Medicare Breaks the Inflation Curve

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.

SnP Healthcare
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.

8 thoughts on “Medicare Breaks the Inflation Curve

  1. Ant possibility that this may be occuring as a result of the Rx Benefit. May it have had a positive impact finally on the balance sheet?

  2. “Meanwhile, hospitals with market clout have been ratcheting up their prices.” — I agree completely that this is a major problem. Can you explain to me what the ACA does to address this? I’m sure its in there somewhere is’t it?

  3. Donald & Joe–
    Donald- I’m not sure how the RX benefit would have a positive effect on Medicare’s balance sheet– unless you mean that thanks to the benefit, people are taking their medications, and are less likely to wind up in the hospital. . .
    Joe- Insofar as state and federal insurance regulators keep a lid on premiums, insurers won’t be able to pay hospitals more. Also, more insurers are likely to come out with products that reward patients who choose the most efficient hospitals (good outcomes at a lower cost.)

  4. First, the numbers do not count Medicare Part D, but are for Parts A and B, which allow valid comparison with private insurance programs that do not cover drugs.
    Further, there are two important ways in which Medicare Part D saves money over the projections for cost.
    The first is by putting real teeth into the demand that patients use generics whenever possible. This is a good thing and saves billions.
    The second, less good, is the fact that significantly fewer Medicare enrollees chose to sign up for Part D than were projected. In fact, only about 70-75% of eligible people have enrolled, with others — including my 84 year old mother — not signing up because they do not have drug costs that are high enough to justify the cost of insurance. That saves billions as well, since those people do not generate any charges to Part D, but is due to the fact that many seniors are better at math than insurance companies think.
    Finally, Part D FAILS to save money in one very important way. It is not allowed to seek bids for drugs. Consequently its expenses are considerably higher than costs for drugs covered through Medicare Parts A and B, drug costs paid by many large HMO’s, and of course drug costs in the VA — to say nothing about costs in Canada and other countries that use bidding.

  5. “Insofar as state and federal insurance regulators keep a lid on premiums, insurers won’t be able to pay hospitals more.” — But I’m not sure that this could work for the large dominant providers who are raising their prices. Their prices are a valid cost of doing business for the insurance companies so the regulators really have no choice but to approve the rates do they?

  6. Joe Says–
    Regulators can tell insurance companies they should push back and refuse to include hospitals that are overcharging in their networks.
    The state can also begin investigating hosptials that overcharge–as they are in Massachusetts.
    Most importantly, insurers can offer plans that don’t include hospitals that are over-charging — with significantly lower premiums.
    (They have begun doing this and it is working).

  7. I don’t think that addresses my question Maggie since dominant providers effectively can’t be eliminated by insurers and have the type of influence with government that trumps real regulation.
    I do agree that investigations by government could lead to some solutions to the problem of too-big-to-regulate providers. We’d have to break them up.
    How did they get so big anyhow, aren’t mergers and buyouts in hospitals normally subject to regulatory review??

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