Current Law Provides Unrealistically Low Medicare Spending Projections

Projections of Medicare spending by the Medicare Board of Trustee are unrealistic and much less than what might actually be spent, according to the CMS Actuary.  The Actuary came to this conclusion because the 2012 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds is based on current law, and the CMS Actuary does not believe that the current law is feasible.

The CMS Actuary believes that the three components of the current law, upon which the Trustees report is based, that are unsustainable include; (1) the 30 percent reduction in the physician fee schedule, (2) the productivity adjustment to annual updates to provider reimbursement systems, established by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148), and (3) reductions to reimbursements that will be implemented by the Independent Payment Advisory Board (IPAB), also created by PPACA.

Current Law Implications

The productivity adjustment, the CMS Actuary argues, will grow to such an extent that it will discourage providers from providing care to Medicare beneficiaries.  This reduction in access to care will necessitate a Congressional alteration to this reduction, according to the Actuary.

By 2019, the CMS Actuary estimates that the updated reductions from the productivity adjustments alone would result in negative facility margins of about 15 percent for hospitals, skilled nursing facilities and home health agencies.  This would increase to a negative 25 percent by 2030 and a negative 40 percent by 2050.

The CMS Actuary projects that the differential between what Medicare and Medicaid pay for inpatient hospital services and what private health insurance plans pay will move from the current 66 percent to 39 percent over the 75 year projection period if the productivity adjustments are made as required by current law.  Payments to physicians by Medicare would be about 26 percent of what payments from health insurers would be in 2086 under current law, primarily as a result of the current physician payment system reductions.

These discrepancies occur because, under current law, the productivity adjustment expected to be assessed to each payment system, according to the Trustee’s report, is a negative 1.1 percent annually.  In reality though, health care providers could sustain only a 0.4 percent reduction, according to the CMS Actuary.  This is because, historically, health sector productivity gains are smaller than productivity gains from the private non-farm segment of the economy.

Opinions on Sustainability of Cuts

The CMS Actuary talked informally with several prominent health economists, and all of them believed that the payment reductions were unsustainable in the long range, for reasons similar to those described above.  Writing in a National Journal blog, Dr. David Cutler, Professor of Applied Economics at Harvard University, stated that, “as the actuaries … note, traditional payment reductions are not a long-term source of financing. Prices can be reduced only so far before they become unreasonably low.”

Dr. Joseph Newhouse, Professor of Health Policy and Management at Harvard, wrote in an article for Health Affairs, “…it is equally hard to imagine cutting only Medicare spending while spending by the commercially insured under age sixty-five continues to grow at historic rates, which would lead to a marked divergence between what providers are paid for treating the commercially insured relative to what they are paid for Medicare beneficiaries. This gap could jeopardize Medicare beneficiaries’ access to mainstream medical care.”

Similarly, in an article for Foreign Affairs, former CBO and OMB Director Peter Orszag said, “[One] approach is to simply reduce payments to providers—hospitals, doctors, and pharmaceutical companies. This blunt strategy can work, often quite well, in the short run. It is inherently limited over the medium and long term. If only Medicare and Medicaid payments were reduced, for example, providers would shift the costs to other patients and also accept fewer Medicare and Medicaid patients.”

Washington and Lee University law professor Timothy Jost wrote in the New England Journal of Medicine that “If the gap between private and Medicare rates continues to grow, health care providers may well abandon Medicare.”

An Alternative Scenario

The CMS Actuary projects Medicare costs if these three components of the law were replaced by (1) a 1 percent increase in physician reimbursement for 10 years followed by an increase connected to the per capita increase in overall health spending, (2) the application of the productivity adjustment of 1.1 percent up to 2019 and then the phasing it down to 0.4 percent over the 15 years beginning in 2020, and (3) the elimination of the IBAP requirements altogether.

The result would be that that Medicare expenditures would grow from being 3.96 percent of gross domestic product (GDP) in 2020 as projected by current law to 4.19 percent of GDP. By 2050, the difference would be 6.15 percent of GDP under current law or 7.68 percent of GDP under the Actuary’s assumptions.

The Trustees acknowledge in their own report that their projections are based on current law and that “future costs are highly uncertain and likely to exceed those shown by current law projections.”  This has happened in the past.  For instance, the 2012 actual expenditures are currently estimated to be $246.9 billion which is $26.4 billion or 12 percent higher than last year’s projection by the Medicare Trustees.  Much of this increase is attributable to Congress overriding the 29 percent reduction in physician reimbursement which was included in the Trustee’s projection, but did not actually occur.