Today, S&P released data tracking the growth of health care costs which showed that over the year ending March 2011, Medicare spending rose at an annual rate of 2.78%—the lowest rate posted for the Medicare Index in its six-year history. (Hat-tip to Kent Bottles for calling attention to this report on Twitter. This news is, as Bottles says, “very important”, not to mention timely, given the deficit debate in Washington.)
By contrast, over the same 12 months, health care costs covered by commercial insurers rose by 7.57%. Still, as the chart below shows, even these costs (tracked by the “commercial index”) have been falling, down from a peak inflation rate of nearly 10 percent in the 12 months ending in July 2010 to 7.5% in the 12 months ending March 2011.
Why is health care inflation decelerating? In the commercial sector, the recession no doubt plays a major role. Insured patients often have high deductibles that must be paid before they receive care. As a result, hospitals report that patients are putting off elective surgery. Thus, commercial insurers are paying out a lower share of premiums. (See for example, Cigna’s most recent financial report which shows patients’ “relatively moderate use of medical services”.)
At the same time, it’s worth noting that commercial insurers’ reimbursements to hospitals continue to rise ; the Hospital Commercial Index’s annual growth rate hit a peak of 9.36% in May of 2010, and as of March 2011, it still stands at an unaffordable 8.36%. This suggests that, even if hospitals are seeing fewer patients, they continue to “do more” to those patients who come through the door, billing insurers for more tests and treatments.
Meanwhile, hospitals with market clout have been ratcheting up their prices. Commercial insurers who want brand-name hospitals in their network have no choice but to over-pay. They then turn around and raise their premiums, passing the cost on to their customers. (Some claim that hospitals charge private insurers more because Medicare underpays—and thus they must make up for their losses by “shifting costs” to the commercial insurers. But economist Austin Frakt has written a compelling paper which reveals “If one is talking about hospital prices, perhaps a shift of 20 cents on the dollar is a justifiable estimate—which means far less than that ends up in premium increases.” Other economists agree that “cost-shifting” is greatly exaggerated. In some cases, marquee hospitals are simply gouging insurers.)
Meanwhile, the amount that Medicare is paying out to hospitals, as measured by the Hospital Medicare Index—has fallen sharply—down from 8.30% in August 2009 to 1.18% in March 11. This is surprising. Medicare patients have less reason to postpone care: their deductible for Medicare Part B is just $162 (as of February, 2011), while their Part A deductible for hospital care ($1,132) is significantly lower than the $2,000 to $5,000 deductible than a growing number of privately insured patients pay. Medicare patients also have not been hit as hard by high unemployment: they may not be able to find a part-time job, but at least they don’t lose their Medicare if they lose a job.
Why is Medicare cost growth slowing? It appears that “costs for Medicare patients are being better contained than those covered under commercial insurance plans,” observes David M. Blitzer, chairman of the S&P Index Committee. And the provisions in the Affordable Care Act that will put Medicare on the road to financial solvency haven’t even begun to kick in. Meanwhile, conservatives argue that we must privatize Medicare, because taxpayers cannot affords “runaway” government entitlement programs. I wonder how they explain the S&P report.