Temporary Effects Driving Some of Medicare's Slow Growth in 2014

Medicare spending has grown remarkably slowly so far this year, according to the often-overlooked Monthly Budget Reviews from the Congressional Budget Office (CBO). Through April (seven months into Fiscal Year 2014), net Medicare spending has increased by $2 billion, or just 0.7 percent, from the same seven months last year. 

Yet, to glean the underlying growth trend in Medicare, it may be more illuminating to ignore the effects of the many one-time cuts either taking effect or ramping up this fiscal year, as a result of the Affordable Care Act (ACA) and the two percent Medicare sequester cut. The temporary effects of these policies are important, but their first-order impacts may just reduce the level of spending, without necessarily influencing the longer-term growth trend. The transitory ACA cuts include phased-in payment reductions for home health agencies and Medicare Advantage plans, ramped-up hospital readmission penalties, and frozen income thresholds Medicare means-tested premiums. The sequester, a temporary cut scheduled to expire after 2024, cuts spending this year but was not in effect for the first six months of FY 2013. On the flip side, the gradual filling in of the "donut hole" in Medicare Part D adds to spending growth.

By our estimate, removing these cuts and the Part D spending increase leaves an underlying year-over-year growth rate through April 2014 of about 3.1 percent, still extremely low by historical contexts. That is still lower than the 3.9 percent nominal economic growth that CBO projects for FY 2014 and the 3.8 percent projected growth in Medicare beneficiaries. Therefore, on a per-beneficiary basis, the underlying trend growth of Medicare is below zero so far this fiscal year (historically, Medicare spending grows significantly faster than the economy).

In short, even after taking out "temporary" effects, Medicare growth so far this year is low by historical standards, roughly in line with what has happened in recent years. Still, the slow growth of Medicare presented in the Monthly Budget Review should not be taken at face value. Because of these temporary cuts, it is unlikely that this exact trend will continue in future years.