Medicare Continues Its Slow Growth in Spending

In a recent article, Peter Orszag, the former director of the Office of Management and Budget under President Obama, discusses the continued slow growth in Medicare spending. Medicare spending per beneficiary has gone from 7.1 percent a year from 2000 to 2005 to 3.8 percent from 2007 to 2010. Over the past year total Medicare spending increased by only 3 percent. Many wonder whether the decline in spending is due to the economic downturn or other causes—the implication being that the decrease in spending will reverse once the economy improves or may continue the decline if attributed to other factors. Mr. Orszag writes that the current economic recession has had “almost no effect” on Medicare spending. He says this is because Medicare beneficiaries have relatively small out-of-pocket costs, and their income is steady since it mostly comes from Social Security, which does not decrease due to a weak economy. However, according to a technical paper by researchers at the Congressional Budget Office (CBO), the slow growth in Medicare spending may be attributed to changes in the delivery of health care. The rate of hospital admissions per beneficiary has decreased, and more palliative care is occurring in hospices instead of hospitals, which are more expensive. The CBO suggests that these trends are due to a “heightened public focus on cost containment.” Many providers expect, in the future, for payments to be based more on the quality of their services rather than the quantity. According to Mr. Orszag, these expectations are having a significant impact. How far can providers go to reduce costs without negatively impacting quality of care? According to a paper from Harvard University and Dartmouth College examining why Medicare spending is so different from region to region, the researchers found that the different ways doctors practice medicine, as opposed to patient demand, appears to explain the regional variation in Medicare spending. Through survey data, the paper found a significant correlation between the way doctors would treat hypothetical patients and the actual spending patterns across regions. According to the paper, if doctors who offer care beyond the medical guidelines were to instead follow the suggested guidelines, Medicare spending would decrease by 17 percent. Presumably, regions with higher Medicare spending would see a spending decrease.