Medicare Spending Slows Sharply; Peter Orszag Isn’t Surprised Either—But Will the Slow-down Continue?

It is an article of faith, at least among conservatives, that as long as Medicare remains a government program, outlays will rise relentlessly, year after year. Only “the market” could possibly tame Medicare inflation, they say. The fear-mongers argue that unless we either shift costs to seniors; raise the age when they become eligible for Medicare; or turn the whole program over to private sector insurers, Medicare expenditures will bankrupt the country.

Here is the truth: Both Standard & Poor’s (S&P) and the Congressional Budget Office (CBO) now have 18 months of hard data showing that Medicare spending has begun to slow dramatically. Health reform legislation has not yet begun to kick in to pare Medicare payments, but something is changing on the ground. As I pointed out in Part 1 of this post, Medicare spending began to plunge in January of 2010. After levitating by an average of 9.7 percent a year from 2000 to 2009, CBO’s monthly budget reports show that Medicare pay-outs are now rising by less than 4 percent a year. (Over the year ending June 2011, Standard & Poor’s reckons that the cost of Medicare claims rose by just 2.5 percent.  But S&P’s Medicare index does not include Medicare Advantage, the private sector option that costs the government significantly more than traditional Medicare.)

Pessimists argue that Medicare pay-outs often fluctuate, and that this is just a short-term drop.  Moreover, the naysayers insist, over the next few years, a horde of aging Hippies will push Medicare’s outlays higher. But hard numbers fly in the face of their assertions. Over 40 years, Medicare pay-outs have rarely dipped, and even a cursory glance at U.S. birth rates makes it clear that the baby-boom bulge will not have a significant impact on Medicare expenditures for another ten to fifteen years. By then, the Affordable Care Act (ACA) will have had a chance to rein in health care spending.

Peter Orszag Comments on the Slow-Down

After publishing the first part of this post, I heard from Peter Orszag, former director of the Office of Management and Budget in the Obama administration. Orszag was well aware of the deceleration in Medicare payouts, and later in the week, he published an opinion piece on Bloomberg, explaining how some hospitals are beginning to use information technology to rein in wasteful spending. Over the weekend, Orszag took a closer look at the CBO monthly budget reports cited in the first part of the post, and he confirmed, via e-mail, that “so far this year, Medicare spending has risen by slightly less than 4%,” after climbing by “just a little over 4 percent” in 2010.

Today, Orszag posted a second piece on Bloomberg headlined: “Medicare Spending Slowing as Hospitals Improve Care.” “The data don’t yet allow a definitive conclusion about what’s causing the recent deceleration and whether it will last,” he writes, “but it may be an early signal of a shift toward value in the health sector. My conversations with various hospital executives, for example, suggest they anticipate less generous reimbursement and more focus on value in the future – and are therefore trying to become more efficient now. That’s the discussion taking place in the strategic planning process at Mount Sinai Medical Center in New York, where I recently joined the board of directors.”

Providers Take the Lead As They Anticipate Reform

To put the slow-down in context, consider the chart below. In the three decades prior to 2000, Medicare inflation slipped below 5 percent only twice, and the first time, it bounced back the very next year. The only sustained slow-down came at the end of the 1990s, following cutbacks in Medicare payments that were part of the Balanced Budget Act of 1997. But at the beginning of this century, Medicare’s outlays once again spiraled.

EXHIBIT 1 Annual Growth Rates In Per Enrollee Payments For Personal Health Care, Medicare And Private Insurers, 1970–2000

What is striking about the recent dip to 4 percent, is that this time around, there have been no major policy changes in Washington. Over the past 18 months, neither benefits nor payments to providers have been reduced in any significant way. The Affordable Care Act does call for cutting overpayments to Medicare Advantage insurers, while shaving annual increases in payments to hospitals, nursing homes and other institutional providers by 1 percent a year over ten years. But these changes have not yet taken effect.

This slow-down is not a result of Congress cutting Medicare spending. Instead, as former White House health care adviser Dr. Zeke Emanuel pointed out in Part 1 of this post,  providers are “anticipating the Affordable Care Act kicking in 2014.” They can’t wait until the end of 2013, he explained: “They have to act today. Everywhere I go,” Emanuel, told me, “medical schools and hospitals are asking me, ‘How can we cut our costs by 10 to 15 percent?’ They know that they must trim their own costs if they are going to lower the bills that they send to Medicare.’" Like Orszag, Emanuel is seeing a “shift toward value in the health sector.”

In the past, Medicare has rewarded providers for “Volume,” by paying them fee-for-service. But the Affordable Care Act contains financial carrots and sticks that reward doctors and hospitals for “Value”– better outcomes at a lower price–while penalizing those that “do more” without improving patient outcomes. “Either we get volume under control, or prices paid both by private insurers and by Medicare will drop,” says Emanuel. “Hospitals know this. This is why they want to make their systems more efficient.”

Their goal is to squeeze some of the waste out of our health care system. Health care researchers estimate that one-third of Medicare’s dollars are squandered on unnecessary tests; ineffective, sometimes unwanted treatments, and preventable medical errors that lead to longer hospital stays–and another surgery to repair the damage done the first time around. Not all of the waste can be removed from the system. Sometimes it is just not clear whether another test or a new procedure will help a particular patient. Medicine is shot through with uncertainties. But if one-third of health care dollars are wasted, it is not unreasonable for hospital to hope that they can cut their costs (and thus the bills that they send to Medicare and other payers) by 10 to 15 percent.

Thus, those who bill Medicare are actually trying to “break the curve” of Medicare inflation by excising waste from the system. Doctors and hospitals can do this better than anyone else because they understand that the fat is marbled throughout the meat–it is not hanging out on the edge of the steak.  It needs to removed carefully with a scalpel, not a cleaver.

Health care providers are in the best position to reduce costs and lift quality by   changing  how care is delivered–using checklists, health Information Technology, shared decision-making (which gives patients the information they need to consider their options); palliative care and, perhaps most importantly, teamwork, as hospitals, doctors nurses and other health care professionals learn to collaborate with each other–and with patients– to provide safer, more effective and more affordable  care,

Health care providers are in the best position to reduce costs and lift quality by  changing  how care is delivered–using checklists, health Information Technology, shared decision-making and palliative care (which give patients the information they need to consider their options), and, perhaps most importantly, teamwork, as hospitals, doctors nurses and other health care professionals learn to collaborate with each other–and with patients– to provide safer, more effective and more affordable  care,

How Providers Are Cutting Costs

What is impressive is that many providers are showing their willingness to trim some of the excess in the way they practice medicine–even if this means losing money. For example, as a result of the debate over health care reform, many physicians are pausing to consider whether all of those diagnostic tests they have been doing really are necessary.

As Paul Levy, former President and CEO of Beth Israel Deaconess Medical Center in Boston, pointed out on The Health Care Blog about six months after reform legislation passed in 2010: “Recent trends in radiology imaging portend a dramatic and rapid reduction in this segment of a hospital's business plan.” Today, Medicare and other insurers pay for diagnostic imaging tests on a fee-for-service basis. The more tests a provider does, the more he is paid. Under health care reform, Medicare plans to move away from fee-for-service and toward global, or capitated payments which reward providers for better outcomes at a lower price. Thus if the hospital is able to diagnose the problem with fewer tests, and treat it successfully, it will earn more money, not less. But Levy reports, “even before capitated payments have come into full play there has been a large reduction in the number of some types of imaging studies in hospitals. 

“Our Chief of Radiology summarizes our experience–common to other hospitals as well–and provides some of the reasons: ‘The biggest hit has been in CT, the modality we are most dependent on for revenue. We are about 10% down in CT cases from last year, due to a combination of patient and physician fears about radiation exposure, more prudent ordering of studies by physicians, leakage out of the medical center, and the introduction of physician incentive programs (to minimize the amount of imaging) by some insurers.’

“'Also, and very surprising, we have not seen an upswing in ultrasound or MRI to match the CT volume drop. The drop in CTs is not due to the recession, Levy adds: “this occurred while our overall patient volume increased during the same period.”

In Part 3 of this post I will explain other ways that hospitals are reining in their costs while simultaneously improving the quality of care. And I will explain why the baby-boomers won’t be driving the cost of Medicare claims to the moon anytime soon.

17 thoughts on “Medicare Spending Slows Sharply; Peter Orszag Isn’t Surprised Either—But Will the Slow-down Continue?

  1. one swallow does not a summer make. time will tell. bls data shows that health spending generally is lagging cpi growth, which is unusual but not unprecedented. also it is a bit of a stretch to say medicare costs are plunging when they’re rising by nearly 4% annually. are revenues rising that fast?

  2. Is this downward bend more or less than what occurred when HMOs were first introduced?

  3. While the recent trends are favorable, I think there are a lot of unknowns. For example, to what extent, if any, are seniors deferring elective surgeries like hip and knee replacements? Could that reverse once the economy recovers? Have hospitals reduced infection rates and complication rates enough to move the needle yet? Is there less futile end of life care and more palliative and hospice care instead?
    According to the Kaiser Family Foundation, there are currently 47.67 million Medicare beneficiaries of which 24.2% are enrolled in Medicare Advantage plans. That number has increased gradually and consistently in recent years and continues to. About 2.4 million people die in the U.S. each year of which roundly 75% are 65 and older. There were 2.86 million births in 1945 which rose to 3.6 million by 1950 and 3.9 million by 1952 before peaking at 4.3 million in 1957. So, the Medicare population should be growing by at least one million per year or slightly more than 2% right now plus some additional amount from the rising population receiving social security disability benefits. Those folks are eligible for Medicare two years after they start to receive disability payments regardless of age.
    It would be interesting to see data on the recent growth in per capita Medicare spending for both the standard Medicare and MA programs and to what extent it varies by state and by county within states. Since each MA beneficiary has an individual risk score (1.0 is average), there could be some interesting findings there. Bundled payments and capitation probably haven’t gained enough traction yet to be relevant at this point.

  4. Barry & Joe Says
    Barry– 90% of Medicare recipients have supplmental coverage such as MediGap or Medicare Advantage, which means many have no co-pays.
    Peter metioned that seniors are undegoing fewer knee and hip replacements, but no one knows why. Myy guess is that this has less to do with seniors deferring surgery because of co-pays, and more to do with the fact that some doctors are now advising patients to try less agressive therapies (such as physical therapy) first.
    Also, as seniors hear, word-of-mouth, from other seniors, just how hard convalescing from a joint replacement can be,some older seniors who
    don’t playing tennis ( and prefer reading or watching TV) may be deciding that it just isn’t worth it.
    Joe Says–
    As the chart in the post shows, this downward bend in the curve is much more extreme than it was when HMOs were first introduced.
    Moreover, the slow-down has lasted for 18 months going on two years.

  5. Barry–
    On Boomers:
    If you look at a chart, you will see that baby-boomer births in the late 40s and the beginning of the 50s repreent a tiny percenage of boomers.
    These are the folks who will be turning 65 over the next 10 years or so.
    Rather than looking at absolute numbers, look at at the percentage increase, over time. Over the next 10 to 15 years, the nunber of Americans turning 65 is relatively small– mirroring the percent of boomers born in the late 40s and very early 50s.

  6. Maggie –
    I’m not sure I understand your comment about the number of boomers turning 65 now vs. the total number over the next 20 years. Annual medical cost growth is driven by a combination of utilization per beneficiary, prices per unit of service rendered, and beneficiary population growth. Nominal GDP growth is driven by real growth in productivity per unit of labor and capital input, total output which is, in part, helped by population growth and the overall inflation rate.
    Right now, the Medicare population is increasing by at least 2% per year and it will grow by more than 2.5% per year relatively soon. The overall growth rate of the U.S. population is closer to 1% or a bit less. Prices per unit of service, test, procedure or drug were increasing faster than overall inflation for a long time, especially for hospital based care, and some drugs. New technologies, including newly approved specialty drugs to fight cancer and other diseases, are often priced very high to begin with. If we are to bring the cost growth of Medicare into alignment with the long term potential growth rate of nominal dollar GDP, if the Medicare eligible population is growing 100-150 basis points per year faster than the total population of the country it’s a headwind that makes the task more challenging than it would be if the growth rates of the two populations were at least in sync with each other.

  7. Thanks to all participants for their comments. It is wonderfully refreshing to see data and data analysis brought to such a politically charged topic, a welcome relief from “death-panel demagoguery.”
    Please keep up the great work; your voices are truly a breath of fresh air.

  8. This post is misleading — Medicare spending isn’t slowing — it’s just increasing at a lower rate than before. I read this item because the intro led me to think that Medicare spending actually was declining. That would be big news. But it’s not true. It’s continuing to increase.

  9. Barry–
    Where do you get thse numbers?
    Here are the facts: .
    “The first of the baby boomers become eligible for Medicare in 2011. In contrast to enrollment growth from 2001–2010 (when average annual growth in beneficiaries was 1.9 percent or half a million to a million more people each year), enrollment from 2011–2020 is projected to grow by an average of 3 percent per year, or a million and a half more people each year.
    You’ll find this here
    In other words, we’re looking at a 1.1 percent increase –not 2 percent (3 percent minus 1.9 = 1.1). And this is a 1.1 percent annual increase for ten years– from 2011 to 2020. We dont’ begin to feel the impact of the boomers until well after 2020.
    Meanwhile, MedPAC tells us that: “2 million Medicare beneficiaries die each year”
    Those leaving this planet are, by and large, much older and much sicker than the 65 year old boomers joining Medicare.
    Upper-middle class, upper-class and some middle-class boomers are much healthier than their parents were (the folks who are now leaving us at age 85 to 90). Most boomers gave up somking in their 20s, and 30s. Heart disease is down in their generation. In the 1970s, they began to switch from meat to fish, from bacon and fried eggs to yogurt and granola, from scotch to white wine spritzers.
    Affluent boomers belong to gyms. They began jogging in the 1970s.
    So on avearge, the people entering the system will need less care than the people leaving the system did– even back when they were 65.
    Some say boomers will demand more care even if they don’t need it. But hospitals don’t want to see prices cut, so they know they must cut volume by avoiding over-treatment, unnecessary tests, etc.
    Many doctors are become more aware of waste, and the dangers to patients when they undergo unnecessayr tests, unnecessy hospitalizations.
    And better-educated boomers are becoming aware of the dangers of over-treatment. The recognize that change of diet and exercise is better than most heart surgery. They like the idea of physical therapy (rather than a hip replacement.)
    Many grew up hearing Jerry Brown explain that “Less is more.”
    Some will be very open to the idea that more care is not better care.
    As for Medicare spending and GDP, Medicare spending growth is always compared to GDP growth because economists are afriad of health care “swallowing” a larger and larger share of GDP, leaving little wealth for other things that we care about:education, global warming,defense, the arts, etc.etc.

  10. Kent–
    I’m sorry that you found the headline confusing– that was not my intention.
    But if you read a headline in the New York Times or the WSJ saying that spending is “slowing” that means that growth in spending is slowing. (They might be talking about consumer spending, or spending on something else. “Slowing” is always going to be referring to the rate of increases.)
    Spending rarely slows in absolute dollars terms; (i.e. dropping from 5 milion dollars to 4.5 million dollars.) Some degree of inflation is built into a capitalist
    economy (unless it’s a very sick economy.)
    In the case of heatlh care, the question is whether health care spending is
    growing faster than the whole economy (measured by GDP).
    If health care spending rises in tandem with GDP, we’re okay. If it rises faster than GDP we have a huge problem.

  11. Ken Cohn–
    Thanks very much.
    If we can bring facts to political debates, then voters can make real decisions.
    Of course liberals and conservatives may well offer different interpretations of what the nubmers mean. But if we all begin by acknowleding the numbers, then at least people are in a much better position to judge different interpretations of those facts.

  12. Maggie –
    I would like to see healthcare cost growth slow as much or more than anyone and I’m all for progress on that front any way we can achieve it within reason.
    Regarding the growth rate of the Medicare population, you are conflating two different concepts. The 1% you referred to is an increase in the growth RATE of the population – from roundly 2% to 3%. The absolute increase in the Medicare population currently and in the near future, according to your data, is 3% per year. So, if we are to hold Medicare cost growth to the rate of nominal dollar GDP growth and even assuming real GDP growth returned to its long term trend rate of 3% per year, per capita utilization would have to be held flat and prices per procedure could be no higher than general inflation. If prices rose faster, per capita utilization would have to fall enough to offset the “excess” inflation rate in healthcare costs.
    While I accept that middle class and upper middle class people are taking better care of themselves than earlier generations, there is also a lot more that modern medicine can do for us. In the case of heart disease, for example, we have CABG and stents, pacemakers, ICD’s, LVAD’s heart transplants, etc. We also have more drugs available to control the disease. So, what might have been a death sentence 30 or 40 years ago is now a chronic condition that can be managed, often at considerable cost, over an extended time period. The same is true of cancer treatments. People are surviving cancer diagnoses for much longer periods today, again at considerable financial cost to the system. Even as 2 million or so Medicare beneficiaries die each year, the population of beneficiaries 80 and above continues to grow.
    I think we could make even more progress on bending the cost growth curve if Medicare stopped paying for services, tests, procedures and drugs that either don’t work or cost more than they’re worth. Dr. Emanuel wrote an op-ed piece on this recently. Steering patients to the most cost-effective providers would also be helpful as would more aggressive fraud mitigation strategies.

  13. Barry–
    You write: “we have CABG and stents, pacemakers, ICD’s, LVAD’s heart transplants . . .
    But this is not what has reduced deaths as a result of heart disease.
    Very low-cost drugs (includng asprin) have lowered mortalities while CABG, stents, etc. have had little effect in recent years– raising costs without saving lives.
    See this study in Health Affairs which shows that “Since 1996,, survival gains have stagnated, while spending has continued to increase:”
    The article goes on ot note that “Paul Heidenreich and McClellan, concluded that the vast majority of the increase in thirty-day survival following AMI between 1975 and 1995 was the consequence of low-cost treatments such as aspirin, beta-blockers, angiotensin-converting enzyme (ACE) inhibitors, and thrombolytics. Furthermore, both observational and clinical trial evidence suggests that use of these noninvasive treatments reduces the incremental benefit of more-expensive treatments such as invasive surgery.”
    In other words, over more than two decades, invasive procedures have not been that important in reducing mortalities from heart disease. But they have added greatly to heatlh care costs.

  14. Maggie –
    The number of CABG procedures is already down by more than half since I had mine in 1999 and it has been for quite awhile now. There is more stenting, though, and a lot of it is unnecessary. This is an area where I think safe harbor protection from lawsuits for doctors who follow evidence based guidelines could be very helpful. If an interventional cardiologist, while doing an angiogram, finds a moderate blockage, it only takes another 15 minutes or so to insert a stent right then and there. If he doesn’t do it and the patient has a heart attack within a few months or even a year, the doctor fears that he might be sued. If he had legal protection and continued to them when they’re not indicated, the only reason would be to make money for either himself or his institution or both. Such doctors could then be singled out as money driven high utilizers and patients could be steered elsewhere. If the Obama administration and the Democratic Senate were really interested in cutting the waste from healthcare, they might try standing up to their trial lawyer friends for a change.
    By the way, I came across some data recently indicating that cancer is now the number one killer, by a slight margin, of people under 65 years old. Heart disease remains the number one killer overall but more of the victims are elderly.

  15. Barry-
    Interventional cardiologists don’t insert stents because they are afraid of being sued.
    They do this because this is what they are trained to do. This is how they make their living. This is alos how the hospitals where they work build revenues.
    We have too many cath labs, working 24-7. Cath labs are very profitable. If we had fewer cath labs, there would be fewer stent procedures.
    I suspect that, under reform, Medicare (and private insurers) will pay less for these procedures.
    As for trial lawyers, they too do what they are trained to do– they protect consumers and others who have been injured–often by manufactures who knowingly put defective products on the market.
    One of the most famous cases involved the Ford Pinto. Ford continued to sell the care, even though it knew that the smallest impact would cause it to burst into flames. People were burned alive. But Ford had done a calculation which showed that it would cost the company less to settle with the relatives of victims than it would to take the ca off the market.
    Pfizer make a similar calculation regarding a heart device that it knew was defective. When I wrote about the Pfizer device for Barron’s, I had a telegram the ccompany sent to the doctor who invented the device, telling him not to publish a piece that he had written about the defect for a medical journal.
    Pro-business lobbies object to trial lawyers because when they sue, businesses lose money. Democrats who put consumers ahead of wealthy stockholders and coporations support trial lawyers.

  16. Maggie –
    Nobody’s suggesting protecting doctors and hospitals from their own negligence or incompetence. If you want doctors to follow evidence based guidelines where they exist, it’s simple common sense to protect them from lawsuits, especially failure to diagnose claims, if they do so. If liberals want the U.S. healthcare system to function more like those in Western Europe, why are they so protective of the uniquely American litigation system which unnecessarily raises both costs and the stress level among doctors from what’s already a very stressful profession?

  17. Barry–
    This isn’t a post about malpractice.
    If anything, the fact that doctors and hospitals are voluntarily cutting back on testing (as Paul Levy describes, and as Peter Orszag describes in his post on Bloomberg) suggests that health care providers are not that afraid of being sued because they missed a diagnosis.