Now for the Bad News: Medicare Costs Are Accelerating
(Bloomberg Opinion) -- As debates rage over the cost of U.S. health care, Medicare’s actuaries have issued a new report. In 2018, overall national spending on health care rose 4.6% from 2017, to a total of $3.6 trillion.
That may sound like a big jump, but the 2018 numbers partially reflect the re-imposition of a tax on health insurance, which is a one-time effect rather than an underlying trend. Even with that renewed tax, spending rose more slowly than GDP last year, so the share of the economy devoted to health care declined. The new figures show that the slow growth that has occurred over the past decade or so has mostly continued.
Today, the consensus on the causes of the continued slow growth has come around, as reflected in a New York Times report on the latest health-care figures.
“The factors leading to the slowdown are not fully understood,” the article said. “For years, economists thought they were the result of lagging effects of the recession. But as the pattern has continued far into the economic recovery, they increasingly point to changes in the delivery of health care itself.”
Whenever the conventional wisdom shifts like this, we should be wary. And indeed the recent data carry a warning: The spending growth of Medicare, which made up more than a fifth of total national health-care expenditures in 2018, has been picking up. This may presage a broader acceleration.
The Congressional Budget Office estimates that Medicare expenditures rose more than 6% in the fiscal year that ended at the end of September; the actuaries’ report also shows a 2018 increase in the program’s spending growth.
Part of the 2018 increase in Medicare is the result of the health insurance tax, which affects private insurance plans within Medicare. But even apart from that, the program’s spending on care delivery itself (instead of administrative costs or taxes on private plans) grew by 5.7% in 2018, compared with 4.7% in 2017. And Medicare spending growth has remained high so far in 2019, as the CBO data show.
Two trends here warrant more attention. The first is that the shift away from fee-for-service reimbursement, which involves paying based on the volumes of services provided, and toward value-based payment, based on paying for the quality of care delivered, is moving too slowly. Maintaining slower growth in Medicare spending will require more forceful movement away from fee-for-service payments. The leadership at the Department of Health and Human Services should get over its reported infighting and move more aggressively on this front.
In addition, Medicare Advantage plans, the private plans within the program, are expanding rapidly. In 2018, enrollment in these plans rose by 8%, compared with less than 3% for Medicare enrollment overall. The plans accounted for 35% of all Medicare beneficiaries in 2018, and that share is very likely to continue rising.
There has been much debate about the impact of these plans. Most evidence from the past several years, including from studies of what happens when private plans voluntarily decide to stop offering insurance in a local area, suggests they have lower costs and better quality than traditional Medicare.
Over the next few years, policymakers will need to consider revamping the system under which the Medicare Advantage plans are paid, since payments are still based on traditional Medicare payments in each local area. That works fine when the private plans are a small share of the overall system, but causes problems as they cover, or come close to covering, the majority of beneficiaries: pricing care for 20 percent of beneficiaries based on the costs for the other 80 percent makes sense, but pricing care for 80 percent based on the costs for the other 20 percent does not.
Finally, there is the hotly debated question of how much consumers are paying out of their own pockets for health care. That’s a legitimate concern, but the actuaries’ report provides some striking data on this subject: In 2018, out-of-pocket expenses represented 10.3% of total health spending, down from 11.4% of total spending in 2012.
What explains the drop? Although deductibles have risen, more consumers are paying out of pocket for low to moderate levels of costs. The Affordable Care Act provided limits on how much consumers themselves are responsible for, so people with insurance but very high health costs don’t run the same personal financial risks that they did a decade ago when there were no such caps.
Advocates of counting on these out-of-pocket expenses to reduce overall spending may be concerned that a small share of spending is coming in this form. But those advocates believe the strategy works better than it actually does. In practice, having consumers pay more out of pocket doesn’t affect health-care spending all that much.
The bottom line is that we’ve had another year of slow growth in overall health-care costs. That’s great news. But we should be paying careful attention to what is happening in Medicare, where costs have accelerated recently.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
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