A flood of 77 million people from the baby boomer generation have been turning 65, the age of Medicare eligibility, since 2011. These younger enrollees have been a leading factor driving down the rate at which health care spending is increasing, because the younger boomers tend to be healthier than older enrollees and therefore use fewer medical services.
While a key factor, that’s not the only story in a compelling narrative that has seen the rate of growth in health care spending slow down so dramatically and unexpectedly during the past few years that budget wonks in Washington are having a hard time keeping up. The Congressional Budget Office, which provides nonpartisan budget and policy analysis to Congress, is predicting that Medicare spending will be $95 billion lower by 2019 than it had predicted four years ago. Also contributing to the slowdown are changes in the way medicine is being practiced, the lingering effects of the Great Recession and the shift in usage from high-priced prescription drugs to less costly generic alternatives.
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And since Medicare spending represents 20 percent of national personal health spending and the government’s payment structure often sets the stage for the private health care industry, it’s the first bit of good news on the health care spending front in decades.
While the Great Recession had something to do with health spending growing at a less than 4 percent rate during recent years, government actuaries still estimate that costs will pick back up in the future at a slower rate than they did during the 1990s. The decrease in the average age of Medicare recipients, faster economic growth and the expansion of health insurance coverage under the Affordable Care Act are key underlying factors that will drive health spending growth in the coming decade — with the impact of health insurance expansion waning during the next few years as Obamacare plays out.
The Office of the Actuary for the Centers for Medicare and Medicaid Services, the agency that carries out the details of the health law, presented findings a few weeks ago about health care spending in the U.S. that were published in the trade journal Health Affairs. The agency projects the U.S. will spend more on health care during the next decade than during the recession, which began in late 2007, but that the rate of spending will be lower than from 1990 to 2008, when costs grew at an average of 7.2 percent each year, or 2 percent faster than the economy.
Health care spending is now projected to grow at a rate of 6 percent per year from 2015 to 2023, or 1.1 percentage points faster than the economy, which is expected to rebound gradually. By 2023, health costs will make up nearly a fifth of total spending. “When there is income growth, people tend to spend their money on health care as well as on everything else,” says Douglas Holtz-Eakin, president of the American Action Forum and a former CBO director.
Health care economists and policy experts have broken down the effects of this shift in spending in terms of hospital costs, long-term care and Medicare, all of which are likely to be affected by the broad changes afoot.
[ READ: Report: Obamacare, Boomers, Recession Slowing Health Costs]
Slowing of Medicare Spending Rates
| Medicare Annual Growth Rates | 2008 | 2012 | 2013 | 2014 | 2015 | 2019 | 2023 |
|---|---|---|---|---|---|---|---|
| 9.5 | 5.2 | 3.3 | 4.2 | 2.7 | 6.9 | 7.7 |
Source: CMS/Health Affairs
“You can’t get around the fact that the population covered by Medicare is expanding,” says Steve Zuckerman, co-director of the Urban Institute’s Health Policy Center.
Predictions show that from 2016 to 2023, the increase in enrollees, along with their likeliness to spend more as they age, will cause Medicare spending to grow by an average of 7.3 percent per year, which is still 2.2 percentage points lower than in 2008. Medicare spending growth is projected to be 2.7 percent next year, driven by lower payments to Medicare Advantage, a type of Medicare health plan offered by a private company that contracts with Medicare. From 2017 to 2023, Medicare spending is projected to grow at a rate of 4.3 percent per beneficiary, eventually costing the country more than $1 trillion a year.
At this time, the boomer generation covered under Medicare isn’t using health care services at the volume that younger Medicare recipients have in the past. Economists attribute this to a lower average age, and therefore likely a better health status, of the population; but economists also say it’s a mystery. “There does seem to be a slowdown in service use per beneficiary,” Zuckerman says. “That’s hard to explain. Medicare beneficiaries are well-insured.”
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Murray Ross, vice president of Kaiser Foundation Health Plan Inc. and director of the Kaiser Permanente Institute for Health Policy, says it may be that today’s 65-year-old has a healthier diet, exercises more and receives better medical care than a generation ago.
He attributes much of the slowdown to the downturn in the economy, as does John Poisal, deputy director of the National Health Statistics Group in the CMS’ Office of the Actuary. The slumping economy contributed to slower growth and utilization of services. “We know that economic growth is such a strong predictor of health expenditures,” Poisal says.
Zuckerman says the 2013 budget sequester, which enacted automatic cuts to government spending, also had a direct impact on the amount being spent on reimbursement.
As seniors age, the prediction is that they will use health care services more often. This will occur at a gradual rate because they are all turning older at different times, and some will be relatively healthy.
“We’re going to have more seniors,” Holtz-Eakin says, “and their propensity to have acute visits is quite high.”
Hospital Costs Will Take Up the Same Share of Health Care Spending
Obamacare is expanding health insurance to millions of Americans. This will cause people to use more medical services, including those from hospitals, according to government forecasts. Enrollment in both Medicaid and private insurance, officials predict, will rise by 9 million people this year, while the number of uninsured Americans will drop from 45 million to 23 million by 2023. Hospital spending will continue to take up a third of total health care costs, as has been the case historically.
In 2014, the report in Health Affairs predicts, the country will spend nearly $960 billion on hospital care. From 2016 to 2023, the health care agency predicts that hospital spending will grow at a rate of 6.2 percent each year, or 1 percentage point less than it had in 2008, and 1.2 percentage points higher than in 2012.
“In this period of very slow health care spending growth, the place where spending is growing substantially faster than the economy is hospitals,” Holtz-Eakin says.
Hospital costs were a key target of Obamacare. Reimbursement rates for Medicare are changing from a fee-for-service — or quantity — model, to one that will reward quality by keeping patients healthy and out of the hospital. Under health care reform, hospitals must demonstrate certain cost-saving measures, including cutting back readmission rates and avoiding wasting money on unnecessary tests.
Ashley Thompson, vice president and deputy director of policy at the American Hospital Association, says much of the decrease in hospital spending growth happened before the implementation of Obamacare, but that provisions in the law such as penalties for high readmission rates have influenced hospital behavior.
Holtz-Eakin says health care organizations know they are being watched. When the spotlight goes off them, he says, the question will be whether reforms stick or whether permanent changes will take place, resulting in less use of services and lower spending growth. Similar efforts at reducing the cost of hospital stays are underway among private insurance companies.
Paul Van de Water, who spent 18 years at the CBO and is now a senior fellow at the Center of Budget and Policy Priorities, a research and analysis group, says health care providers across different medical specialties are gradually becoming enlisted in the effort to slow the growth of costs. Health care professionals within various medical fields are identifying procedures that should rarely, if ever, be done, because they don’t seem to be worth doing or in some cases can produce harm, he says.
Other ways of lowering costs will include shifting patients to less expensive sites of care, including clinics or emergency centers. Similarly, changes in technology and procedures are affecting costs by reducing the length of time patients are kept in hospitals during surgery. Cataract surgery, for instance, can be performed in an outpatient setting. The laparoscopic technique, which uses small incisions for surgery, also reduces the amount of time a patient will take to heal.
[ READ: 10 Changes In Surgery in 25 Years]
Ross points out that changing procedures from inpatient to outpatient is less resource-intensive, and therefore less expensive, but at the same time more procedures are being done. People who wouldn’t have been a candidate for a hip replacement 20 years ago now are, he says. “We have less invasive surgical techniques, better rehab and better anesthesia,” he says.
Regardless, hospital care continues to be more intensive and expensive than other health care services. Surgery or a week of inpatient care will cost more than a doctor’s visit for the flu, for instance, says Andrea Sisko, the lead author for the CMS study. “While there can be accounts [of lower spending] at an individual hospital or individual parts of the country, what we look at is all hospital spending at an aggregate level,” she says.
Zuckerman agrees. “Even though there has been some movement of care out of the hospital, it’s still the case that hospitals are really where expensive care is being provided. The patients that go to the hospital end up being the most expensive patients in the system,” he says.
Home Health and Nursing Home Care
| Nursing Home and Home Care Spending (in Billions of Dollars) | 2013 | 2014 | 2015 | 2019 | 2023 |
|---|---|---|---|---|---|
| Home Health Care | 81.5 | 86.2 | 91.7 | 121.5 | 162.3 |
| Nursing Home Care | 156.4 | 162.3 | 170.2 | 215.6 | 271.4 |
Source: CMS/Health Affairs
Though hospital stays, doctor visits and prescription drugs will make up a larger portion of health care spending during the coming decade, the aging baby boomers bring attention to the cost of long-term care — including home health care and nursing home care — which will cost the country $162.3 billion and $271.4 billion, respectively, by 2023.
The nursing home share of total health spending is expected to be 5.3 to 5.4 percent, Sisko says, and has been in that general range throughout history, though it peaked at about 6.5 percent in the 1990s. Obamacare seeks to cut back on long-term care costs by encouraging home care instead of expensive nursing home or hospital stays. Four in 10 people are expected to need some period of time in a nursing home, according to The Associated Press-NORC Center for Public Affairs Research. Even with financial incentives, however, some seniors will need the highly specialized care that only a nursing home can offer.
Home health care is projected to have the largest rate of annual spending growth by 2023 compared to any other health consumption expenditures listed in the CMS report. This parallels AARP reports, which have shown that 90 percent of seniors say they prefer to age at home. Home care includes sending nurses, therapists and staff performing post-surgical checkups to a person’s home and averages $21 an hour, according to the U.S. Department of Health and Human Services Administration for Community Living. Depending on services and the hours a caretaker works, home care could cost half the price of a private room at a nursing home.
[ INFOGRAPHIC : A Guide to Nursing Home Costs]
“These predictions show a lot of use of home health,” Holtz-Eakin says. “That relies heavily on assuming that we’ll have enough providers and that we’ll be able to keep people out of the hospital.”
To reduce costs, Obamacare drops the rate of Medicare reimbursement for home health by 14 percent during the next few years. Medicare does not cover nursing home stays, though Medicaid, the government’s health program for low-income or disabled Americans, will assist families who have depleted nearly all of their savings and assets. Medicaid currently covers 60 percent of all nursing home residents, according to the Center on Budget and Policy Priorities.
The Unknowns: Obamacare Implementation and the State of the Economy
The key variable in spending projections for health care is what real effect Obamacare will end up having on health spending. Economists can project how many seniors are likely to be added to Medicare’s rolls in coming years, but how Obamacare changes the practices and utilization of health care is more difficult to project. Similarly, the economy could do better or worse than projected.
“There’s no doubt that the elephant in the room was the recession,” Ross says. People lost their jobs and health care coverage, and used health care services less frequently because they didn’t have as much disposable income.
“There is so much uncertainty associated with the estimates, particularly regarding the expansions [under Obamacare],” Poisal says. “We make our best technical estimates on this and wait for the data to play out.”
Zuckerman agrees: “They can’t know in the future what’s going to happen here other than to project past trends,” he says. “It could be that things are fundamentally changing and slowdown could continue in the same way it has during the last couple of years.”
So caution is the watchword among the economists and actuaries. But, for now, it appears to some the health care spending bubble may have experienced a pinprick.
More on Medicare Spending:
— U.S. News’ Guide to Medicare Insurance
— Will the Slowdown in Health Care Costs Last?
— How the Slowdown in Medicare Spending Is Affecting Hospitals
— Republicans Hurt By Slowing Costs in Health Care
— Study: Employers Pushing More Health Costs on Workers Despite Slow Premium Growth
— Opinion: No Mission Accomplished on Health Care Costs
— Opinion: Health Care Spending Reform Won’t Improve Actual Health
More from U.S. News
No Victory for Obamacare Over Health Care Costs
How the Slowdown in Medicare Spending Is Affecting Hospitals
Will the Slowdown in Health Care Costs Last?
What’s Behind the Slowdown in Health Care Costs originally appeared on usnews.com
