Medicare Spending: Urgent Changes Needed for Fiscal Health

At first glance, there appears to be a reduction in the Medicare spending. Year-over-year comparisons in Medicare spending for October and November fiscal years (or, FY) 2013 and 2014 indicate a decline in spending for FY 2014. Preliminary spending declined by 3 percent, or $3 billion dollars. If a one-off payment is considered – which should have occurred in September according to the Congressional Budget Office (or, CBO) — spending appears to decrease by 8 percent, or $7 billion.

When it comes to healthcare spending, the devil is truly in the details. A Bloomberg column, penned by former director of the Office of Management and Budget in the Obama administration, Peter Orszag, Obamacare advisor Dr. Ezekiel Emanuel, and Senator Sheldon Whitehouse (D-R.I.) call the decrease in Medicare spending “an extraordinary feat.” They wrote, “If this streak keeps going, the U.S. will reap enormous economic benefits.”

The streak however, is not projected to continue. Healthcare spending is expected to rise in the coming decades. A CBO report from December 5 says that health care spending was in excess of $1 trillion during FY 2013; Medicaid and Medicare contributed $760 billion to that amount. The programs represent roughly one-quarter of all federal spending for 2013.

Medicaid and Medicare will continue to consume vast portions of the budget. This will occur even though in recent years, one area of Medicare spending, fee-for-service per beneficiary, has slowed. (The CBO also tried to assess why this is, but did not come to a conclusive answer.)

A continued, sustainable decline in spending under current conditions is not possible. The CBO explains that, “The government’s healthcare programs will be a continuing source of budgetary pressure.” This is due largely to the fact that the number of beneficiaries for federal programs is about to sharply increase. There are two reasons this will happen. First, as the baby-boomer generation ages, and larger number of people will become eligible for Medicare. In the next decade, a one-third increase is excepted.

The second reason is subsidies related to health care. If no laws or programs are altered, the CBO says “net federal spending for Medicare, Medicaid, CHIP, and subsidies for premiums and cost sharing in the health insurance exchanges is projected by CBO to reach 5.9 percent of GDP in 2023, compared with 4.6 percent in 2013.” Although they reach different conclusions about trends in Medicare spending, Orszag et al. and the CBO agree that spending needs to be reigned in, and occasionally, share ideas on how to accomplish this.

Both, for example, agree in assessing Medicare costs differently. Fee-for-service is how the system operates now, meaning that there is a separate payment for each service, or visit. This creates the incentive to prescribe more medical care, in order to collect more money. Other goals, while laudable, are harder to imagine being successfully implemented. The Bloomberg writers ask readers to “imagine paperless healthcare in 2020, with no real per capita growth and with most payments set according to value rather than intensity of treatment. That’s a set of goals worth shooting for.”

Unfortunately, the government does not have a positive track record with going paperless. A News21 investigation detailed that over four years, the Department of Veterans Affairs, and Department of Defense, have spent  $1.3 billion on that endeavor without producing any paperless results. Orszag, Emanuel, and Whitehouse are right to bring attention to the needs to reduce healthcare costs. However, when doing so, people need to look beyond the surface to understand trends in spending and the cost of programs already in place.

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