Here's some good news to start the New Year. Without any major change in its structure, Medicare's spending growth has started to slow down on its own.
Medicare costs have risen by an average of about 12% a year since the early 1970s, and they grew by about 9% a year between 2000 and 2009. But things started to change in 2010 according to the nonpartisan Congressional Budget Office. That year's increase was only 4.3%. And in 2011, it was even lower, at 3.8%. Projections now put the growth rate in 2012 at close to zero.
The spending slowdown for Part B of the program, which covers physician and other outpatient services, has been especially dramatic. The program's chief actuary sees spending growth declining to the lowest levels ever.
Radical restructuring of Medicare to reduce spending remains a hot topic in Congress, including a plan to replace it with vouchers for purchasing private coverage. Yet the spending slowdown has begun without the enactment of any major revisions.
Explanations differ according to whom you ask. Some Democrats tout the early effects of health reform, which will cut $500 billion in payments to hospitals over the next decade. In anticipation of these and possible further cuts, some hospitals are reducing spending on their own. Health reform also includes provisions to encourage better hospital efficiency, like penalties for readmitting patients soon after a discharge.
Republicans tend to see the recent spending slowdown as temporary and unlikely to last. That's the view of Congressman Paul Ryan (R-Wisc.), architect of a plan to turn Medicare into a voucher program.
Others point to the economy. In tight times, people tend to skimp on health care to save on copayments and deductibles. That means fewer services are rendered that Medicare must pay for.
So, is Medicare doing something right, or is its spending slowdown an aberration?
An answer may lie in a comparison with private insurance. According to an analysis by Standard and Poors (using a different methodology than CBO), in the 12 months starting in May 2010, spending growth moderated in both Medicare and the private sector. But under Medicare, the drop was much steeper. Medicare's growth rate fell to a meager 2.6%, while the rate for private insurance was almost three times higher at 7.35%.
In other words, Medicare is achieving success at controlling costs that private insurance is unable to match. Clearly, it is doing something right.
Of course, even if the recent trend continues, Medicare is not out of the woods. It will gain millions of new beneficiaries as the baby boom generation ages, and the underlying cost of health care will continue to rise relentlessly. CBO believes these factors will increase costs no matter what Medicare does and necessitate new cost control measures in the years ahead.
But fault for future cost pressures does not lie with Medicare's structure. Rather, blame rests with external factors that will plague the program under any scenario.
We can take two lessons from this.
First, there is no immediate need to radically restructure Medicare, and there may never be one. Increased reliance on private insurance to deliver benefits could actually make cost pressures worse.