Costs Are Being Saved in Medicare

We recently reported on a study of the myriad ways in which savings could be exacted from Medicare without affecting benefits. The conclusion was that there were many options that should be pursued before any drastic steps would be necessary. Maggie Maher had earlier reported on her blog Health Beat data that indicated the rate of growth in Medicare costs had greatly diminished. Maher has provided us with an update on the issue.

The data, from private sources, and confirmed by the Congressional budget Office, indicate that over the past year Medicare costs have grown at a rate of about 4%. In fact, the most recent data indicates growth at about 2.6%. This is to be compared with growth over the period 2000-2009 that averaged 9.7%. It was assumed that this was a result of a conscious effort on the part of the medical community to become more efficient in anticipation of full implementation of the healthcare reform legislation.

Maher reports that Peter Orszag is in agreement. Orszag also provides some insight into what is occurring. He is quoted as follows.

"We don’t yet have enough data to tell for sure what’s causing the recent deceleration in Medicare spending -- or whether it will last. But some evidence suggests it may be a shift toward value in the health-care sector. Various hospital executives have told me they have already begun to prepare for less generous reimbursement from Medicare as the new federal health-care-reform law takes effect and there is a greater focus on value. They 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."

"'The Mount Sinai experience may be instructive,’ he continued. ‘From September 2010 to May 2011, the hospital’s Medicare revenue rose only 2 percent over the previous year -- in part because the number of inpatient cases fell. Why was that? One important reason was that the number of patients readmitted to the hospital within 30 days of discharge was 5 percent less than what it had been the previous year’."

"'Reducing readmissions is one of the objectives of the federal health-care-reform law enacted last year. Historically, nearly 20 percent of Medicare patients have been readmitted to a hospital within 30 days of being discharged, in part because their doctors and other health-care providers have not managed patient handoffs very effectively’."

There are provisions in the new law to cut benefit payments to poorly performing hospitals and reward those providing cost-effective care by sharing the savings with them. The readmission rate of patients after a hospitalization is one of the prescribed metrics of effective care.

Orszag’s example is just one of many that illustrate the potential for cost savings. Hospitals incur about one-third of Medicare costs so lowering growth to 2% via relatively simple approaches is a big deal. Getting growth in expenses down to 2% puts the cost within the growth rate of the economy as a whole, and we can begin to consider the Medicare program as financially sustainable.

Maher reminds us that it is estimated that about 30% of current Medicare costs should be considered waste. There is a lot of room for improvement.

We can put this observed decrease in cost growth in context. At a 9.7% growth rate a $500B program becomes $1,048B over ten years and $2,646B over twenty years. At 4% growth it drops to $684B over ten years and $1,012 over twenty years. The 2% figure yields $586B over ten years and $714 over twenty. The savings are enormous. The lower growth rate saves almost $2T over twenty years. And remember we are just beginning to get serious about controlling costs.

Keep the faith! Keep the benefits!