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National Health Care Spending Trends and Implications
Health Law Perspectives
August 1, 2016

Three recent reports highlight the slower growth in health care costs in recent years and the implications of a likely return to higher growth rates for the Federal budget, the Medicare trust funds, and the share of the economy overall going to health care.  The three reports are the Medicare Trustees’ report, Congressional Budget Office projections, and National Health Expenditure forecasts from CMS.  All projections beyond a few years are highly prone to error, but unfortunately it is often the specific projections that get the headlines.  The most valuable thing about these reports are the trends and issues they highlight, such as the sustainability of last year’s physician payment reform, aka MACRA, and productivity adjustments that were part of the Affordable Care Act.  Also of note is the possibility that the Independent Payment Advisory Board’s (IPAB) cost control mechanism for Medicare may trigger next year.

Key Take Aways from These Analyses

IPAB May Trigger in 2017

The Independent Payment Advisory Board (IPAB) statute creates a powerful, but untested, mechanism by which Medicare costs can be reduced if growth exceeds a specific target.  The law specifies a method by which the Medicare Actuary calculates a target growth rate and compares that Medicare’s growth rate to determine whether or not the cost control provisions of the law are triggered, and if they are, calculate a target savings amount.  If the provision triggers, a process begins under which, under the statute, the Board makes recommendations, the President transmits those to Congress, and if Congress fails to act, the President is required to implement those provisions. At least that’s the way it is supposed to work.  The law also specifies a fallback procedure if the board fails to act – which appears to include situations such as the present where there is no board appointed.  Under the fallback the Secretary of HHS would make recommendations to the President, who then transmits them to Congress, and if Congress fails to act to either implement or block those recommendations, then the Secretary would be required to implement those changes.  The prospect that a new President could be in a position to make recommendations, and then in the event Congress does not act and implement those recommendations, could strongly influence the legislative/executive dynamics. Put another way, in the absence of Congressional action, the Executive would be empowered to rewrite the statute as if Congress had amended it, which is unprecedented.  Such an event could give the President a powerful tool in negotiation with the Congress, as it could potentially require a veto of 2/3rd vote in both houses of Congress to override any effort to block Executive implementation.

The Actuary came very close to a determination that this provision would trigger in this year’s report. The calculated target growth rate was 2.33 and the Medicare growth rate for this purpose was 2.21.  Although the determination will not be made until next year when more data will be available, if current estimates were to hold true and Medicare growth is 2.82 and the target is 2.62, the IPAB process would be triggered.  While the Actuary’s estimates govern, it is worth noting that the non-partisan Congressional Budget Office (CBO) projects that the IPAB could trigger several times over the next decade, and estimates savings of about $8 billion dollars in its projections.

Sustainability of MACRA and Medicare Provider Productivity

As part of the Affordable Care Act, target productivity rates for fee for service providers were “baked in” and therefore are assumed in the projections of growth for the Medicare program. Notwithstanding this, the Medicare Actuary has, every year since 2011, published a separate memorandum that expresses his concerns about the long run impacts of the reduction in market basket payments for productivity in the national economy.  His view is that because of the labor intensive nature of much of health care, productivity gains in the health sector over the long run are likely to be less than productivity growth in the national economy, and thus Medicare payments may not keep pace with cost growth over the long term.  And, the productivity adjustment also affects Medicaid payments for certain classes of providers indirectly, through the Upper Payment Limits, which limit total payments for the class to what Medicare would have paid.

This year the actuary expanded on the memo to include concerns about the new physician payment changes in the Medicare and Chip Reauthorization Act (MACRA.)  Although the enactment of MACRA avoided significant short run disruptions in physician payments, in the Actuary’s view it is likely not sustainable over the long term.  Payment updates for 2017-2019 are .5%, for 2020-2025 the updates are zero, and for 2026 and later there will be two rates -- .75% if the physician meets criteria for participating in the Alternative Payment Model program, and .25% if the provider is not.  Bonuses of $500 million for the top quartile of those physicians not in the APM program, and 5% for those who are, expire in 2025.  The Actuary concludes: “We anticipate that physician payment rates under current law will be lower than they would have been under the SGR formula by 2048 and will continue to worsen thereafter.”

Growth in Medicare Advantage

By 2026, the Congressional Budget Office projects that 30 million out of 74 million Medicare beneficiaries will be in Medicare Advantage – about 40%.  Actual data shows that in 2015, nearly a third of total Medicare payments were through private plans. This stands in stark contrast to the projections at the time the ACA was enacted, when both CBO and the Actuary projected significant declines. However, this growth is occurring at a time when payment reductions from the ACA are now all but fully implemented, and rising drug costs, and increasing consolidation are now rippling through the program.

 Premium Increase/No Cola

General inflation is projected to be low, resulting in a cost-of-living adjustment in Social Security of about .2%.  This will trigger the “hold harmless” provisions under which most Social Security checks are prohibited from decreasing.  The hold harmless, however, can result in large premium increases for States (paying premiums for “dual eligibles,) and certain other categories of beneficiaries. In 2015, Congress acted to mitigate the resulting issues scheduled to take effect in 2016.  It is quite possible that Congress will once again intervene to smooth out the premium increases likely in 2017. Such action would need to occur this fall, possibly in a “lame duck” session.

Slow growth in recent years and Implications of resurgence of growth.

The remarkable story in Medicare has been, as the Administrator of CMS announced, that “Per-enrollee Medicare spending growth has been low, averaging 1.4 percent over the last five years, slower than GDP per capita (2.9 percent) and overall health expenditures per capita (3.4 percent).”  However, the consensus of virtually all forecasters is that Medicare growth will accelerate somewhat over the coming years.  There are two key elements:  The first is estimates of the number of beneficiaries, which are generally reliable as key demographic trends are well known.  The second is how much faster per capita costs grow than GDP, and that is highly, highly uncertain.  In general, all forecasters assume that growth in Medicare will creep up from its current low levels to approximately GDP+1 per capita, which leads to a growing share of the budget going to Medicare.

The Budget and Total Health Spending and the Economy

Overall, total health spending in the US is projected to grow 1.3 percentage points faster than Gross Domestic Product (GDP) per year over 2015-2025 and thus the share of GDP associated with health would rise to 20.1 percent by 2025, up from 17.5 percent in 2014.  Part of that overall growth is due to acceleration in per beneficiary costs particularly as the baby boomers age, and part is due to a growing number of beneficiaries.

The CBO and the Trustees reports highlights the substantial and growing role that health programs play in the Federal budget.  CBO projects high and rising levels of Federal debt under their forecasts, which would require large reductions in spending or increases in revenues to moderate.  Looking out beyond this year, that bleak Federal fiscal picture will be a source of continued pressure for cost control in Federal health care programs.

For more information, please contact Keith Fontenot or Marty Corry in Washington, D.C. at 202.580.7700.

For media inquiries, please contact Barrett McBride at 916.456.5855.