What the Affordable Care Act Could Do to Medicare

Source: Thinkstock

Source: Thinkstock

The implementation of the Affordable Care Act has taught the U.S. government a lot of things — how to build a functioning website, how many viral videos it takes to get the public’s attention, etc. — but one of the most important lessons is how complicated health care spending is to predict. As pointed out by the Brookings Institute, the ACA lowered projected spending for Medicare and made it clear that we don’t have all the tools to make accurate projections.

The ACA means less Medicare spending

Health care spending accounts for about a quarter of government spending. Together, Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Affordable Care Act marketplace subsidies accounted for 24% of the federal budget in 2014, or $836 billion, according to the Center on Budget and Policy Priorities. Medicare, which provides subsidized medical insurance for the elderly and certain disabled people, is the second-largest federal program in the U.S., according to the Congressional Budget Office. That makes it pretty disconcerting when we realize we don’t have a handle on its future spending.

Projections as of 2009 suggested Medicare spending would account for 10% of GDP by 2065. After the ACA was enacted in 2010, the Medicare Trustees projected Medicare spending in 2065 would reach only 6.2% of GDP. Sounds like great news, doesn’t it? Medicare spending wouldn’t rise nearly as much as expected, right? It’s not so simple, according to the Brookings Institute’s Senior Economic Fellow Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy.

Why did the spending projection change?

According to Sheiner, the formula to project Medicare spending had changed in light of the ACA. Before the ACA, payments to hospitals and other non-physician providers increased at the same rate as input costs. The ACA, however, accounted for the fact that more productivity from each input would allow the providers to offer the same services with fewer inputs, so reimbursements don’t have to rise at the same rate as inputs.

Sheiner explains this change, writing, “Medicare reimbursements are updated by input cost growth less economy-wide productivity growth: if input costs increase 3 percent and productivity increases 1 percent, Medicare reimbursements increase 2 percent.” That difference adds up and results in less spending over time.

But the projection still isn’t accurate

But the problem is that even that formula is based on the existed projections we had for Medicare spending that were just not accurate, Sheiner suggests. While Medicare spending has increased faster than GDP growth in the past, it has to be assumed that this rate will slow at some point. Unfortunately, there’s no way to predict when that will happen. No one knows how Medicare growth will slow or, as Sheiner points out, “whether it will require a change in legislation to do so.” This means that to make their formula, Medicare Trustees have chosen some sort of arbitrary time for it to slow, creating a rather flimsy projection.

Medicare provides health coverage to around 54 million people, according to the Center on Budget and Policy Priorities, and in 2014, it received $511 billion in funding. Health care spending is important and not something to be skimped on, but people shouldn’t rejoice at Medicare spending being only 6% of the GDP in 2065 — because we really have no clue.

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