The Medicare and Social Security Trustees’ reports usually released in April or May each year were finally released on Monday, July 28, with great fanfare about Medicare's improved outlook. Medicare’s future now looks better than it did last year, but largely due to lower spending during 2013 than was anticipated and that the Trustees then doubled-down with lower short-run expenditure growth assumptions.
With the new report, the projected date of the Hospital Insurance (HI) Trust Fund’s exhaustion improved four years from 2026 to 2030. The new exhaustion year is the same as was recently forecast by the Congressional Budget Office. Further, the Trustees’ estimate of the HI unfunded obligation, based on the next 75 years spending and revenue projections, declined by 22%, from $4.6 to $3.6 trillion.
Of special note is the fact that the Trustees long-run forecasts have been significantly more optimistic since the passage of the Affordable Care Act (ACA). The accompanying figure depicts the Trustees’ current-law spending forecast from the each of the Trustees’ reports from 2009 to 2014.
Figure 1.
When comparing the Trustees’ 2009 pre-ACA forecast to all post-ACA forecasts one is struck by the astounding reduction in the program’s long run forecasted spending. But the post-ACA’s forecast spending reductions arise primarily from a provision requiring that in the future provider payments will be reduced at a rate based on economy-wide productivity. The fact that provider payments bear little, if any, relation to economy-wide productivity has been completely ignored in the post-ACA period.
The ACA “productivity adjustment” is similar to the sustainable growth rate (SGR), a provision from the Balanced Budget Act of 1997 that was intended to constrain payments to physicians in Part B of the program. The SGR has been overridden by legislation in every year since 2003 and the same fate likely faces the productivity adjustment.
These past legislative efforts to lessen the prescribed effects of the SGR led the trustees to produce a baseline forecast in this year’s report that assumes the SGR provision is overridden and the physician payment are updated at a rate consistent with the past legislative compromises. The new baseline essentially replaces the current law forecast in the 2014 report. The contrast between the current law and new baseline forecasts for 2014 is evident in Figure 1. While the new baseline forecast for 2014 is higher than the corresponding 2014 current law forecast, it does not exceed last year’s current law projections until mid-century.
From 2010 to 2013 the Trustees made clear in their reports that the current law forecasts rested on the assumption that the SGR and the ACA’s productivity adjustment provision achieved their cost saving, but that future costs could be considerably higher than the current law forecasts. Some of the cautionary language from past reports has been removed in the 2014 report.
In part this is understandable, given the move toward the more realistic treatment of the SGR with the new baseline forecast. The new baseline Medicare forecasts also incorporate the effects of several recent years of lower Medicare spending growth and a general trend toward lower per capita health spending growth relative to per capita GDP growth.
Because the ACA’s productivity adjustment that drives the baseline forecast is similar to the SGR it too will likely face the same legislative overrides that has the SGR. Cuts to Medicare services are politically unpopular, and as societies get wealthier they want to purchase more medical care to make people’s lives more comfortable. While overrides of the productivity adjustment may be in the future, the baseline forecasts are still rosier than they would be otherwise. For the next 20 to 25 years the baseline Trustees’ and CBO’s estimates of total Medicare spending are similar, but thereafter the CBO’s forecast are higher. By 2080, the CBO’s baseline forecast of Medicare spending as a percent of GDP is 54 percent higher than the Trustees’ baseline.
Starting with the 2012 report, the Trustees include alternative estimates in the main report that had in previous years been released as a separate memorandum. The alternative estimates assume that the SGR is overridden and that the productivity adjustments are gradually reduced beginning in 2020. The Trustees make the point that that future Medicare spending may be substantially higher than the baseline and that the alternative forecast illustrates the “potential magnitude of this difference.” (2014 Medicare Trustees Report, p. 209) By 2080, the Trustees’ alternative forecast spending is 20 percent higher than their baseline, yet it is more than 20 percent lower than the CBO’s baseline.
This year’s Medicare Trustees Report was generally received as good news and some have seen it as an indication that the ACA’s reforms are working. But we must be careful to separate the ongoing trend in lower health spending growth from ACA’s provisions that are driving the lower long-run baseline projections. Time will tell whether the general trend toward lower per capita health care spending growth in excess of per capita GDP growth is persistent or whether it is the calm before the storm. And if the history with the SGR is a predictor of the ACA’s productivity adjustment’s ability to constrain payments to providers, Medicare spending will likely be significantly higher in the long run than is currently projected with the baseline forecast.
Andrew J. Rettenmaier is the Executive Associate Director at the Private Enterprise Research Center at Texas A&M University. Dr. Thomas R. Saving is the Director of the Private Enterprise Research Center and the Jeff Montgomery Professor in Economics.
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