Medicare Growth Continues to Be Slow

Prior to the release of CBO's August baseline, we surmised that one of the revisions to the budget would come from Medicare, whose growth in 2014 had come in much lower than CBO expected. As it turns out, CBO did revise Medicare spending in 2014 down by $9 billion, with growth expected to be a very low 2.4 percent for the year. CBO's latest Monthly Budget Review shows the program on track to meet that new growth rate, as the program has a growth rate of 1.9 percent through 11 months of FY 2014 after adjusting for timing shifts.

As in previous months, we also calculated the "underlying" Medicare growth rate, which removes the effects of temporary or phased-in legislative changes to Medicare.* Last month, we calculated the underlying rate to be 3.7 percent, slightly less than both projected economic growth and beneficiary growth. This month, the rate is largely the same at 3.8 percent, equal to the beneficiary growth rate but slightly more than the economic growth rate, which was revised down from 3.9 percent to 3.4 percent in the August baseline.

 

This underlying growth rate is also lower than the average projected growth rate over the next ten years of 5.4 percent. Medicare spending will accelerate as the baby boomers continue to retire, adding millions of new beneficiaries to the program, and as the boomers age within the program. For now, though, policymakers can breathe a little bit easier because of the slower short-term growth of Medicare.

* The temporary policies holding down spending growth are the Medicare sequester (which wasn't in effect for part of FY 2013), payment reductions in the Affordable Care Act for home health agencies and Medicare Advantage plans, ramped-up hospital re-admission penalties, and frozen means-tested Medicare premium income thresholds. On the other side, the gradual filling in of the Part D "donut hole" increases spending growth.