Spending Surge Lurks in new Projections, Medicare Actuary tells AEI/Schaeffer Initiative Briefing

Downplaying headlines announcing that the federal hospital trust fund will be insolvent by 2028, Medicare Actuary Paul Spitalnic instead stressed other projections in the 2016 Medicare Trustees report that warn of longer term dangers.  The 261-page report is the latest annual review of the state of Medicare finances submitted to Congress and the public.

Spitalnic spoke at a panel sponsored by the American Enterprise Institute and the Schaeffer Initiative for Innovation in Health Policy, a partnership between the USC Schaeffer Center for Health Policy & Economics and the Brookings Institution. Brookings hosted the event in Washington D.C. the day after the Medicare Trustees Report was released.  Over 70 people attended the event and another 417 watched the live web stream.

Spitalnic noted that the insolvency date for Medicare Part A was moved up two years from the 2030 date projected in the 2015 report due to some methodological changes and to higher than expected increases in hospital admissions.  But dedicated tax revenues will still equal 87% of obligations that year, and Congress has acted in the past to keep the program fully funded.

He spent more time pointing to long term projections that largely rely on provider productivity requirements built into the Affordable Care Act.  If those requirements are loosened, ”we are looking at a big difference” in what the overall program will cost, he said.  Even under current law, Medicare spending is likely to increase from 3.6% of GDP to 5.6% by 2040 and 6% by 2090.  Under an alternative assumption in which adherence to the requirements erode, Medicare costs would rise to 6.2% of GDP in 2040 and 9.1% in 2090.

More immediately, prescription costs are rising, spurred by specialty drug use, resulting in higher than anticipated general revenue support for Medicare Part D.  Premiums for Medicare Part B, which covers out-of-hospital care, are expected to increase 23% next year to $149 a month for those who do not have their payments deducted from their Social Security checks.  That could cause Congress to shift additional funds into the program to avoid the hike, as it did this year.

Spitalnic said that ACA-mandated automatic spending cuts in Medicare are still possible in 2018 based on a formula looking at two years of past Medicare performance, the current year, and two years of projections.  The complicated triggering mechanism is not an immediate concern, he said.

Panelists questioned whether the ACA productivity requirements—which cut Medicare payments if goals are not met—will actually flush waste from the system and can be sustained in the face of rising costs to providers.

The trustees’ assumptions “are based on current law, and that’s an optimistic outlook,” said panel leader Joseph Antos, an AEI expert on health care and retirement.  “We need to bring costs in line with society’s ability to pay for them.”

Keith Fontenot, a visiting Scholar at Brookings Center for Health Policy, said the slowdown in health cost growth in recent years has bought some time.  “In the near term, the ACA is working,” he said, noting that the Trustees had at one time projected insolvency for the Part A trust fund in 2017.

Still, Medicare’s $650 billion pricetag last year is a major reason the country is fiscally stressed, said James Capretta, a senior fellow at AEI’s Ethics and Public Policy Center.  And the ACA formulas for keeping spending in line amount to a policy of “let’s pay everybody less.”

“If you just reduce spending, and productivity doesn’t go up, then quality goes down,” he said.

Access and quality issues are clearly looming, said Robert Moffit, senior fellow at the Center for Health Policy Studies at The Heritage Foundation.  Physicians thought they had solved their long standing compensation problem with Medicare last year, but the incentives and requirements in the ACA pushing them towards managed care will soon make them “livid,” he predicted.

Alice M. Rivlin, a senior fellow at Brookings Center for Health Policy, said Medicare has little choice but to keep changing payment formulas to value rather than volume.  A goal should be to give consumers choices of capitated health plans that are competing with each other, she said.

Spitalnic agreed that the “current trajectory” of Medicare needs to the addressed, and that the Centers for Medicare and Medicaid Services is doing the groundwork by shifting payments based on quantity to payments based on quality.

In pursuit of innovation, “CMS is ranking plans now,” he said, “and adjusting payment accordingly.”