be a significant transformation of our delivery system—not just the delivery system for Medicare but the private sector as well," Reischauer said. "But I think we are on our way on that because of the pressure that Congress has been exerting on health care providers.

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