Healthcare Spending Trends: Is Medicare Becoming Sustainable?

One is always looking for good news in the area of healthcare spending. A New York Times article by Annie Lowrey attracted attention with this title: In Hopeful Sign, Health Spending Is Flattening Out. 
"In 2009 and 2010, total nationwide health care spending grew less than 4 percent per year, the slowest annual pace in more than five decades, according to the latest numbers from the Centers for Medicaid and Medicare Services. After years of taking up a growing share of economic activity, health spending held steady in 2010, at 17.9 percent of the gross domestic product."

The explanation of this trend is confounded by the fact that this data occurs over the period of the economic recession when one would expect spending of all sorts to fall. In the healthcare arena people are losing insurance coverage, companies are trimming costs and benefits, and consumers are trying to limit out-of-pocket expenses. Those who are supposed to know about these things believe that there is more at work here than just the recession.

"....the slowdown was sharper than health economists expected, and a broad, bipartisan range of academics, hospital administrators and policy experts has started to wonder if what had seemed impossible might be happening — if doctors and patients have begun to change their behavior in ways that bend the so-called cost curve."

"Experts were surprised, for instance, at a drop in spending on some hospitalized seniors — people enrolled in Medicare, whose coverage the recession should not affect. They also noted that some of the states where health care spending slowed most rapidly were states that were not hit particularly badly by the recession, suggesting that other factors were at play."

If this trend is representative of long-term shifts in spending, the ramifications are significant.

"Policy makers on both sides of the aisle see rising health care costs as the central threat to household budgets and the country’s fiscal health. If the growth in Medicare were to come down to a rate of only 1 percentage point a year faster than the economy’s growth, the projected long-term deficit would fall by more than one-third."

The New York Times has one of those do-it-yourself sites where visitors can select from an array of actions in an attempt to come up with a solution to the budget deficit. One of the options is to control and lower Medicare spending growth to 1% over the national GDP growth rate. Capping Medicare spending at that level of growth in 2013 would project to a savings in cost in 2015 of $29B. By 2030 the annual savings would have grown to $562B out of a projected deficit of $1,345B.

The leverage of Medicare spending on the federal deficit is enormous. There are data to indicate that we may be already operating in that projected growth range of 1% over GDP.

S&P provides indices that track healthcare costs from commercial insurance and Medicare programs. In April, 2012 this chart was published.

This data is more recent than that discussed in the previous article. Note that it also represents a 12 month moving average so there is likely considerable noise in the raw monthly data. Focus on the curves labeled "Composite Index" and "Medicare Index." The composite curve is a weighted average of the various categories tracked. Note the dip in the 2008-2010 timeframe. Much of that was undoubtedly associated with the recession, but there is a definite residual decrease that has persisted. The last few points are beginning to show an increase so we should be cautiously optimistic and stay tuned.

Consider now the Medicare Index. There is no obvious dip from the recession. What occurred in the 2008-2010 might be interpreted as an acceleration of a long-term trend toward reduced spending growth. Since Medicare has received the most attention over recent years because of its impact, it is not unexpected that trends would be accentuated in this area.

Lowrey’s article provides these insights:

"Finally, and most important, health economists point to a shift toward accountable care, in which providers are paid for the quality of care, not the quantity."

"Many health care experts said they believed that the shift toward publicizing medical error rates and encouraging accountable care seemed to be paying dividends — and that providers were making changes in anticipation of the health care overhaul, which further emphasize accountable care."

The emphasis is mine. The comment merits some emphasis. It should be shouted from the rooftops.

The S&P Medicare Index spent most of 2011 a bit above 2%. This is a growth rate even lower than the projected 1% over GDP growth—and we have only just begun.

Let us hope that this trend continues and spending growth—if not spending itself—will continue to fall. If we could get growth to less than the GDP growth rate, then Medicare would no longer be adding to the growth in deficit and it could be deemed "sustainable." In other words, "Keep your hands off my Medicare!"