Why Official Medicare Costs are Understated

When the Medicare trustees deliver their official forecasts for the Medicare system in their annual report, the actuaries who draft the report are required by law to assume that the law will be followed as written. For example, the current Medicare law says that physician payments will be cut 31% by 2013. For most other categories of Medicare services, 2009 hearth care reform legislation also specifies that the payment rates will be reduced each year by a rate equal to the economy-wide increase in multifactor productivity, which is projected at 1.1% per year. 

However, to their great credit, the Medicare actuaries also produce an annual background which explains why these assumed cost reductions are so implausible. This year's version was published on May 18 under the dry-as-dust title: " Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers."

Here are a couple of figures projecting how Medicare reimbursement would compare with reimbursement from private health insurance. The first figure shows what current law projects for Medicare reimbursements for physician services, with comparisons to reimbursement from the Medicaid program and from private health insurance. Notice the 31% drop that is supposed to happen immediately, followed by an additional decline. In short, Medicare reimbursement of physicians is now about 80% of private health insurance, but under current law it is supposed to fall immediately to less than 60% of private insurance, and then over time to about 25% of private insurance.

The next figures shows a similar comparison for reimbursement for in-patient hospital services.  Medicare reimbursement for such services was about 90% of private health insurance reimbursement in the mid-1990s, is now down to about 65% of private health insurance reimbursement, and is projected under current law to continue falling to 40% of private health insurance reimbursement. 
 

Clearly, cost projections based on these continually falling rates of reimbursement can't be taken seriously. Indeed, there have been scheduled reductions in physician reimbursement every year since 2003--and Congress has overridden them every year. The scheduled 31% drop in physician reimbursements for next year is supposed to get us back on track for all the reductions that haven't happened since 2003, but no one believes it's going to happen. These kinds of reductions in reimbursements would either drive health care providers into insolvency, or lead them to stop serving Medicare patients.

As a result, the official current law estimates of future Medicare costs are wildly optimistic. The first column of this table shows that under current law, even with its unrealistic reimbursement reductions, Medicare costs nearly double as a share of GDP over the next seven decades. But under an alternative projection, which doesn't assume the immediate cut in physician reimbursements or the long-run slowdown in spending growth, Medicare spending is close to tripling as a share of GDP over the next seven decades. 

The actuaries are about as blunt as their profession allows about what all this means: "The immediate physician fee reductions required under current law are clearly unworkable and are almost certain to be overridden by Congress. The productivity adjustments will affect other Medicare price levels much more gradually, but a strong likelihood exists that, without very substantial and transformational changes in health care practices, payment rates would become inadequate in the long range. ... Thus, the current-law projections should not be interpreted as the most likely expectation of actual Medicare financial operations in the future but rather as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved."