What’s Going On With Health Care Costs?


Posted by Joel Wittman

Egads!  Is it truly possible?  Has the increase in health care costs been at its lowest in almost four decades?  And this in spite of the Baby Boomer generation fast approaching retirement age?  What could account for such a phenomenon and is it sustainable?  All relevant questions that have health care experts scratching their heads in search of answers and have politicians scrambling to enact programs to further the slow down in the increase in health care costs.  But, perhaps inaction at this time is the appropriate response.  Can we afford to have the fractured political process impede the progress that has been achieved?  Eduardo Porter, in an article in his Economic Scene column in the New York Times, opines on his take on the subject.  The article is shown below.  I thought this would be of interest to you.  Comments, please.

 

Economic Scene

Medicare Needs Fixing, but Not Right Now

By EDUARDO PORTER

What’s the rush? For all the white-knuckled wrangling over spending cuts set to start on Friday, the fundamental partisan argument over how to fix the government’s finances is not about the immediate future. It is about the much longer term: how will the nation pay for the care of older Americans as the vast baby boom generation retires? Will the government keep Medicare spending in check by asking older Americans to shoulder more costs? Should we raise taxes instead?

Experiments by health care providers on cheaper and more efficient ways to deliver care appear to be helping push costs down.

Health Spending Slows

It might not be a good idea to try to resolve these questions quite so urgently. Partisan bickering under the threat of automatic budget cuts is unlikely to produce a calm, thoughtful deal.

“We don’t have to solve this tomorrow; not even next year,” said Jonathan Gruber, an economist at the Massachusetts Institute of Technology who worked on the design of President Obama’s health care reform.

More significantly perhaps, some economists point out that the problem may already be on the way toward largely fixing itself. The budget-busting rise in health care costs, it seems, is finally losing speed. While it would be foolhardy to assume that this alone will stabilize government’s finances, the slowdown offers hope that the challenge may not be as daunting as the frenzied declarations from Washington make it seem.

The growth of the nation’s spending slowed sharply over the last four years. This year, it is expected to increase only 3.8 percent, according to the Centers for Medicare and Medicaid Services, the slowest pace in four decades and slower than the rate of nominal economic growth.

Medicare spending is growing faster — stretched by baby boomers stepping out of the work force and into retirement. But its pace has slowed markedly, too. Earlier this month, the Congressional Budget Office said that by 2020 Medicare spending would be $126 billion less than it predicted three years ago. Spending over the coming decade, it added, would be $143 billion less than it forecast just last August.

While economists acknowledge that the recession accounts for part of the decline, depressing incomes and consumption, something else also seems to be going on: insurers, doctors, hospitals and other providers are experimenting with new, cheaper and more efficient ways to deliver care.

Prodded by President Obama’s Affordable Care Act, which offers providers a share of savings reaped by Medicare from any efficiency gains, many doctors are dropping the costly practice of charging a fee for each service regardless of its contribution to patients’ health. Doctors are joining hundreds of so-called Accountable Care Organizations, which are paid to maintain patients in good health and are thus encouraged to seek the most effective treatments at the lowest possible cost.

This has kindled hope among some scholars that Medicare could achieve the needed savings just by cleaning out the health care system’s waste.

Elliott Fisher, who directs Dartmouth’s Atlas of Health Care, which tracks disparities in medical practices and outcomes across the country, pointed out that Medicare spending per person varies widely regardless of quality — from $7,734 a year in Minneapolis to $11,646 in Chicago — even after correcting for the different age, sex and race profiles of their populations.

He noted that if hospital stays by Medicare enrollees across the country fell to the length prevailing in Oregon and Washington, hospital use — one of the biggest drivers of costs — would fall by almost a third.

“Twenty to 30 percent of Medicare spending is pure waste,” Dr. Fisher argues. “The challenge of getting those savings is nontrivial. But those kinds of savings are not out of the question.”

We could be disappointed, of course. Similar breakthroughs before have quickly fizzled. Just think back to that brief spell in the mid-1990s when health maintenance organizations seemed to beat health care inflation — until patients rebelled against being denied services and doctors dropped out of their networks rather than accept lower fees.

The Centers for Medicare and Medicaid Services already expects spending to rebound in coming years. Without tougher cost control devices, be it vouchers to limit government spending or direct government rationing, counting on savings of the scale needed to overcome the expected increase in Medicare rolls may be hoping for pie in the sky.

“It makes no sense,” said Eugene Steuerle, an economist at the Urban Institute, to expect the government will reap vast Medicare savings without having an impact on the quality of care.

The Affordable Care Act already contemplates fairly big cuts to Medicare. In its latest long-term projections published last year, the Congressional Budget Office estimated that under current law, growth in spending per beneficiary over the coming decade would be about half a percentage point slower than the rate of economic growth per person.

To understand how ambitious this is, consider that Medicare spending per beneficiary since 1985 has exceeded the growth of gross domestic product per person by about 1.5 percentage points per year. Slowing down that spending would require deep cuts in doctor reimbursements that, though written into law, Congress has never allowed to happen — repeatedly voting to cancel or postpone them.

Under a more realistic situation, the Budget Office projected that the growth of Medicare spending per capita over the next 10 years would be in fact 0.6 percentage points higher than under current law and accelerate further after that.

Yet despite the ambition of these targets, they would not be enough to stabilize future Medicare spending as a share of the economy. A report by three health care policy experts, Michael Chernew and Richard Frank of Harvard Medical School, together with Stephen Parente of the University of Minnesota, concluded that to do that would require limiting the growth of spending per beneficiary at 1.25 percentage points less than the growth of our gross domestic product per person.

“The Affordable Care Act places Medicare spending on a trajectory that is historically low,” Mr. Chernew said, noting his opinion was not an official statement as vice chairman of Medicare’s Payment Advisory Commission, which advises Congress on Medicare. “Could we do better? Of course. Will we? That requires a little more skepticism.”

Yet even if it is unrealistic to expect that newfound efficiencies will stabilize Medicare’s finances, the slowdown in health care spending suggests that politicians in Washington calm down. It offers, at the very least, more breathing room to carefully consider reforms to the system to raise revenue or trim benefits in the least damaging way.

There are many ideas out there — from changing Medicare’s premiums, deductibles and coinsurance to introducing a tax on carbon emissions to raise revenue. Some of them are not as good as others. Until recently, President Obama favored increasing the eligibility age for Medicare. Then research by the Kaiser Family Foundation concluded that raising the age would increase insurance premiums and cost businesses, beneficiaries and states more than the federal government would save. The nation would lose money in the deal.

“As we do this, there are smarter and dumber ways to do it,” Mr. Gruber said. “It would be a problem if we were to do things in a panic mode that set us backward.”

                                                                                                                                               

 Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

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