Are Future Medicare Reimbursement Reductions to Providers the Key To Cost Reduction?

Lower payments to non-physician providers in the upcoming years, as a result of the productivity adjustments of the Patient Protection and Affordable Care Act (PPACA) will lower the rate at which health care costs have been increasing, according to testimony delivered by CMS’ Chief Actuary Richard S. Foster to the House of Representative’s Budget Committee.    These factors will contribute to a projected growth rate of 5.9 percent during the years 2012 to 2020, according to Foster, as opposed to a 9.6 percent annual increase from 1965 to 2010. 

 The largest single contributing factor to the estimated 5.9 percent growth rate in the next ten years is due to the baby boomer generation becoming Medicare eligible. Contrary to popular belief, the baby boomers have not yet substantially become eligible for Medicare.  Foster says the full eligibility of baby boomers in the upcoming years accounts for nearly 3 percent of the 5.9 percent growth rate.  There will just be more people spending money on health care in the upcoming years.  If the Medicare population stayed at the same level the growth rate would only be 2.9 percent each year.

 Over time, productivity adjustments required by PPACA will mean that prices paid by Medicare will grow in all future years by about 1.1 percent per year more slowly than the input prices providers will be required to pay purchase the goods and services they use to furnish health care services to beneficiaries.  Foster is worried that this inequity in cost to reimbursement will result in providers eventually become unwilling or unable to treat Medicare beneficiaries. As the availability of care is threatened, Foster sees Congress moving to not impose cost cutting requirements just as they have not imposed the reduction to the physician fee service schedule as law required.

 In previous years, Foster demonstrated that the increase in spending in medical care was the result of new and improvement technologies and an increase in disposable income. Of the average 9.6 percent year-to-year increase in health care spending, 1.0 percent was a result of the increasing in the Medicare population, 4.0 percent was a result of general, economy-wide inflation, 1.4 percent was a result of medical care specific inflation due to the higher component of labor in medical care, and 2.9 percent as a result of individuals being able to order more expensive procedures.  This 2.9 percent is the result of growing incomes being able to afford more care and the high cost of new technologies to provide that care, and he sees this continuing.

 Foster is concerned though that the only way to reduce the amount that is spent on care is to reduce the amount paid to providers.  From 1965 to 2010 when the cost of health care grew 9.6 percent per year, and the number or workers only increased 1.7 percent per year.  The result being that economic growth factors only increased 6.9 percent while spending on health care increase 9.6 percent.  Foster noted that could not continue over time.  He concluded that based on past trends labor productivity growth is not likely to keep pace with continuing increases in excess medical prices. 

 Foster noted that provisions in PPACA have already started the process of reducing health care spending.  Under current law, Medicare payment rates are projected to decline relative to private health insurance payment rates.  Medicare payment rates for inpatient hospital services would be 33 percent less the average level of private heal insurance rates and about one-half of the current Medicaid payment rates.  By 2085 Foster predicts that Medicare payment rates would be 27 percent of what private insurers pay.  These reductions are all a result of the productivity adjustments put into place by PPACA.

 Foster see this reduced federal spending on health care as being the impetus to develop less expensive technology that will result in more curtailed spending on health care.  “Over time, as all payers continue to seek ways to reduce costs and as providers can no longer be assured of revenue flows that will automatically adjust to higher cost level, the medical research and development community may direct their efforts more toward new treatments, devices and drugs that can  provide health outcomes that are equal to or better those provided by existing technology, but at a much lower cost,” Foster said in closing his remarks before the committee.