Slowing Medicare Spending Fuels “Doc Fix” Speculation

Medicare spending will be slower in 2014 than originally projected, says the Congressional Budget Office (CBO) in a mid-year report. The news is reigniting efforts to repeal the sustainable growth rate (SGR) physician payment system.

In an August report titled “An Update To The Budget And Economic Outlook: 2014 to 2024, ” the CBO reported that net spending for Medicare will increase by only 2% in 2014. That compares to a 15% rise in Medicaid and about 5% for Social Security. Spending on all mandatory programs is projected to rise by 4%.

CBO lowered its projection of spending for Medicare by $9 billion for 2014 and a total of $11 billion for the 2015-2024 period. “Such revisions primarily stem from lower than expected spending for Part A (Hospital Insurance) services and Part D (prescription drugs), ” says the CBO report.

Deficit Shrinks $170 Billion

The federal budget deficit has fallen sharply during the past few years, and it is on a path to decline further this year and next year. The deficit will shrink by about $170 billion in 2014.

“Doc Fix” Costs $131 Billion

The CBO report estimates the cost of replacing the SGR formula remains at $131 billion.

At 2.9% of gross domestic product (GDP), the CBO says this year’s deficit will be much smaller than those of recent years (which reached almost 10% of GDP in 2009) and slightly below the average of federal deficits over the past 40 years.

ACOs and Bundled Payments

Who gets credit for this $9 billion Medicare windfall?

The Motley Fool’s Bruce Japson writes on September 7, 2014 that it appears that Medicare spending is slowing because of partnerships between the government, health plans, and providers of health care to seniors, as well as cost controls woven into the Affordable Care Act.

Placing more risk on doctors and hospitals to perform better through “bundled payments” or from accountable care organizations (ACOs) are generating savings for the Medicare program. Earlier this year, Medicare reported that more than $380 million in savings had been achieved from various such value-based arrangements.

Health insurers that operate Medicare Advantage plans are escalating their contracts with ACOs, which cover more than five million Medicare beneficiaries.

Complication Penalties

One of the biggest cost risks are hospital readmissions and surgical complications. The first year that penalties were levied against hospitals, penalized facilities were ordered to pay more than $220 million, according to the U.S. Department of Health and Human Services. This year, the readmissions criteria under Medicare broadened with total hip and knee replacements being added.

Declining Cost of Wars

While Medicare and Social Security payments are non-discretionary, discretionary spending on other federal programs of $1.17 trillion is down $32 billion (3%) from 2013. The CBO says that decline is almost entirely due to a drop in military spending in Afghanistan and Iraq ($20 billion). Overall military spending will drop by $32 billion.

CBO expects that non-defense discretionary outlays will total $576 billion in 2014. That amount would be about the same as such spending last year and 12% less than its peak in 2010, when outlays were boosted by spending from the American Recovery and Reinvestment Act of 2009.