Medicare Cost Increases Drop

One of the (very few) successes in health care this year was described by Lori Montgomery in a major article in The Washington Post. This was a substantial drop in the growth of Part B Medicare costs. Although they usually grow by 4% a year, they are now growing at a mere 2%. Everyone she spoke to is baffled. She writes:

At first, chief Medicare actuary Rick Foster thought it was a mistake, perhaps a glitch in data collection. No other explanation made sense. Congress had just passed far-reaching health-care legislation that mandated cuts in Medicare spending. But the law was so new that rules for implementation had not been written.

She goes on to interview a host of people who couldn’t explain it. Some speculated that it is the recession. Others (Democrat politicians) thought it is the salutary effect of Obama’s health care law. Still others argued that this shows how efficient the Medicare program is.

Montgomery writes:

But the drop serves to highlight an often-overlooked truth: Medicare spending per person is rising more slowly than spending in the private health sector.

We’ll come back to this last point in a moment, but first, Ms. Montgomery needs to expand her rolodex a bit. All of the people she spoke to were the usual DC-based health policy wonks, and these people have been wrong about almost everything.

Some of us are not a bit surprised by this development, in fact we predicted it when the Part D Prescription Drug program was enacted. For all of the problems with Part D (subsidizing people who don’t need it and relying on deficit spending) we expected that better access to prescription drugs would reduce spending on core Medicare (Parts A and B).

This should not be surprising. Proper use of drugs can help people avoid hospitalization and physician visits. That is the main reason employers and insurance companies have included Rx coverage over the past two decades.  These savings on core services may not equal the costs of covering the drugs, but they help offset those new costs and result in better health for the covered population. So it is considered a net gain even if the total cost may be higher.

Only in Medicare are drugs treated as an entirely separate program. So the costs of coverage are all retained in the Part D program, but the savings are reaped by Parts A and B.

No one Ms. Montgomery spoke to thought to mention this dynamic. Very likely it never occurred to them. And you wonder why nothing we ever do in health care actually works?

And this leads us back to Ms. Montgomery’s other point. Again, she wrote:

But the drop serves to highlight an often-overlooked truth: Medicare spending per person is rising more slowly than spending in the private health sector.

This is similar to a point Ezekiel Emanuel made in The New York Times:

In fact, from 1970 through 2009, Medicare spending per beneficiary grew at a slower rate than that of private health insurance.

Apparently this is a new theme of the Left. But it is as absurd as everything else they say. John Goodman thoroughly covered the problems with this sort of comparison on the Health Affairs Blog. In addition, as we noted above, Medicare places the entire cost of covering drugs in a separate program while keeping the savings in the core program. Employer coverage retains those costs in their core program.  So employer costs go up while Medicare costs stay the same.

Add in all the mandates that private plans have been required to cover in recent years — autism, in vitro fertilization, etc. — and voluntary expansion of prevention, wellness, and other services, it is small wonder that per person costs have risen in private health insurance. Medicare didn’t do any of this. Medicare benefits stayed essentially the same over this time period.

But these expansions are now being used a political cudgel to bash private coverage!

Is there any hope for a reasoned conversation about health care in the United States? I don’t think so.





Comments (15)

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  1. Larry C. says:

    Good post.

  2. Buster says:

    This is an interesting theory. I’m not sure I believe it — but it is an interesting theory, nonetheless. However, I don’t have a better explanation.

    Health care utilization is down for the non-Medicare crowd and the explanations are somewhat convoluted. There are those who claim it’s the recession. Supposedly, people are hurting financially and cannot afford the cost-sharing required to see a doctor. But, maybe patients are making better decisions because they have cost-sharing. The average deductible is not more than $1,000.

  3. Bob Lucisano says:

    As a insurance agent who markets both type of medicare plans, the traditional supplement and advantge plans, more people entering the system are taking the advantage plans due to the quality of care it provides and their already use to this type of plan with copays. I think in the long run, the private medicare plans will deliver greater savings since they do encourage preventive care and regular monitoring of medical conditions. What do you think?

  4. John McElroy says:

    I’m confused. I thought this was Dr. Goodman’s blog – is he referring to himself in the third person in the fourth-to-last paragraph?

  5. Mark Lowe says:

    While I can appreciate the explanation provided, it fails to account for why the savings would suddenly have been realized now. Did Medicare Part D reach higher levels of participation last year? Perhaps this is why the “D.C. crowd” focused on recession-related theories – they explain why this would happen now and not before.

  6. Brian says:

    I don’t buy that chief Medicare actuary Rick Foster thought it was a mistake – I think they knew what they were doing and they sorta planned it, thinking that they could shift the cost increase over to private plans.

  7. Brian says:

    @John McElroy: Greg Scandlen is the author of the posting (see top)

  8. ralph at MediBid says:

    I’m with government efficiency. …NOT
    Maybe doctors have just gotten really sick and tired of fighting and are letting bills go without submitting them?

  9. John McElroy says:

    Ah! Thanks for clarifying.

  10. Ross Schriftman says:


    Could it be that the per person costs for Part B are not trending as high as expected due to the introduction of younger and healthier baby boomers entering Medicare?

  11. Al says:

    Whether or not total costs rise or fall is near meaningless unless one looks at the breakdown. There are two graphs I would love to superimpose upon costs. Cost of technology and length of stay. Technology costs decrease over time if new expensive technology is not added. LOS frequently decreases after certain technological advances. Thus as an example the use of stents decreased total costs by decreasing the LOS, costs of the procedures, and decreased costs of the stents with time assuming there were no costly technological advances.

    Claims of government efficiency, improved preventative care with MA and other similar claims are likely bogus.

  12. Greg Scandlen says:

    Mark Lowe —
    Having better access to Rx would take a while to show up in reduced hospital and physician care. Think of BP medication as an example. Taking it now might reduce heart attacks five or ten years from now. I think Robert Goldberg has done some pretty good work on this phenomenon.

    Ross Schriftman —
    Sure, that could also be a factor.

    Bob Lusicano —
    Interesting possibility, but it adds another wrinkle. The comparison between private coverage and Medicare also fails to account for claims incurred through Medigap plans. Are you seeing any changes in Medigap premiums in recent years?

    Buster —
    In the past HC spending has increased during recessions. This one is different and I think you are right that it is due to cost sharing.

  13. Karl Stecher says:

    Informative posting, Greg.

    To all, and esp. ralph at MediBid:

    For the years 1998 and 1999 I reviewed my office visit billings and reimbursements (not new patients here, that’s separate) for the 15 min (short) and 30 min (intermediate) visits paid by Medicare. The amount received was roughly equal to our cost for secretarial time, postage, typing of progress notes, etc. But not even equal to full overhead, which also included rent and malpractice insurance. Realize also that when I operated upon a patient ( e.g. lumbar disc, brain tumor), the reimbursement for surgery also included all office visits (and hospital care) for the following 90 days…so those visits just “occupied” (word of the day) office time.
    You can understand why 30% of doctors can not and will not even see a Medicare patient.
    Now, a few years ago I coined the term “Gasicare,” as a hypothetical system to which most of us could relate. I compare reimbursement and regulations to what goes on in Medicine, which is a black box to most people (even the people administering the system and writing about it who are interested in cutting costs, versus the people who are delivering the care and are impeded by the system). Gas has gone from roughly $1.90 a gallon at the beginning of Obama’s administration to $3.20 now. But Medicare is paying doctors at the rate of 85 cents a gallon. If I ran Gasicare, I could surely keep the price down, and the growth of the Gasicare spending down, by paying only 85 cents a gallon. And that is what is going on in Medicare.
    Without the “doc fix” (and remember Obamacare was calculated WITHOUT the doc fix), gas would be reimbursed at 60 cents a gallon. With the doc fix, it is reimbursed at 86 cents. Big deal.
    Medicaid is worse, and that is the program which will swell if Obamacare goes through.
    Note also that the Consumer Price Index, used as a gauge of inflation, does not include gas or food in its calculations.

  14. Stuart says:

    The reason you are seeing a decrease in medicare expenditures is this.
    On January 1, 2011, Medicare administratively gave
    the doctors a 40% –not a typo –FORTY–percent pay cut overnight for every
    in-hospital patient consultation. That means every internist, cardiologist, orthopedist in the nation got their salary cut in almost in half. You won’t see them protesting because they are foreclosing on their homes.
    Thanks NObama.

  15. Zulyana says:

    , The right to swing my fist ends where the other man’s nose beigns.’ Rights must apply to everyone in the same sense at the same time. So rights must therefore be limited to claims of freedom to do anything which does not violate the freedoms of others. This requires recognizing, respecting and abiding by anyone else’s wishes to be left alone whenever he wants, and his wishes to be free to do anything which doesn’t violate others. This is why no one can claim a right’ to interfere with your life in any way without your explicit, personally-given consent for a specified purpose. There can be no such thing as a right’ for anyone (or any group) to mess with you whenever he wants (or whenever they want) since it obviously isn’t applying to YOU in the same sense at the same time.If Healthcare were a right, it would automatically necessitate the violation of another’s rights. That being the case, again I say, Healthcare is not a right. And as it isn’t a right, it means that Obamacare is nothing more than a giving of entitlements to some, at the expense of others. In short, redistribution of wealth.Reply