Long term Medicare spending

Long term spending projections for Medicare were sharply reduced as a response to the ACA. In 2009, the Trustees of Medicare made projections that spending would reach up to 10% of the GDP by 2065 whereas in 2010 after the enactment by the ACA, it was projected that by 2065, spending would be 6.2% of the GDP.

The primary reason behind the change in the projections was because of the change in the formula which was used in calculating annual updates for payments Medicare made to hospitals as well as to other non-physician providers. Before the ACA, increases in provider payments occurred at the same rate as input costs. However the ACA finally realized that with the increase in productivity over time, reimbursements and input costs do not rise at the same rate. When an input is more productive, the same services can be provided with fewer inputs by the health care sector. Thus as part of the ACA, reimbursements are updated on the basis of input cost growth minus productivity growth occurring throughout the economy.

In the past, spending by Medicare has increased much faster than the rise in the GDP growth as well as healthcare spending in general. Carrying out the same projection into the future calls for it to be a nonsensical one because eventually, health spending will consume the entire GDP. Because of this, there is a need for health spending to reduce and projections made by Trustees have always taken this into consideration. However what no one has been able to predict as yet is when this growth will begin to slow down and whether or not a change in laws will be required for it to occur or not. Hence it can be said that most of the projections made have done so on a formula based approach.

While it is necessary to make use of a formula based approach for making long term projections, it is difficult to know how the effects of the ACA can be assessed which caused a permanent change to occur to the annual payment updates for providers of Medicare. The Trustees took the initial approach of assuming that prior to the ACA, spending growth of Medicare slowed down to its GDP growth however after it; the spending growth would fall below the growth of GDP.

The necessity of making projections regarding the ACA effects on long term spending of Medicare exposed the unclear nature of these projections as well as led to a number of questions to be asked. These questions have been responded to variously by forecasters. While the Actuaries at the CMS have been figuring out a better model of long run spending of Medicare and preferably one based on economics, the Congressional Budget Office has made the decision of trying to stop Medicare policies which are specific to any model and have instead decided to take an approach which is more mechanical to make projections.

One of the better questions however which has been raised and which is of importance is how and whether or not projections should be made regarding long run Medicare spending.


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