Last Wednesday, the CMS Actuary released updated National Health Expenditure (NHE) estimates. CMS’ figures, at least in the short run, are based on current law assumptions that are widely unrealistic, and that point to the current law dangers that health spending will swamp us as a nation.
First, let’s look at what CMS is saying.
CMS estimates annual growth rates of 5.8 percent from 2010 to 2020. Health spending as a percent of GDP will rise from 17.6 percent in 2010 to almost 20 percent of GDP in 2020. The figures show a near term slow down in health costs in the 2010 to 2013 period, and then a rapid cost escalation after health reform’s exchanges, subsidies and Medicaid expansion are implemented in 2014 and beyond.
Not unexpected, the share of government health spending will total almost half of all health spending by 2020, largely as a result of PPACA’s unprecedented Medicaid expansion and robust private insurance subsidies for low, middle and upper class families and individuals.
Near Term
· Health spending in 2010 is estimated to have been $2.6 trillion, or 17.6 percent of the economy. This represents growth of 3.9 percent over the 2009 level, slightly down from the historic low growth rate in that year of 4.0 percent. This is due to lower spending on Medicare Advantage (caused by Congressionally mandated cuts), lower out of pocket spending, and fewer people enrolled in coverage caused by the recession; private plan enrollment was down by 5 million.
· Between 2011 and 2013 health spending is expected to accelerate to 4.9 percent on average, reflecting CMS’ assumptions of a rally in the labor markets and better economic growth.
· In 2012, however, CMS estimates Medicare spending will reflect a 29.4 percent cut in payments for physician services, leading to a reduction in Medicare spending growth rate to 1.7 percent. This is down from the 2011 estimate of 5.9 percent. If Congress reversed the cut in 2012, growth in the program would accelerate to 6.6 percent.
PPACA’s Cost Spiral
· In 2014, exchange subsidies and Medicaid expansion will lead to 22.9 million newly covered.
· As a result, CMS estimates Medicaid spending will increase by 20.3 percent and private insurance spending will grow 9.4 percent.
· The total spending growth rate will thus spike at 8.3 percent, compared to a more modest 5.5 percent in 2013.
· Demand for all health services will increase over current law.
Hospitals
At the same time, CMS assumes PPACA’s cuts to hospitals – 10 years of productivity adjustments – will continue unabated, reducing Medicare spending and likely shifting costs on to private payers. CMS Actuaries estimate program enrollment growth will offset the reduced rate of growth in hospital payments.
· By 2014, spending on hospital services by Medicare is expected to increase to 7 percent plus annual growth levels, 1 percent higher than projected had PPACA not been enacted.
· Total spending is projected to increase 6.2 percent per year from 2015 to 2020.
Physician Services
As a result of the recession, CMS estimates physician spending growth at a historic low, growing by just 2.3 percent in 2010 as consumers delayed or went without care and a light flu season contributed to lower office visits.
· CMS estimates a 0.8 percent increase in physician spending for 2012, factoring in the 29.4 percent cut in Medicare starting in January, absent Congressional action.
· Under CMS’ alternative scenario, where Medicare payments grow at the Medicare Economic Index, total physician and clinical spending would grow at 4.5 percent.
· By 2014, spending growth for physicians and clinical services would increase to 8.9 percent growth, which is 3.1 percent more than had PPACA not been enacted.
· Spending growth for these services over the 2015 to 2020 period would average 5.6 percent.
Payers
Various changes to program eligibility, expanded benefits and case mix are instructive to see what is happening with the various payers. For all programs, medical costs drive premium trend, but the outlook moving forward is far less clear as what private plans will have to cover under PPACA’s rules has not been defined yet (essential benefits packages). To the extent the coverage is robust, it will likely be more expensive considering PPACA also eliminated many tools private plans and employers have used to hold down cost growth.
· Medicare: Slowed from 7.9 percent in 2009 to 4.5 percent in 2010. 2011 will see an estimated increase of 5.9 percent, before slowing to 1.7 percent in 2012. Spending growth from 2013 to 2020 will average 6.3 percent.
· Medicaid: Perhaps the biggest change on the horizon is a projected 20 percent increase (20 percent!) in 2014 as PPACA’s expansions take full impact. States will have problems, to say the least, absorbing these costs.
· Private Insurance: Premium growth remained low in 2010 – just 2.6 percent – resulting largely from 5 million people dropping from private insurance rolls. The net cost of insurance – the difference between premiums collected and benefits paid – increased by 8.7 percent, largely because of the slow down in services demanded (same premium, fewer office visits). In 2014, premium growth is expected to accelerate to 9.4 percent, or 4.4 percent higher than had PPACA not been enacted. This is due largely to 13.9 million people obtaining benefits through exchange plans.
Conclusion
Last Thursday, Budget Chair Paul Ryan argued savings from eliminating the long term costs of war expenditures never expected to be incurred was a fantasy. Likewise, repealing taxes on medical devices and insurance that have yet to take effect scores as revenue cuts. These counterintuitive scoring conventions show just how out of touch our estimates are with reality. For example, CMS has to estimate a significant slow down in Medicare spending due to the 29.4 percent cut in physician services under current law as well as 10 year changes to hospital payments. These estimates likely understate health spending growth as Congress is unlikely to allow the cuts to proceed uninhibited. Thus the estimates likely do not reflect future realities that will have to be faced, dealt with and implemented.
To be fair, the CMS actuaries couch their analysis in alternative scenarios, but still cannot guess every change in the near or 10 year future. For example, CMS does not estimate likely provider behavior changes caused by a massive influx of new patients. Provider scarcities will likely cause access problems, and they will also likely drive up prices for services.
My twelve years on Capitol Hill tells me these cuts will never materialize. Members cannot sustain the politics of declining Medicare payments, cost shifts onto private plans (and onto subsidies in exchanges), and seniors faced with limited access to health services. The politics of deficit and debt financing, however, means creative solutions might trump spending cut and tax increase fall backs.
When we crafted Part D, we built a competitive model that produced a program that today is 40 percent under expected budget. 4 million seniors saw an 11 percent premium cut this year. Should ACOs and payment bundling fail to inject management into unconstrained fee-for-service, system wide upheaval against fee-for-service medicine could result, and likely end up ushering in premium support for Medicare. While the house passed voucher may not be the Medicare silver bullet in the entitlement reform debate, something like it and Part D very likely will.
Considering the spending outlook, Congress shouldn’t wait long to enact such a system.
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Graphics Source: Sean P. Keehan, Andrea M. Sisko, Christopher J. Truffer, John A. Poisal, Gigi A. Cuckler, Andrew J. Madison, Joseph M. Lizonitz and Sheila D. Smith
National Health Spending Projections Through 2020: Economic Recovery And Reform
Drive Faster Spending Growth Health Affairs, , no. (2011):
http://content.healthaffairs.org/content/early/2011/07/27/hlthaff.2011.0662.full.html
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