Recession, Medicare cuts not enough to stop skyrocketing health spending growth

President Obama holds a budget summit and calls rising health care costs the "single most pressing fiscal challenge" faced by the nation.

By Doug Trapp, AMNews staff. Posted March 2, 2009.

Washington -- Although a projected 21% cut to Medicare physician pay and the downturn in the economy are poised to restrain national health spending growth in 2010, overall health spending is still expected to nearly double between 2009 and 2018, reaching $4.4 trillion.

The spending projections, from the Centers for Medicare & Medicaid Services Office of the Actuary, were published online by the journalHealth Affairs on Feb. 24. The actuaries estimated that next year's Medicare physician fee cut required by law would help hold national health spending growth to only 4.6% in 2010. But if Congress averts the cuts, as it has every year since 2002, national spending would grow by 5.4%, about the same rate as expected in 2009.

The report provides more evidence that Medicare's pay formula needs to be reformed, because it casts doubt on both physicians' pay and overall health spending projections, said American Medical Association President-elect J. James Rohack, MD. "It's clear that to achieve the goal of health system and Medicare reform, we must address rising health care costs, but we must have realistic forecasts of what those costs are going to be."

The economic recession is shifting health care costs from the private to the public sector, the report said. Growing unemployment and the resulting loss of private health coverage is expected to decelerate private health spending growth to 3.9% in 2009, its lowest increase in 15 years. Similar trends are expected for prescription drug and hospital spending.

Public spending, on the other hand, is expected to increase by 7.4% in 2009, due largely to higher enrollment in Medicaid. That projection does not include the effect of the recent expansion of the Children's Health Insurance Program and the $787 billion stimulus package, which included about $150 billion in health spending.

Public spending accounted for 46% of total national health spending in 2007.

But even with Medicare fee cuts and the recession, CMS anticipates that annual growth in national health care spending will start creeping up again starting in 2011. The rate is expected to exceed 7.0% by 2018, in part because baby boomers will move from private coverage to Medicare. That estimate assumes an economic recovery beginning in 2010.

Spending growth on physicians and clinical services is expected to slow from 6.0% in 2009 to 5.0% in 2010 should Congress avert the Medicare pay cuts, the report said. If lawmakers allow the cuts to go through, growth would slow to 2.3%. Under either scenario, a healthier economy is expected to return spending growth on physicians to a more historical rate of about 6.0% by the end of the decade.

Higher enrollment in Medicare, which on the whole offers lower pay than private coverage, will partially hold down physician spending growth. But a shortage of primary care physicians and registered nurses will counteract this trend by boosting doctors' and nurses' wages. In addition, a series of positive Medicare physician updates is scheduled to begin in 2014 under current law, said Andrea Sisko, a report co-author and an economist in CMS' Office of the Actuary.

Public health spending is expected to overtake private spending by 2016, largely from growth in public programs due to an aging population. In 2007, public spending accounted for 46.2% of total national health spending.

The ongoing recession looms large in the debate over long-term national health system reform, Sisko said. "Policymakers and the public will be faced with tough decisions regarding the future of the health care system."

The recession is not expected to affect Medicare spending dramatically in the short term, said Christopher Truffer, a CMS actuary and report co-author. But the shrinking economy could hasten the insolvency of the Medicare Part A trust fund -- which covers hospital, home health, skilled nursing and other care -- by reducing payroll tax revenues that support the fund. Previous CMS estimates said the fund would run into a deficit in 2019, but now that could happen as early as 2016, said CMS chief actuary Rick Foster.

An unhealthy debt

President Obama said health reform figures prominently in his economic agenda. "Over the longer run, putting America on a sustainable fiscal course will require addressing health care."

Obama made that remark on Feb. 23, when he convened a group of more than 100 policymakers -- administration officials, congressional leaders and a variety of stakeholders -- at the White House to begin discussing how to tackle the country's $12 trillion national debt and ongoing annual $1.3 trillion budget deficit. Obama said the country spends $250 billion a year in payments on the national debt -- about one of every 10 taxpayer dollars. That doesn't include the trillions obligated in future years to Medicare, Medicaid and Social Security.

The recession is shifting health care costs from the private to the public sector.

Although Obama approved the stimulus package, which helped increase the national debt, he opened the forum by pledging to cut the $1.3 trillion budget deficit in half by the end of his first term. "We cannot simply spend as we please and defer the consequences to the next budget, the next administration or the next generation."

Participants -- including AMA President Nancy H. Nielsen, MD, PhD -- broke into five groups chaired by White House staff to discuss health care, Social Security, the federal budget process, tax reform and the federal purchasing process.

According to press pool reports of the event, Dr. Nielsen said any savings from reform should be reinvested in the health system. She worried about the conflicting needs for investing in health care and for adopting federal budgets without running up deficit spending.

Dr. Nielsen also said the nation needs to reach consensus on whether health care is a right, a responsibility or a privilege. "We cannot pay for everything for everyone. We really have to have together a societal discussion. What is an individual's responsibility for their health, the choices they make, do they exercise, smoke?"

Although the participants appeared to agree that the health system must be reformed, the event was more notable for bringing key leaders together to talk, said AARP CEO Bill Novelli. "I went away feeling that it was a productive afternoon and that we have momentum here in terms of health care reform."

Obama said at the conclusion of the forum that dialogue will continue. "We need to build off this afternoon's conversation and work together to forge a consensus."