CBO Dissects the Medicare Spending Growth Slowdown

The slowdown in health care spending growth in recent years has been a hotly debated topic, as experts try to figure out the source of the slowdown. Some have theorized that it is due mostly to the weak economy, while others have argued that changes in the delivery of care or other factors, perhaps in anticipation of the implementation of the Affordable Care Act, have been the main drivers. Now, CBO has jumped into the action, estimating the specific sources of the slowdown in fee-for-service Medicare in a new working paper. The study of Medicare in particular is interesting because the nature of the program and its beneficiaries should theoretically make it less effected by cyclical economic factors than other forms of insurance.

In particular, CBO compares the 2000 to 2005 period and the 2007 to 2010 period to see why growth in Parts A and B was slower in the latter period; specifically, per-beneficiary spending growth was 3.2 percentage points lower. Unfortunately, they were only able to identify reasons for one-quarter (0.8 percentage points) of the slowdown.

While the 2007 to 2010 period covers the Great Recession, CBO found that the economic downturn had no meaningful effect on spending growth. They found that differences in payment rates accounted for 0.2 percentage points of slower growth, although the periods studied were before provider payment cuts in the Affordable Care Act were implemented in 2011, so that may be a higher contributor going forward. Changes in the health status of beneficiaries, in part due to the average age of the Medicare population declining, contributed 0.3 percentage points to the slowdown. The share of beneficiaries enrolled only in Part A of Medicare also rose during the 2007-2010 period, causing a 0.2 percentage point slowdown. Growth in the use of prescription drugs, which may sometimes discourage the consumption of other medical care, caused 0.1 percentage point of the slowdown. Changes in supplemental coverage like Medigap had no effect.

The authors note that economy-wide inflation was lower in the 2007-2010 period than the 2000-2005 period but that even after accounting for that, there was still a significant slowdown. One thing they did not appear to account for are spillover effects from non-Medicare health care affecting costs.

Based on this data, the authors concluded the following:

In sum, our understanding of the causes of the slowdown in Medicare spending growth between 2000 and 2010, as well as the likelihood of those factors’ persistence, remains incomplete. Nevertheless, we can say that the slowdown appears to have been driven in substantial part by factors that were not related to the economic recession’s effect on beneficiaries’ demand for services; some of the other influences on Medicare spending that could have contributed to the slowdown, such as changes in how care is delivered to beneficiaries, might hold down spending growth for many years.

Obviously, the paper leaves a lot of question marks about the source of the slowdown but indicates that at least some of it may be hear to stay. But it's encouraging to see that CBO has found evidence for more structural and, hopefully, longer-lasting explanations for the recent slowdown in health care cost growth. If this leads CBO to alter some of their long-term budget forecasts for the better, it will be very welcomed news. As we have said many times before, it is better to be prudent and not simply assume that the problem is solved. We have seen seemingly permanent shifts in health care be illusory, particularly in the late 1990s. It would be better to be proactive and make health care spending sustainable considering how central it is to the fiscal outlook.