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Rate Announcement Reveals More Evidence of Medicare Spending Slowdown

By John Reichard, CQ HealthBeat Editor

April 8, 2014 -- Washington policymakers may be even less motivated to strike a big deficit reduction deal targeting entitlement spending thanks to an eye-popping statistic tucked in a recent Medicare payment announcement.

Medicare officials said spending per beneficiary is falling at almost double the rate that they estimated in February.

Centers for Medicare and Medicaid Services (CMS) Deputy Administrator Jon Blum said Medicare's so-called cost growth factor, calculated in February at minus 1.9 percent, is now calculated at minus 3.4 percent. That it is falling at all is remarkable given Medicare's long history of per capita spending growth.

The statistic was calculated as part of a final rate announcement that private Medicare plans that serve 15 million beneficiaries would see a 0.4 percent boost in their payment rates for 2015.

The spending drop-off is expected to lessen pressure on policymakers to take politically unpleasant steps to slow Medicare expenditures, such as raising the program's eligibility age from 65 to 67 or make "Medigap" supplemental coverage less generous. Instead, it could mean lower Part B premium increases in the future and, perhaps, longer term solvency for the program, which serves the elderly and disabled.

"The slowdown in Medicare fee for service spending is dramatic," said Dan Mendelson, a former White House health budget chief in the Bill Clinton administration. "It definitely will mean good news for solvency when the trustees report is released this spring."

The spending trend could also lower the cost of overhauling Medicare's sustainable growth rate (SGR) formula governing physician reimbursement, some analysts say. Congress has been looking at across the board cuts to providers to offset an overhaul of the formula next year.

It will take many months for all of these possible effects to be sorted out and confirmed. "I think it's good news across the board," said Tom Scully, a Wall Street executive who ran CMS during the George W. Bush administration and before that was a top White House health budget official.

A CMS official who was not authorized to publicly discuss the matter said the Medicare spending dropoff is part of a trend toward a slowdown in overall health care spending. It's attributed to an effort to "shift the dynamic about how health care is delivered" in the United States, including moving providers away from delivering a high volume of services and to focus more on the quality of treatment, the official said.

Medicare per capita spending is coming down not only in the traditional fee-for-service program—where critics say payment incentives are too strong to deliver ever-greater volumes of services—but also in the Medicare Advantage program, CMS officials say.

The latest figures show that by 2015, Medicare spending per capita will drop at an annual clip of 3.3 percent in the fee for service program and 4 percent in the Medicare Advantage program, the official said. Overall, the estimated per capita drop is 3.4 percent.

The trend "takes off the pressure for a big budget deal," assuming it continues, said Scully. And it will lessen interest in the near term for raising the eligibility age and in moving to premium support based overhaul of Medicare, he said, adding that he still thinks the latter move is a policy change worth making.

Scully still sees a budget deal on entitlements as inevitable, particularly because of the costs of the health care overhaul law (PL 111-148, PL 111-152). But he said meaningful discussions won't take place until 2017 at earliest, after the next presidential election.

The way doctors and hospitals deliver care is changing in response to a move away from the traditional fee for service system, Scully said. Increasingly payments are "capitated," meaning providers get a fixed sum ahead of treatment, putting pressure on them to avoid wasteful services so they can keep more of their reimbursement.

Those payments that aren't capitated increasingly are taking other forms that have similar resource-sparing incentives. Models include "bundled" payments for a package of services needed to treat a particular condition or "value-based" payments that rise with the quality and efficiency of health care delivery.

Those changes are occurring both in Medicare and in the commercial sector, he said. Another Medicare model is the reductions in payments sustained by hospitals if their treatment leads to unnecessary readmissions, he says. The commercial sector feeds off of such changes in Medicare and vice versa, according to Scully.

Scully sees other factors at play that change the way physicians deliver care such as the rapid growth of managed care in both Medicare and Medicaid. Also, high deductibles in the commercial sector are driving down the use of services by consumers and also influencing the way physicians practice, he says.

The shift in payment incentives and in the way providers practice medicine "is happening faster than I think a lot of people realize," Scully said.

Further evidence of profound changes in Medicare costs could be reflected in the Medicare trustees report due out later this spring and in August, when the Congressional Budget Office (CBO) issues a mid-year estimate of government spending levels.

But the announcement was only the latest piece of evidence of a Medicare cost slowdown. Former CBO Director Peter Orszag recently said "the entire fiscal imbalance" in the nation's long term budget outlook disappears if trends that occurred over the past five years in Medicare continue. "That's how big the slowdown has been," he said.

If that's so, prospects for a big entitlement overhaul will be dramatically diminished. Potomac Research analyst Paul Heldman said "it may take a couple of presidential elections" for that to happen.

The slowdown may also drive changes in physician reimbursement. The Medicare cost growth rate "clearly affects the SGR score," said Scully.

Julius Hobson, a lobbyist who serves as senior policy analyst for the Polsinelli law firm, agrees. He called the new cost growth figure "a big deal."

Hobson noted that when CBO in 2012 sharply lowered its estimate of the cost of an SGR overhaul, it did so on the basis of three years of declining volume in Medicare services. The latest cost growth factor figure suggests that trend is continuing, he said. Hobson added the figure might indicate that physician payment cuts next January under the SGR formula could be smaller.

But while the cost growth figure may bode well fixing physician reimbursement, analysts shy away from trying to quantify the effects on the SGR. Heldman, who said he wasn't willing to make any predictions about the SGR based on the cost growth factor, said he needs to see more specific figures on physician services first.

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