Medicare just got cheaper - again

For the third straight year, Medicare spending will grow more slowly than expected. That's the conclusion of the nonpartisan Congressional Budget Office (CBO) in a report issued this week. (See page 53 of the Report, available here.)

CBO found that Medicare spending was lower than predicted during the first half of 2012 for all types of expenses – hospitals, physicians, and prescription drugs. Based on that finding, it believes Medicare will spend $19 billion less in 2012 than it had originally thought and a total of $169 billion less over the next 10 years.

Why is the program getting cheaper? Mostly because Americans have been using less health care since the recession began in 2007. The slowdown isn't limited to Medicare. Spending under private insurance is down, as well.

CBO reported a similar finding of lower-than-expected Medicare spending growth this past January. It was the subject of a previous blog post.

None of this means that the program is out of the financial woods. CBO sees Medicare spending continuing to grow at an unsustainable rate, just not as fast. The program's budget will equal 4.3 percent of the gross domestic product in 2022, up from 3.7 this year.

That means in 10 years almost five cents of every dollar we spend will go just for Medicare. It's a major reason that Medicare now occupies center stage as an issue in the presidential campaign.

And it says something about proposals to tame the program's costs. Obama wants to maintain Medicare's basic structure while trying to wring out waste by changing the way providers are paid. The health reform law promotes various experiments to test methods of doing that.

The major alternative proposal is that of Republican vice presidential candidate Paul Ryan. He wants to turn Medicare into a voucher program. Under it, the government would no longer administer benefits directly. Instead, it would give vouchers to beneficiaries to purchase private coverage. He thinks private companies would be more efficient.

The lesson of the recent financial trend is that Medicare spending responds to forces outside of the program itself. Costs rise and fall in response to those in the rest of the health care system.

Medicare spending is not increasing because the government is inefficient at running it. There is no reason to believe the private sector would do any better. Under a voucher system, the same underlying inflationary forces would remain.

One of those forces is the nature of reimbursement. Most providers today are paid a fee for each service they render, which encourages them to find as many services to perform as possible. New methods of payment could make a big difference, regardless of whether the government or a private company is administering benefits.

The Obama approach is to address this challenge head on. The alternative of replacing government-run Medicare with private insurance ignores it.

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